What is the Finished Goods Inventory?

Finished Goods Inventories are the final stage of inventories that have completed the manufacturing process and comprises the goods that have attained their final form and are completely eligible to be sold to the end customers.

Finished Goods Inventory Formula

It can be easily calculated with the help of details like the cost of goods manufactured, the cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more, and opening inventory.

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Example of Finished Goods Inventory

ABC Ltd. manufactures diaries. Calculate the Finished Goods inventory from the details provided below-

  • Diaries manufactured- 500Diaries sold – 200Opening finished goods – 300Cost of each diary – $10

Solution

  • Cost of goods manufacturedCost Of Goods ManufacturedCost of Goods Manufactured Formula is value of the total inventory produced during a period and is ready for the purpose of sale. It is calculated by adding manufacturing costs, value of work-in-process inventory at the beginning and then subtracting ending value of goods-in-process.read more= $5,000 (500 * $10)Cost of goods sold= $2,000 (200 * $10)Opening inventory value=$3,000 (300 * $10)

Calculation of Finished Goods Inventory

  • = $3,000 + $5,000 – $2,000= $6,000

Thus the value of Finished Goods = $6,000

Advantages

The various advantages are as follows:

  • Enhancement in Sales – Managing it allows an organization to boost its sales and earn better profits. A company can easily accomplish its predetermined goals and objectives with better sales and profits figures.Increased Focus on Inventories – Finished goods lying in inventories for a long time can impact an organization. Therefore, when an organization emphasizes more focus on inventories and takes initiatives to clear off the finished goods as soon as possible, it becomes quite obvious to achieve its long-term and short-term goals and objectives.Implementation of Better Tools and Technologies for Managing Inventories – They are also one of the significant reasons organizations choose to use better tools, technologies, and strategies for managing inventories.Improvement in Overall Business Conditions – A Faster flow of finished goods signifies better decisions taken by the organization, increased demand, and, thus, a rise in sales. It means that the overall business conditions and the environment have improved, and the organization will surely achieve all its predetermined goals and objectives.Enhanced Demand for the Goods – It motivates an organization to come up with strategies that help in the enhancement of the demand for its goods and services. Thus, the higher the demand, the higher the sales and faster the clearance of finished goods from the inventories.Better Decision Making – Managing it is a task. If an organization can do it, then the management of the same is making appropriate and thoughtful decisions after considering all the aspects. It hugely helps an organization in making necessary and effective strategies and decisions.Performance Incentives for Sales and Marketing Executives – When there is a rise in demand for goods and services, the sales shall automatically increase, and it will ultimately allow the finished goods to move faster from the inventories. The rise in sales denotes that the company will earn better profits. The same will declare incentives for sales and marketing executives, which will motivate them to bring in more sales and business to the organization.Developed Planning Practices and Tools – Managing it will allow a company to develop better planning practices and tools and accordingly implement the same for the better.

Disadvantages

The various disadvantages are as follows:

  • Obsolete Inventory – When the finished goods are overstocked, it increases the chances of the same becoming obsolete, and ultimately, the company will bear the losses.Storage Costs – More storage shall be needed for the finished goods that are lying, and the company will have to bear more costs for audit, control, additional workforce, etc.Insurance Costs – When there are larger inventories, the insurance costs will automatically increase. If there is a theft, fire, or any other disaster, the company is likely to suffer, and thus, there would be the need to pay higher premiums.

Important Points

  • Reasons like sales growth, implementation of better tools and technology, improved overall business conditions, etc., accounts for reduced levels of finished goods inventories as a percentage of sales.Demand-driven supply chain management tools might have a positive impact on inventory levels.It helps manage and reduce supply days and ensures the shipment is always on time.MTS (make-to-stock) and MTO (make-to-order) are two different strategies used to manage levels of FG inventories at the manufacturing sites.

This article has been a guide to the Finished Goods Inventory. Here we discuss the formula to calculate finished goods inventory along with an example, advantages, and disadvantages. You may learn more about accounting from the following articles –

  • Raw Material InventoryWIP InventoryFormula of Average InventoryFormula of Ending InventoryAging Accounts Receivables