Work in Progress Inventory: Cost Flows

By Ryan O'Connell, CFA, FRM Published November 6, 2026
Table of Contents

    A factory can buy materials, work on unfinished products and complete goods that remain unsold, all in the same month. Work in progress inventory explains where the costs of incomplete production sit while those activities continue. Understanding that balance helps you distinguish money spent on production from the cost of completed goods and the expense recognized when goods sell.

    This guide follows one hypothetical manufacturer through a connected month of raw materials, work in progress, finished goods and cost of goods sold. The schedules and journal entries reconcile to the same records, so you can see precisely why current manufacturing costs, cost of goods manufactured and cost of goods sold differ.

    What Is Work in Progress Inventory?

    Work in progress, also called work in process or WIP, is the accumulated eligible manufacturing cost of goods that have entered production but are incomplete at the reporting date. It can contain direct materials, direct labor and allocated manufacturing overhead. It is not limited to the materials physically visible on the factory floor.[1][3]

    An Inventory Asset, Measured at Cost

    WIP holds production costs that have not yet transferred to finished goods. Completing the goods moves their accumulated cost between inventory accounts; selling them normally moves that cost into expense. Neither transfer uses the customer’s selling price.

    Raw Materials vs WIP vs Finished Goods

    Consider an ordinary component manufacturer. Unused metal, partly machined components and completed components occupy different stages. The classification depends on their production status, while the recorded amounts reflect the applicable inventory-cost basis.

    Three manufacturing inventory stages
    Stage What it contains Next cost transfer
    Raw materials (RM) Materials held for production, including indirect supplies in this example Direct materials to WIP; indirect materials to overhead
    Work in progress (WIP) Costs accumulated on incomplete production Completed production to finished goods
    Finished goods (FG) Completed goods awaiting sale Sold goods to cost of goods sold

    Raw materials have not yet been issued, WIP still needs production work, and finished goods are complete. These are three asset balances. Cost of goods sold (COGS) is the expense for goods sold during the period.[1] A distributor buying already completed products usually has a simpler inventory flow, developed separately in inventory valuation methods.

    The WIP, COGM and COGS Formulas

    Each inventory account follows the same logic: beginning cost plus costs entering the account must equal costs leaving it plus ending cost. In the normal-costing system used below, direct materials and direct labor are traced at actual cost, while overhead is applied using a predetermined rate. Applied overhead enters WIP once.

    Current Manufacturing Costs Added to WIP
    Direct materials used + Direct labor + Applied manufacturing overhead
    Costs assigned to production during this period, including costs of work still incomplete at its end.
    Cost of Goods Manufactured
    COGM = Beginning WIP + Current manufacturing costs − Ending WIP
    The cost transferred out of WIP because production was completed during the period.
    Unadjusted Cost of Goods Sold
    COGS = Beginning FG + COGM − Ending FG
    The cost transferred from finished goods to expense before any separate overhead or other cost adjustment.

    These simplified schedules assume no write-downs, inventory losses or other inventory movements. They distinguish cost added, cost completed and cost sold.[1] A business with other movements needs to show them explicitly rather than force every reduction into COGM or COGS.

    Two related terms describe overlapping cost groups: prime cost is direct materials plus direct labor; conversion cost is direct labor plus manufacturing overhead. Direct labor appears in both, so adding the two totals would count it twice.[5] See managerial accounting and cost classifications for that broader classification lesson.

    A Connected Manufacturing Example

    Consider Blue Harbor Components, a hypothetical manufacturer, for the month of May. All amounts are U.S. dollars at cost unless identified as sales revenue. Its inventory records show these opening and closing balances:

    Hypothetical May inventory balances (USD)
    Inventory account May 1 May 31
    Raw materials $20,000 $30,000
    Work in progress $25,000 $40,000
    Finished goods $35,000 $50,000

    The ending balances come from reconciled material, job and finished-stock records. In particular, the $40,000 of ending WIP is the cost accumulated on unfinished jobs. It is not a percentage of their expected selling price or a guess based on the number of items visible.

    During May, Blue Harbor purchases $110,000 of materials on credit. Material requisitions identify $10,000 of indirect materials used, and job records identify $60,000 of direct labor cost. The company recognizes $260,000 of credit sales when control of the sold goods transfers to customers. There are no returns, discounts or other sales adjustments in this example.

