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Goods in process, also known as work in process, is an inventory category that is commonly used by manufacturing companies. It allows a company to keep track of products that are in some stage of production but not yet ready for sale. This category appears as an asset on the company's balance sheet and includes a valuation of raw materials, labor and factory overhead that is tied up in production at the time the company's financial statements are generated.
Inventory management is a critical part of business operations for manufacturing companies. Typically, a manufacturer has a significant portion of its financial resources tied up in its inventory and production process. Often, the production process will span financial reporting periods. To generate accurate financial reports that reflect the state of the company's assets and liabilities, the company must have a way to identify and quantify assets that are not raw materials waiting to be used or finished goods waiting to be sold.
A manufacturer uses three inventory categories to keep track of its assets for accounting purposes: raw materials, goods in process and finished goods. The goods in process category is a holding account that allows the company to place a value on resources that are tied up in the production phase. Without this account, a portion of the company's resources would be invisible until the assets reached the finished product stage.
The account is listed in the assets section of the company's balance sheet. Quantitatively, the category is composed of the raw materials used plus the labor costs and overhead that is required in the production of the in-process goods. These components are valued at cost or realizable value, whichever is lower. It is important not to value goods in process at retail cost or the cost of finished goods because that type of valuation is speculative and can inflate the company's assets. Profits should not be assumed on the balance sheet until the amounts are recognized or received.
Correctly managing goods in process enables a manufacturer to invest the correct amount of financial resources in raw materials and not overspend. Raw materials that sit in inventory, waiting to be processed, represent money that the company cannot use to pay other bills. The account can be used to determine inventory turnover ratios. This type of information is critical in enabling a company to keep up with customer orders without generating an overage or shortage in inventory.
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