What it means
Manufacturing inventory moves through three stages: raw materials, work-in-progress and finished goods. Work-in-progress captures everything in the middle, partly assembled units on the production line, jobs half-completed in a workshop, or a service engagement where hours have been worked but not yet billed.
The balance represents money already spent that has not yet turned into something saleable. It matters because work-in-progress ties up cash without producing revenue.
A rising balance can mean growing demand, but it can equally signal a bottleneck, a quality problem holding units back, or a job that has stalled while the costs keep accruing. Operations and finance teams therefore watch the trend, not just the closing number.
The value assigned is the accumulated cost of the partly finished work, not what it will eventually sell for. That means direct materials issued to the job, direct labour hours recorded against it and a share of production overhead absorbed using an agreed rate.
Because overhead absorption involves judgement, work-in-progress is one of the balances auditors examine most closely. Professional services firms use a similar concept for unbilled time.
Hours recorded but not yet invoiced sit as work-in-progress until they are billed, and firms track how long that takes because ageing unbilled work tends to be written down. A partner who lets work-in-progress build for six months has effectively lent the client money at no interest.
The most common variant is percentage-of-completion accounting used on long contracts. There, revenue and profit are recognised as the work progresses rather than at handover, which changes what appears on the balance sheet but rests on the same underlying question: how much of the job is genuinely done?
In practice
Real-world examples
Example 1
A specialist boat builder carries $2.4 million of work-in-progress across four hulls at different stages. When a customer cancels, the yard has to decide whether to complete the vessel speculatively or write the accumulated cost down to a realistic resale value.
Example 2
An engineering consultancy reviews unbilled time monthly and finds $310,000 of work-in-progress older than ninety days. Most of it relates to a scope dispute, and the finance director provides against half of the balance rather than carrying it at full value.
Example 3
A contract electronics assembler introduces a shortage of one connector into its planning system and watches work-in-progress climb by $180,000 in three weeks as half-finished boards accumulate. The balance normalises once the component arrives.
Think of it
Imagine baking a three-tier wedding cake. The flour and eggs on your counter are raw materials. The boxed cake ready for collection is finished goods. The cake currently baking in the oven, half-decorated, is your work in progress.
Formula
Calculation
Ending work-in-progress = Beginning work-in-progress + costs added during the period - cost of goods manufactured
A furniture manufacturer starts the quarter with $180,000 of partly built units on the factory floor. During the quarter it adds direct materials of $420,000, direct labour of $260,000 and absorbed production overhead of $190,000.
Costs added = $420,000 + $260,000 + $190,000 = $870,000.
Total costs in process = $180,000 + $870,000 = $1,050,000.
Cost of goods manufactured, meaning units completed and moved to finished goods, is $910,000.
Ending work-in-progress = $1,050,000 - $910,000 = $140,000.
The balance has fallen from $180,000 to $140,000, so the factory finished slightly more value than it started during the quarter. If the balance had instead risen to $300,000 on the same production volume, the operations director would want to know which stage of the line was holding units back.Case study
Seen in the real world
Ravenhurst Joinery is a fictional cabinet maker used purely to illustrate the concept. Its owner had always assumed that a large work-in-progress balance was a sign of a busy workshop, and at the end of one quarter the balance stood at $140,000 against monthly revenue of about $300,000.
A closer look showed that nearly half the balance related to three kitchens held up waiting for customer decisions on worktops. The materials had been bought, the carcasses built and the labour paid, yet nothing could be invoiced until the customers chose finishes, so the workshop was financing its clients' indecision.
Ravenhurst changed its contracts to require finish selections before production started and added a staged payment at the point materials were ordered. Work-in-progress fell to roughly $90,000 without any drop in output, releasing cash that had previously been sitting on the workshop floor.
Watch out
Common mistakes
- Valuing work-in-progress at expected selling price rather than at the cost accumulated so far.
- Reading a rising work-in-progress balance as good news, when it often points to a production bottleneck or a stalled job.
- Forgetting to review ageing unbilled work in a services firm, so amounts that will never be recovered stay on the balance sheet at full value.
Questions
People also ask
Where does work-in-progress appear in the financial statements?
Within inventory as a current asset on the balance sheet, and it flows into cost of sales once the goods are completed and sold.
Does work-in-progress include overhead?
Yes, an absorbed share of production overhead is normally included alongside direct materials and direct labour, using a rate agreed in advance.
How is work-in-progress different from finished goods?
Finished goods are complete and ready to sell, while work-in-progress still needs further work before it can be delivered to a customer.