WIP Inventory for Job Shops Explained Simply

What Is WIP?

WIP (Work-In-Progress) inventory is the value of all jobs that have started but not yet finished. It includes:

• Labor cost: Hours already worked on the job × labor rate
• Material cost: Materials issued to the job
• Overhead: Allocated overhead based on labor or other driver

In accounting terms, WIP is an asset on your balance sheet. It represents value you've created but haven't yet converted to revenue (because the job hasn't shipped and invoiced).

In practical terms, WIP is cash tied up on your shop floor. Every job in progress is money you've spent that you haven't gotten back yet.

Why WIP Matters

Cash Flow

WIP directly impacts cash flow. Money spent on labor and materials for unfinished jobs is money you can't use for other things. High WIP means:

• More capital tied up in operations
• Longer time between spending and collecting
• Greater exposure if a customer cancels

Shops often don't realize how much cash they have sitting on the floor. $100K-300K of WIP is common for shops doing $5-10M revenue.

Aged WIP

WIP that sits too long is a warning sign. Aged WIP often means:

• Jobs stuck waiting for customer input
• Quality issues that haven't been resolved
• Forgotten jobs that fell through the cracks
• Customer disputes that haven't been settled

Aged WIP represents both tied-up cash and potential problems. Monitoring WIP age helps you catch issues before they become write-offs.

Financial Reporting

Your accountant needs WIP value for accurate financial statements. If WIP is guessed wrong:

• Assets are misstated on the balance sheet
• Cost of goods sold is wrong
• Gross profit is wrong
• You might be paying taxes on phantom profit (or missing real profit)

Accurate WIP tracking isn't just operational—it's a financial compliance issue.

Calculating WIP

The Basic Formula

For each job in progress:

WIP = Labor Cost + Material Cost + Overhead

Where:

• Labor Cost = Hours worked × Loaded labor rate
• Material Cost = Materials issued × Unit cost
• Overhead = Labor hours × Overhead rate per hour (or other allocation method)

Example

Job #1234 has so far consumed:

• 20 hours of labor at $35/hour loaded = $700
• $400 of material (steel bar stock)
• Overhead at $25/labor hour = $500

Job #1234 WIP = $700 + $400 + $500 = $1,600

That $1,600 is cash you've invested in this job. Until it ships and invoices, it's tied up.

Total WIP

Add up WIP across all active jobs for total WIP inventory:

Tracking WIP Effectively

Manual Tracking (The Hard Way)

Without software, WIP tracking requires:

• List all jobs in progress
• Sum labor hours per job (from timesheets or estimates)
• Sum materials issued per job
• Apply overhead rates
• Calculate and total

This is typically done monthly at best. By the time you calculate WIP, it's already changed. Manual WIP is always a lagging indicator.

Automated Tracking (The Right Way)

Job costing software calculates WIP automatically:

• Labor flows from time tracking
• Materials flow from issue tracking
• Overhead applies based on your rules
• WIP updates in real time

Real-time WIP means you can:

• See current floor investment anytime
• Monitor WIP age automatically
• Generate month-end WIP reports instantly
• Track WIP trends over time

Using WIP Data

Once you're tracking WIP, use it:

• Cash management: Watch WIP trends to anticipate cash needs
• Aged WIP review: Weekly review of jobs with WIP over 30 days
• Customer concentration: If one customer has 50% of your WIP, that's risk
• Process improvement: High WIP = long cycle times. Reduce WIP by reducing throughput time.