Raw materials and works in progress (WIP) are distinct categories in financial accounting for business inventory. Each applies to a different stage in the production process. The first stage in the production process involves gathering raw materials, or basics. When labor or other capital equipment is mixed with raw materials, raw materials are transitioned into works in progress. Ultimately, finished goods are produced and sold for revenue.
Businesses don't only carry one or the other. In a modern production process, new raw materials enter the production process while (WIP) are being altered and other finished goods are leaving the store shelves. Inventory accounting needs to be able to capture these stages separately for financial statement snapshots.
Raw Materials Inventory
Raw material costs appear on the balance sheet as a current asset, although sometimes a single line item is used that also includes WIP and finished goods inventory.
Accountants identify two subcategories of raw materials for inventory purposes. One subcategory is direct materials, which includes all resources that are physically incorporated into the final good. The other is indirect materials, which includes the resources necessary for the production process itself, such as light bulbs and oils necessary for a factory.
Work in Progress Inventory
A piece of inventory is classified as WIP whenever it has been mixed with human labor but has not reached final goods status; only some but not all necessary labor has been mixed with it.
WIP is also an asset on the balance sheet. It is standard practice to minimize the amount of WIP inventory before reporting is necessary since it is difficult and time-consuming to estimate the percentage of completion for an inventory asset.