    Keep Actual and Applied Overhead Separate

    Blue Harbor’s predetermined overhead rate is $45,000 of budgeted eligible manufacturing overhead / 9,000 machine hours = $5 per machine hour. The activity base is appropriate for this simplified factory, production is at normal capacity, and the budget respects the normal-capacity allocation basis for its fixed overhead component. Actual May activity is 9,000 machine hours, so applied overhead = 9,000 × $5 = $45,000.

    The actual overhead incurred during the same month consists of the four costs below. The indirect materials are the same $10,000 identified in the materials records, not an additional purchase or another direct-material charge.

    Hypothetical May actual factory overhead (USD)
    Actual overhead item Cost
    Indirect materials used $10,000
    Indirect factory labor $12,000
    Factory utilities $8,000
    Factory-equipment depreciation $15,000
    Actual overhead incurred $45,000

    Actual overhead is recorded in the Manufacturing Overhead control account; overhead application credits that account and debits WIP.[2] Actual and applied overhead happen to match here: $10,000 + $12,000 + $8,000 + $15,000 = $45,000. Do not add both $45,000 amounts to production cost.

    Assume all recorded production costs qualify for inventory, there is no abnormal spoilage or idle-facility cost, and inventory needs no write-down. Selling and general nonproduction administrative costs remain outside these manufacturing schedules. The example stops at gross profit.

    Calculate Materials Used, COGM and COGS

    1. Reconcile Raw Materials and Direct Materials Used

    Blue Harbor’s raw-material account includes both direct and indirect materials. Begin with $20,000 on hand, add $110,000 purchased, and deduct the $30,000 still unused at May 31. Then separate indirect supplies from materials traced directly to production.

    May materials schedule (hypothetical USD)
    Calculation Cost
    Beginning RM $20,000
    Add: material purchases $110,000
    Materials available $130,000
    Less: ending RM $30,000
    Total materials issued $100,000
    Less: indirect materials issued to overhead $10,000
    Direct materials used in WIP $90,000

    The arithmetic is $20,000 + $110,000 − $30,000 = $100,000 of materials issued, then $100,000 − $10,000 = $90,000 of direct materials. The indirect $10,000 enters the overhead pool.[2] Charging the full $100,000 directly to WIP and also applying overhead containing indirect-material cost would count that material cost twice.

    2. Reconcile WIP to Cost of Goods Manufactured

    Now add the $90,000 of direct materials, $60,000 of direct labor and $45,000 of applied overhead to the $25,000 opening WIP balance. Deduct the $40,000 still assigned to unfinished jobs at month-end to identify the cost of completed production.

    May cost of goods manufactured (hypothetical USD)
    Schedule line Cost
    Direct materials used $90,000
    Direct labor $60,000
    Applied manufacturing overhead $45,000
    Current manufacturing costs added $195,000
    Add: beginning WIP $25,000
    Total cost to account for in WIP $220,000
    Less: ending WIP $40,000
    Cost of goods manufactured $180,000

    Current manufacturing additions are $90,000 + $60,000 + $45,000 = $195,000. COGM is $25,000 + $195,000 − $40,000 = $180,000. It is $15,000 below current additions because WIP increased by $40,000 − $25,000 = $15,000. COGM includes costs brought forward in beginning WIP and excludes costs left in incomplete jobs.

    3. Reconcile Finished Goods to Cost of Goods Sold

    Completed production enters finished goods, where it joins the $35,000 already on hand at May 1. The finished-stock records leave $50,000 unsold at May 31. Use those balances to determine the cost assigned to sales.

    May unadjusted COGS (hypothetical USD)
    Schedule line Cost
    Beginning finished goods $35,000
    Add: COGM transferred from WIP $180,000
    Goods available for sale $215,000
    Less: ending finished goods $50,000
    Unadjusted COGS $165,000

    Unadjusted COGS is $35,000 + $180,000 − $50,000 = $165,000. Finished goods increased by $15,000, so another $15,000 of cost stayed in inventory rather than entering expense. With no overhead variance or other adjustment here, final manufacturing COGS is also $165,000.

    Against recognized sales of $260,000, gross profit is $260,000 − $165,000 = $95,000. That is before selling, administrative and other expenses; it is not net income or cash collected. The profit margins guide develops those different income-statement measures.

    See the Transfers in Three Inventory Ledgers

    The following simplified T-account tables show the same May records from the ledger’s perspective. Inventory assets increase on the debit side and decrease on the credit side. Opening balances are carried forward, not new May purchases. The J-numbers identify the journal entries in the next section; double-entry accounting explains the debit-and-credit foundation.

