Finished Goods Inventory
Manufacturing process has three stages in which the inventory is classified:
- Raw material: This is the inventory that has not been processed yet.
- Work-in-progress: This is the manufacturing process where the inventory is still being processed and hold for this purpose.
- Finished goods: In this part of the manufacturing process, all the work on the inventory is completed, and it is turned into the finished good and is ready to be sold.
There are some terms related to the finished goods inventory below that will help better understand the importance, features and accounting of the finished goods inventory:
Finished goods accounting
Until the goods are not completed in the product and the work-in-progress phase of the goods manufactured is finished, the finished goods are not written to the inventory account. Instead, common practice is to open a work-in-progress account where you manage the inventory that is still being finished.
Apart from this, the value of the inventory for the current accounting period is calculated in the financial statements and then shown in the final accounts. The inventory is calculated by balancing-off the sales with cost of sales and calculating the closing balance figure. This figure is then reported in the balance sheet to show the current inventory value in the current assets of the company.
Once the work-in-progress good are finalized and converted into finished goods, the companies have to move them to the warehouses for selling purpose until a potential buyer comes along. The costs on handling the finished goods in the warehouse are called warehousing costs.
Inventory holding days
The inventory-holding day’s ratio allows you to calculate the time for which you have held the inventory in your premises after finishing it into the complete product.
Just-in-time inventory systemIf a company introduces a just-in-time inventory system, then the finished goods do not hold in the premises of the business. The goods are produced on the order basis and sold once they are manufactured. In this method of inventory holding, there is no need to keep finishing good in the warehouse. This saves the costs associated to the warehousing and allows the company to save inventory losses otherwise suffered.