Finished Goods Inventory
Why valuing finished goods is important
Understanding the total value of raw materials, works in progress, and finished goods in your warehouse requires accurately calculating your finished goods. Businesses, particularly those engaged in manufacturing, use a formula to calculate finished goods and generate an inventory ratio that establishes their value. The results can influence future production rates and profitability.
The value of finished goods is recorded on the balance sheet and financial statements of the company as true value inventory. Because they are typically sold within a year, finished goods are viewed as a short-term or current asset on a company’s balance sheet.
Knowing the true value of the manufactured goods you have on hand in your finished goods inventory is crucial for minimizing material waste, calculating profits, and improving inventory management. The information is crucial to parties involved in observing the flow of raw materials, finished goods, and sold goods.
The company’s financial team regularly, such as once every three months, controls, maintains, and computes finished goods into its accounting. This ensures that valuation, manufacturing, sales, and inventory management are all done with accurate calculation of inventory and costs, current values, and up-to-date information.
Production must be slowed down in order for the inventory ratio to balance if the amount of finished goods is higher than the amount of finished goods sold. Production must rise to keep up with demand if finished goods inventory is lower than the number of sales.
What are finished goods?
Finished goods are items that have finished production but haven’t yet been sold. They represent the culmination of a manufacturer’s manufacturing process. Each of the three types of production builds on the one that came before it:
Depending on the manufacturer, finished goods can have different definitions and functions. For instance, a flour mill’s finished product is flour made from raw wheat. The flour is then sold to a bakery, where it is used to make the bakery’s final products before being used as a raw material once more.
How to calculate finished goods inventory
Follow these steps to calculate finished goods in inventory:
1. Learn the equation
To determine finished stock, a straightforward mathematical equation is employed:
Beginning finished goods inventory + (cost of goods manufactured – cost of goods sold) = Current finished goods inventory.
2. Check inventory records
Check the inventory records of your business to find the finished goods inventory for the prior period. For the current period, use this number as your “beginning finished goods inventory.”
Example: If the finished goods inventory at the end of the previous period was $75,000, then $75,000 is the starting finished goods inventory in the formula for the current period.
3. Add the cost of goods manufactured
Next, add the cost of goods manufactured. For the time period, this includes the cost of raw materials, direct labor, operational costs, and overhead.
Example: Your total inventory value would be $375,000 if you started with $75,000 in finished goods inventory and added $300,000 in new goods.
4. Subtract the cost of goods sold
Your total finished goods inventory value is obtained by deducting the previous period’s costs of goods sold. Your finished goods inventory for the new period will be this number.
Example: If you sold products that cost you $350,000 to manufacture out of your $375,000 total inventory, your finished goods inventory for the new period would be $25,000.
What are examples of finished goods?
- final product.
- final result.
- finished product.
What is finished goods classified?
- Fruits and vegetables.
- Processed foods such as cereal and sardines.
What finished goods formula?
Finished goods are items that have finished production but have not yet been distributed to consumers.