Defining goods-in-process

To understand what goods-in-process really mean, it’s crucial to place it within a balance sheet, which is one of the most crucial financial statements that a company holds. 

A balance sheet provides a clear view of the financial health of a company at a given point in time so that a potential investor can make a judgement call about the company’s stock.

One of the key elements of a balance sheet is inventory. Simply put, inventory represents the raw material used for manufacturing the final goods of a company. Goods-in-process, in turn, are an inherent part of the overall inventories. 

For any manufacturing company, before it puts forward the manufactured goods for sale to the final customers, these goods go through two inventory stages, namely: raw material and goods-in-process. 

Goods-in-process represents those goods which need to be still worked upon, before they are ready for sale.

Also referred to as work-in-process, they account for the costs invested in the production of those goods such as labour overhead. Tracking the cost of goods-in-process and efficient inventory management practices are key to the success of manufacturing enterprises.

Why are goods-in-process important?

Keeping an organised goods-in-process account benefits the company, as it can take cues from this information of whether to accelerate or slow down its overall manufacturing processes based on the consumer demand. It is also instrumental in calculating various inventory turnover ratios of the company.

An example of goods-in-process can be illustrated as follows. Suppose a bicycle manufacturing company has just received an order for 10 bicycles to be delivered within a week.

The goods-in-process indicate only 5 bicycles being processed at the manufacturing unit. This signals a need for the manufacturer to ramp up on its production to meet the demand. 

What does a high amount of goods-in-process represent?

An increase in the goods-in-process levels can be indicative of the rising demand for the company’s final products.

It implies that the company must churn out final products at a higher stage to meet the growing demand, which is why the volume of goods-in-process remains on the rise. 

Do goods-in-process show up in the balance sheet?

Yes, goods-in-process show up in the ‘Current assets’ section of the balance sheet. It is nestled between the other two inventory categories of raw materials and finished goods. 

Calculation of goods-in-process

There is a simple formula to calculate the amount of goods-in-process existing within any company.

Goods in process = (Opening inventory goods in process + Raw materials used during the period + Direct labour during the period + Factory Overheads for period) - Ending inventory