    Raw Materials

    RM ledger: May, hypothetical USD
    Debit: cost available Credit: cost issued
    Beginning balance: $20,000 J2 direct materials to WIP: $90,000
    J1 purchases: $110,000 J3 indirect materials to overhead: $10,000
    Total debits: $130,000 Total credits: $100,000

    The ending RM debit balance is $130,000 − $100,000 = $30,000. Both kinds of material leave this account, but only the direct portion transfers straight to WIP.

    Work in Progress

    WIP ledger: May, hypothetical USD
    Debit: accumulated cost Credit: completed cost
    Beginning balance: $25,000 J7 transfer to FG: $180,000
    J2 direct materials: $90,000 —
    J4 direct labor: $60,000 —
    J6 applied overhead: $45,000 —
    Total debits: $220,000 Total credits: $180,000

    The ending WIP debit balance is $220,000 − $180,000 = $40,000. The $180,000 credit is COGM: it moves to finished goods, leaving unfinished production’s cost behind.

    Finished Goods

    FG ledger: May, hypothetical USD
    Debit: goods available Credit: goods sold at cost
    Beginning balance: $35,000 J8 transfer to COGS: $165,000
    J7 completed from WIP: $180,000 —
    Total debits: $215,000 Total credits: $165,000

    The ending FG debit balance is $215,000 − $165,000 = $50,000. Completion did not create an expense: it transferred $180,000 between two assets. The later sale transferred $165,000 from FG into COGS.[2]

    The Linked Manufacturing Journal Entries

    Blue Harbor uses perpetual inventory records; the entries below summarize the month’s activity. Debit and credit amounts are U.S. dollars. Wages and utilities remain payable in this illustration, and depreciation credits accumulated depreciation. These credits identify the counterpart to the production cost without assuming every cost was paid in cash.

    Hypothetical May entries: purchases through sale
    Entry and event Debit Credit
    J1: buy materials on credit RM $110,000 Accounts Payable $110,000
    J2: issue direct materials WIP $90,000 RM $90,000
    J3: issue indirect materials Manufacturing Overhead $10,000 RM $10,000
    J4: record factory labor WIP $60,000;
    Manufacturing Overhead $12,000    		 Wages Payable $72,000
    J5: record other actual overhead Manufacturing Overhead $23,000 Utilities Payable $8,000;
    Accumulated Depreciation $15,000
    J6: apply overhead to production WIP $45,000 Manufacturing Overhead $45,000
    J7: complete production FG $180,000 WIP $180,000
    J8: recognize sold goods’ cost COGS $165,000 FG $165,000
    J9: recognize credit sales Accounts Receivable $260,000 Sales Revenue $260,000

    J4 balances because $60,000 + $12,000 = $72,000; J5 balances because $8,000 + $15,000 = $23,000. J8 and J9 record different aspects of the sale: the inventory’s cost and the customer’s selling price. Collecting the receivable later would debit Cash and credit Accounts Receivable, without recording the revenue again.[2]

    What If Actual and Applied Overhead Differ?

    Actual overhead debits total $10,000 + $12,000 + $23,000 = $45,000 across J3–J5. J6 credits $45,000, leaving the overhead control account at zero. There is no overhead-adjusting entry in this example.

    A remaining debit balance would be underapplied overhead; a remaining credit balance would be overapplied overhead. A separate adjustment may affect COGS alone or inventory and COGS, depending on the circumstances and applicable guidance.[4] Do not treat every difference as automatically capitalizable or silently mix an adjustment into the original COGM schedule. Choosing and calculating that disposal is a separate analysis.

    Overhead allocation across products is also a different question from tracking cost through inventory. Activity-based costing develops multiple activity pools and drivers; the May example uses one appropriate machine-hour rate to keep the transfers visible.

    External Reporting: Which Costs Belong in WIP?

    For ordinary U.S. manufacturing inventory, ASC 330 governs the inventory-cost assessment. Normal allocable fixed production overhead belongs in product cost; excluding all fixed factory overhead produces a different internal costing view. See absorption vs variable costing for the fixed-overhead timing comparison.

    FASB’s historical Statement No. 151 documents the normal-capacity principle: abnormally low production does not justify increasing the fixed overhead assigned to each unit, and unallocated overhead is expensed. Abnormal idle-facility, freight, handling and spoilage costs are current-period charges rather than inventory cost.[6] The May example assumes normal production and no such abnormal amounts. The historical statement is original standard-setting evidence; current authoritative U.S. GAAP resides in the Codification.

