Wood fiber/polyethylene composite (WFPEC) is composed of a natural wood fiber and a recyclable polyethylene plastic, which is normally used as an environmental protection composite material. However, better knowledge of chip formation and surface damage mechanism of WFPEC is essential to improve its machinability for extending exterior and interior applications. In this article, machinability of WFPEC was investigated by analyzing the disparity between cutting efficiency and surface quality through a group of orthogonal cutting experiments with change of cutting depth. The chip formation process was recorded by a high-speed camera system with 5000 frames per second. Surface topography was observed by a scanning electron microscope. The results showed that the chip morphology changed from continuous cutting governed by a continuous shearing process under the shallow cutting depth, to a discontinuous cutting governed by plastic fracture under the deep cutting depth ahead of the tool tip. Flattened matrix was the main form of surface topography caused by shallow cutting depth, while matrix-fiber tearing was caused by deep cutting depth. Pullout/fracture and debonding of fibers were related to the fiber orientation angle and the diameter of fiber bundles, but not to the cutting depth. Taken together, the toughness of the workpiece material in the cutting region decreased with the increase in cutting depth. To avoid matrix-fiber tearing, shallow cutting depth should be used during finishing to maintain surface quality. In contrast, pre-cutting can be performed with a deep cutting depth in order to improve the cutting efficiency.