On the previous post we have discussed Budgeting for Raw Materials Inventory, now let’s go on for Work-In-Process (WIP) Inventory. The inventory of goods actually in process of production between stocking points can be best estimated by applying standard turnover rates to budgeted production. This may be expressed either in units of production or dollars and may be calculated for individual processes and departments or for the factory as a whole. The former is more accurate. To illustrate this procedure, assume the following inventory and production data for a particular process or department:


Process inventory estimated for January = 1 500 units (a)
Production budgeted for month of January = 1,200 units (b)
Standard rate of turnover (per month) = 4 times (c)
Average value per unit of goods in this process = $10

With a standard turnover rate of four times per month: the average inventory should be 300 units (1,200 ( 4). To produce an average inventory of 300 units, the ending inventory should be 100 units:

500 + 100
———–— = 300

Using the symbol X to denote the quantity to be budgeted as ending inventory, the following formula can be applied:

           2b                2(1200)
X = (–) –––—– x a = —————- (–) 500 = 100 units
           c                  4

Value of ending inventory is $1,000 (100 × $10)

Where the formula produces a minus quantity (as it will if beginning inventory is excessive), the case should be studied as an individual problem, and a specific estimate should be made for the process or department in question.

Control over the work-in-process inventories can be exercised by a continuous check of turnover rates. Where the individual processes, departments, or plants are revealed to be excessive, they should then be subjected to individual investigation.

The control of work-in-process inventories has been sorely neglected in many concerns. The time between which material enters the factory and emerges as the finished product is often much longer than necessary for efficient production. An extensive study of the automobile tire industry revealed an amazing spread of time among five leading manufacturers, one company having an inventory float six times that of another. This study also indicated, by an analysis of the causes of the float time that substantial reductions could be made in all five of the companies without interfering with production efficiency. Thus, budgeting for work-in-process inventory is an excellent area in which to incorporate an active program of inventory reduction activities, usually through a program of incorporating just-in-time concepts into the production process.

Although it is desirable to reduce the investment in goods actually being processed to a minimum consistent with efficient production, it is often desirable to maintain substantial inventories of parts and partially finished goods as a means of reducing finished inventories.


Parts, partial assemblies, processed stock, or any type of work-in-process that is stocked at certain points should be budgeted and controlled in the same manner as materials. That is, inventory quantities should be set for each individual item, based on the production plan; or inventory limits should be set that will conform to standard rates of turnover. In the former case, control must be exercised through the enforcement of the production plan; in the latter case, maximum and minimum quantities must be established and enforced for each individual item.

With the planned cost input to work-in-process known from the materials usage budget, the direct labor budget, and the manufacturing expense budget, and the quantities of planned completed goods furnished by manufacturing, the inventory accountant may develop the planned work-in-process time-phased (condensed) budge. The reasonableness of the budgeted inventory level should be tested by comparing it to historical inventory turnover levels.