What is the Finished Goods Inventory?
Finished Goods Inventories are the final stage of inventories that have completed the manufacturing process and comprises of the goods that have totally attained its 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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For eg:
Source: Finished Goods Inventory (wallstreetmojo.com)
Example of Finished Goods Inventory
ABC Ltd. manufactures diaries. Calculate the Finished Goods inventory from the details provided below-
- Diaries manufactured- 500
- Diaries sold – 200
- Opening finished goods – 300
- Cost 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. With better sales and profits figures, a company can easily accomplish its pre-determined goals and objectives.
- Increased Focus on Inventories – Finished goods lying in inventories for a long time can impact an organization in numerous ways. Therefore, when an organization emphasizes more focus on inventories and takes initiatives for clearing off the finished goods as soon possible, then it becomes quite obvious for the same 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 why organizations are choosing to make use of 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 for the same. It means that the overall business conditions and the environment have been improved, and the organization is surely going to achieve all its pre-determined goals and objectives.
- Enhanced Demand for the Goods – It motivates an organization to come up with strategies that helps 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 is able to do it, then this means that the management of the same is making appropriate and thoughtful decisions after considering all the aspects. It hugely helps an organization in taking necessary and effective strategies and decisions.
- Performance Incentives for Sales and Marketing Executives – When there is a rise in demand for goods and services, automatically, the sales shall also 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, and the same will declare incentives for sales and marketing executives, which will again motivate them to bring in more sales and business to the organization.
- Developed Planning Practices and Tools – Managing it will allow a company to come up with 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 to become obsolete, and ultimately, the losses are to be borne by the company.
- 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, its control, additional manpower, 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 for the same 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 in managing and reducing days of supply and ensures the shipment is always on-time.
- MTS (make-to-stock) and MTO (make-to-order) are two different strategies that are used for managing levels of FG inventories at the manufacturing sites.
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This article has been a guide to 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 –
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