    IFRS uses the same broad manufacturing-cost building blocks. The IFRS Foundation’s IAS 2 overview includes direct labor and production overhead in conversion costs and recognizes inventory carrying cost as expense when the related revenue is recognized. Write-downs and losses can create expense before a sale.[7] This shared cost-flow idea does not make all U.S. GAAP and IFRS inventory rules identical.

    The GAAP conceptual framework supplies broader reporting context, while specific standards determine the accounting. Likewise, a financial-reporting WIP schedule does not establish a business’s tax inventory method or tax deduction.

    What Public Inventory Components Reveal

    A manufacturer may present inventory components on its balance sheet or in the notes. For commercial and industrial registrants covered by the SEC’s Regulation S-X rule, major inventory classes are separately stated if practicable, and the measurement basis is disclosed. The rule names WIP, raw materials, finished goods and other categories.[8] That is a disclosure requirement for the entities within its scope, not a requirement that every private manufacturer publish its internal ledger.

    For a real historical example, Texas Instruments’ January 27, 2026 results release reports the following components in its consolidated balance sheets. These are December 31 balances in USD millions, separate from Blue Harbor’s hypothetical May figures.[9]

    Texas Instruments inventory at December 31 (USD millions)
    Inventory component 2025 2024
    Raw materials 465 395
    Work in process 2,372 2,214
    Finished goods 1,967 1,918
    Total inventories 4,804 4,527

    The components reconcile: 465 + 2,372 + 1,967 = 4,804 in 2025 and 395 + 2,214 + 1,918 = 4,527 in 2024. WIP increased by 2,372 − 2,214 = $158 million. That change identifies an increase in the recorded balance; it does not measure annual COGM.

    A WIP component note is a stock snapshot, while COGM is a flow over a period. To calculate COGM from WIP, you also need the production costs added during that period and any other relevant movements. To infer it through finished goods, you need consistently defined COGS and all other FG movements. A public cost-of-revenue line can include items beyond a simplified factory transfer, so it should not automatically be substituted for the internal ledger amount.

    Nor does a higher WIP balance alone prove a bottleneck. It could reflect more jobs in production, longer production time, higher input costs or a different product mix. Those are questions for operational evidence and management explanation. Read the accounting policy, comparative balances, write-down information and business discussion before drawing a conclusion.

    How to Check a WIP Reconciliation

    1. Fix the scope and dates. Use the same entity, manufacturing function, period and costing basis throughout. Keep long-term contract assets and self-constructed capital assets out of this ordinary goods-for-sale schedule.
    2. Reconcile materials. Match purchases and ending stores to the RM ledger, then split direct and indirect requisitions.
    3. Reconcile WIP detail. Sum unfinished-job records to the WIP control balance. Check labor records, applied overhead and the cutoff for completed jobs.
    4. Match the transfer. WIP’s credit for completed production must equal the corresponding FG debit. FG’s cost of sales must match the COGS debit.
    5. Resolve separate adjustments. Investigate overhead residuals, abnormal costs, losses and valuation adjustments without concealing them in a balancing figure.
    6. Connect costs to operations and liquidity. Review job aging, completion needs and demand. Inventory remains excluded from the quick ratio; its recorded cost is not cash available to pay bills.

    For an additional check on Blue Harbor, opening inventory totals $20,000 + $25,000 + $35,000 = $80,000; closing inventory totals $30,000 + $40,000 + $50,000 = $120,000. Add only new costs entering the combined inventory system: $110,000 of material purchases, $60,000 of direct labor and $35,000 of nonmaterial overhead. Thus $80,000 + $110,000 + $60,000 + $35,000 = $285,000 = $120,000 closing inventory + $165,000 COGS. Indirect materials are already in the material costs and must not be added again.

    Common Mistakes with Work in Progress Inventory

    • Calling all materials issued direct materials. If stores include indirect supplies, remove that portion before determining the direct-material charge to WIP.
    • Adding actual overhead after applying overhead. Actual costs debit the overhead control account; the applied amount enters WIP. Reconcile the residual separately.
    • Equating manufacturing additions with COGM. Beginning and ending WIP bridge the difference. May’s $195,000 of additions becomes $180,000 of completed production.
    • Equating COGM with COGS. Beginning and ending FG form a second bridge. Blue Harbor completes $180,000 of goods but expenses $165,000 on sales.
    • Recording an expense when goods are completed. Completion ordinarily moves cost from WIP to FG. The sale’s cost entry is separate from both completion and the revenue entry.
    • Valuing WIP at expected revenue. A quoted customer price is not the accumulated inventory cost. Completion costs and recoverability still matter.
    • Treating a growing WIP balance as proof of poor operations. Establish the cause with production, aging and cost evidence before diagnosing a delay.

