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).