Finished Goods Inventory

Inventory management is essential for any business. However, proper inventory management can be challenging, especially for more than one store business. Calculating the number of finished products in hand that are ready for sale can ease the inventory management process.

What is the Finished Goods Inventory?

Finished goods inventory refers to the number of finished goods available in hand that customers can purchase. It helps businesses understand the total value of their saleable products. Finished goods of one business can be used as raw material by another business; hence the term is relative. As it is often predicted that the finished goods would be sold within a year, the finished goods inventory is often not seen as a long-term asset.

Why is Calculating Finished Goods Inventory Important?

Calculating finished goods inventory can enhance customer experience by preventing products from going out of stock. There are several reasons why calculating finished goods inventory is important for businesses.

• Gross Income

Inventory is one asset that needs to be included in financial documents like income statements, account statements, etc. Calculating finished goods inventory helps identify the gross income and eases the process of planning budgets.

• Finances

Calculating finished goods inventory saves businesses from wasting capital on unnecessary raw materials and finished products.

• Inventory Management

Calculation of finished goods inventory enhances the inventory management system by identifying labour and management costs.

How to Calculate Finished Goods Inventory?

You will need to calculate the Cost Of Goods Manufactured (COGM) and the Cost Of Goods Sold (COGS) to use the finished goods inventory formula.

COGM = (Beginning WIP Inventory + Total Manufacturing Cost) – Ending WIP

COGS = (Beginning Inventory + Purchase During The Time Period) – Ending Inventory

Finished Goods Inventory = (COGM – COGS) + Value of Previous Year’s Finished Goods.

Make sure that the period is consistent throughout to ensure proper calculation.

Step-by-step Guide to Calculate Finished Goods Inventory

Below mentioned is a step-by-step guide for calculating finished goods inventory:

• Calculate the previous year’s finished goods by searching the inventory records.

Suppose a shoe company had 400 finished shoes at the end of last year, each shoe costing Rs.500 to produce.

Previous Year’s Finished Goods = 400 x Rs.500 = Rs.2,00,000

• Deduct the COGS (cost of goods sold) from the COGM (cost of goods manufactured).

For instance, the shoe company manufactured 600 shoes and sold 300 shoes last year.

Cost of goods manufactured (COGM) = 600 x Rs.500 = Rs.3,00,000

Cost of goods sold (COGS) = 300 x Rs.500 = Rs.1,50,000

COGM – COGS = Rs.3,00,000 – Rs.1,50,000 = Rs.1,50,000

• Finally, calculate the finished goods inventory by adding the value of the previous year’s finished goods to the value of COGM – COGS.

For the shoe company, Finished goods inventory = Rs.2,00,000 + Rs.1,50,000 = Rs.3,50,000