    Limitations of a WIP Cost Schedule

    A Reconciliation Does Not Prove Recoverability

    A ledger can add up correctly while including obsolete jobs, incorrect job charges or costs that should be expensed. Check physical existence, production status, cost eligibility and the applicable inventory valuation requirements as well as arithmetic.

    The ending balance needs evidence. This example supplies ending WIP from job records. In a continuous process, valuing incomplete units can require separate completion estimates for materials and conversion work. The simple roll-forward does not perform that equivalent-unit analysis.

    The balance is not a cash-flow forecast. Some costs are payable, some may already have been paid, and depreciation is noncash. WIP may require further spending before goods can be completed and sold. Working capital management connects inventory decisions to collection and payment timing.

    Scope and system differences matter. Multiple departments, changing overhead rates, standard-cost variances, losses or acquisitions can require more detailed reconciliations. WIP for manufactured goods should not be confused with construction in progress for a company’s own equipment or with revenue recognition on a long-term customer contract.

    Frequently Asked Questions

    Both terms are used for incomplete manufacturing inventory. Read the company’s policy and account definition: similar language in construction, services or long-term contracts can refer to items governed by different accounting guidance.

    No. It accumulates the eligible direct materials, direct labor and manufacturing overhead assigned to incomplete production. Labor and overhead are included as the work is performed and costs are assigned. Materials still unused in stores remain in raw materials.

    Those costs belong to production still incomplete at the end of the period. Beginning WIP plus current additions is the total cost to account for; subtracting the unfinished portion leaves completed production’s cost. In the example, $25,000 + $195,000 − $40,000 = $180,000 of COGM.

    Yes. In the simple schedule, COGM exceeds current additions when ending WIP is below beginning WIP. Completing work begun in a previous period releases some of those earlier costs into finished goods. That does not mean the current period incurred those costs again.

    Debit Finished Goods and credit Work in Progress for the accumulated cost of completed production. Blue Harbor records $180,000 on each side. No revenue is recorded merely because the goods are completed; the later sale has separate revenue and cost entries.

    Not from beginning and ending WIP alone. You also need manufacturing costs added and any other relevant WIP movements. Inventory-component disclosures show balances at reporting dates; they generally do not reproduce the detailed internal production-cost schedule.

    Sources

    Sources accessed November 6, 2026. Blue Harbor Components and all May amounts are hypothetical. Texas Instruments figures are historical December 31, 2025 and 2024 balances from its January 27, 2026 release, not current inventory estimates. The discussion uses a U.S. educational manufacturing-accounting context and identifies IFRS separately.

    1. OpenStax, Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts, Principles of Accounting, Volume 2: Managerial Accounting, section 4.3; RM, WIP, FG and COGS sections. Book published February 14, 2019.
    2. OpenStax, Prepare Journal Entries for a Job Order Cost System, section 4.7; materials, labor, actual/applied overhead, completion and separate sale entries.
    3. OpenStax, Describe and Identify the Three Major Components of Product Costs under Job Order Costing, section 4.2; manufacturing inputs and cost tracing.
    4. OpenStax, Determine and Dispose of Underapplied or Overapplied Overhead, section 4.6; overhead control balances and separate adjustment alternatives.
    5. OpenStax, Identify and Apply Basic Cost Behavior Patterns, section 2.2, Prime Costs versus Conversion Costs.
    6. Financial Accounting Standards Board, Statement No. 151: Inventory Costs, November 2004, paragraph 2 and amended inventory-cost guidance, printed pp. 5–6. Historical original standard-setting evidence for capacity allocation and cost exclusions; current authoritative U.S. GAAP is in the FASB Accounting Standards Codification.
    7. IFRS Foundation, IAS 2 Inventories, About section; conversion costs, expense recognition and inventory write-downs.
    8. U.S. Securities and Exchange Commission, 17 CFR 210.5-02: Balance sheets, Regulation S-X, paragraph 6(a)–(b), via eCFR; inventory components, practicability and measurement-basis disclosure. Displayed Title 17 current through November 3, 2026.
    9. Texas Instruments, TI reports Q4 2025 and 2025 financial results and shareholder returns, January 27, 2026; Consolidated Balance Sheets, inventory components in USD millions at December 31, 2025 and 2024.
    Disclaimer

    This article is for educational and informational purposes and does not constitute accounting, tax or investment advice. The hypothetical example simplifies production, overhead and inventory valuation. Consult current applicable standards and a qualified professional for a specific business’s reporting, tax or operating decisions.

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