Finished goods inventory refers to the number of manufactured products in stock that are available for customers to purchase. The finished goods inventory formula is an important inventory ratio that can be used to calculate the value of these goods for sale.
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Manufacturing businesses usually have products in three stages of production. In this example, we’ll look at a candle-making business – Jen’s Candles:
- Raw materials: any materials used to produce candles, such as wax, wicks, decorative ribbons, etc.
- Work-in-progress: unfinished products that are moving through production, such as candles that are drying and unpackaged.
- Finished goods: products that are ready to be sold, such as finished and packaged candles.
How to calculate finished goods inventory in manufacturing
1. Check inventory records to find out the finished goods inventory for the previous period.
Example: At the end of last year, Jen’s Candles had 800 finished candles in stock. Candles cost $2 each to produce.
Previous finished goods inventory value = 800 x $2 = $1600
2. Subtract the cost of goods sold (COGS) from the cost of goods manufactured (COGM).
Example: During the year, Jen’s Candles manufactured 1000 candles and sold 600 candles.
Cost of goods manufactured = 1000 x $2 = $2000
Cost of goods sold = 600 x $2 = $1200
$2000 - $1200 = $800
3. Calculate the new finished goods inventory by adding the previous finished goods inventory value to the previous solution (COGM minus COGS).
Example: $800 + $1600 = $2400
So, in this example, Jen’s Candles had a finished goods inventory worth $2400.
Why is the finished goods inventory formula useful?
Calculating the value of finished goods inventory can help business owners better understand the value of their inventory and record that value as an asset on the business’ balance sheet. Knowing the true value of manufactured stock is an important factor in reducing wastage of materials, determining profitability, and optimising inventory management processes.
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