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Finished Goods Inventory

What is finished goods inventory?

Finished goods inventory is the total number of manufactured products that are available, in stock, and ready for purchase by vendors, retailers, and consumers. With that said, finished products are often a relative concept, since a seller’s goods may actually become another buyer’s raw materials inventory. Still, finished goods are an important inventory management metric, and the formula is helpful when determining the valuation of the goods for sale. 

Finished goods inventory is great for tracking production and work-in-process inventory, which can be helpful for ensuring that the financial statements in the current and future accounting periods are accurate.

How to calculate finished goods inventory

The finished goods inventory formula is:

Finished goods = [COGM – COGS] + previous finished goods inventory value

To calculate your finished goods inventory, you do need to know your cost of goods manufactured (COGM), as well as your cost of goods sold (COGS). Keep in mind, as you’re evaluating your COGM and COGS, you’ll need to use the same time period for both – consistency is key to guarantee accuracy with these formulas.

The COGM can be calculated as: [beginning WIP inventory + total manufacturing cost] – ending WIP inventory. Next, COGS can be found using: [beginning inventory + purchases during the period] − ending Inventory.

With these numbers, you can implement the finished goods formula. Remember that you’ll need to check your inventory records to capture the finished goods inventory for the previous period.)

Calculating finished goods inventory: an example

Let’s say at the end of last year, your pillow company had 1,000 finished pillows in stock. Each pillow cost $4 to produce, so the previous finished goods inventory value would look like: 1,000 x $4 = $4,000. During this current fiscal year, your brand manufactured 1,200 pillows and sold 800 of those. The COGM is [1,200 x $4 = $4,800] and the COGS is [800 x $4 = $3,200].

Now, subtract the COGS from the COGM: $4,800 – $3,200 = $1,600. From there, you can calculate the new finished goods inventory by adding the previous finished goods inventory value to the answer from COGM minus COGS. This looks like: $4,000 + $1,600, meaning your finished goods inventory is worth $5,600.

Frequently Asked Questions

  • Why is the finished goods inventory formula useful?

    The finished goods formula is useful because it helps business owners (1) better understand the total value of their inventory, and (2) record that value as an asset on their balance sheet. Additionally, knowing the true value of your manufactured stock plays an important role in reducing waste in the production process, determining overall profitability, and optimizing your supply chain and inventory management systems.

  • What are examples of finished goods?

    Finished goods are really the third and final phase of the manufacturing process, where there is no more work to be done on an item; it’s been completed, and is now ready to be sold. Products like clothing, processed food, and appliances all fall into the finished goods category.

  • How are finished goods valued?

    Finished goods are often used to calculate profits within inventory accounts. Goods that have yet to be sold are marked as debt on the balance sheet — but after they’ve sold, they’re registered as a credit. At the end of a fiscal period, the difference between goods sold and goods in inventory is calculated, with the resulting number dictating gross profit.

    Evaluating the cost of finished goods plays a big role in the success of your business. For instance, the time needed for manufacturing and the cost of direct labor and direct materials all need to be considered. If the expense of any of these factors exceeds the price for the final product, cheaper alternatives must be found (to avoid going into serious debt).

More terms and formulas

formulas Fill Rate See definition and examples
Orders WISMO See definition and examples
formulas Holding Costs Formula See definition and examples

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