Goods-in-Process

Exploring Goods-in-Process: Understanding Its Role in Manufacturing

In the intricate world of manufacturing, understanding inventory management is crucial. One essential aspect is goods-in-process, a vital component of a company's balance sheet. Let's delve into what goods-in-process entails, its significance, and its implications for manufacturing companies.

What Is Goods-in-Process?

Goods-in-process, also known as work-in-process, represents partially completed goods in the manufacturing process, not yet ready for sale. It encompasses the costs of labor, raw materials, and overhead incurred during production. This inventory classification appears as a current asset on a company's balance sheet, alongside raw materials and finished goods.

Understanding Goods-in-Process

Manufacturing companies undergo a sequential process of producing goods, from sourcing raw materials to transforming them into finished products. Accounting regulations mandate the segregation of these stages, leading to separate accounts for raw materials, goods-in-process, and finished goods. Goods-in-process serves as an intermediate state between raw materials and finished goods, reflecting the value of partially completed products.

Example of Goods-in-Process

Take Deere & Company (DE), a renowned manufacturer of farming and construction equipment, as an example. Upon acquiring raw materials like steel and electronics, Deere's factory workers commence production. As work progresses, raw materials are transferred to the goods-in-process account. Once products are complete, they move to the finished goods account. For instance, Deere & Co.'s 2018 fiscal year recorded $0.8 billion in goods-in-process inventory, reflecting its manufacturing activities.

Benefits of Goods-in-Process

Monitoring changes in goods-in-process provides insights into a company's production activities and market demand. Increases suggest heightened production to meet demand, benefiting shareholders and the economy. Conversely, decreases may indicate production slowdowns, signaling weakening demand.

Special Considerations

Investors must understand how companies measure goods-in-process, as calculation methods may vary. This disparity necessitates careful analysis to make meaningful comparisons across firms.