What Are Finished Goods? (And How To Calculate Their Inventory Value)

By Indeed Editorial Team

Updated March 11, 2022 | Published May 3, 2021

Updated March 11, 2022

Published May 3, 2021

Finished goods is a category of inventory unique to manufacturing businesses. They are products that have completed the manufacturing process but have not yet been sold or distributed to vendors or retailers. Understanding finished goods and how to account for their value on your balance sheet and financial statements can help keep your company profitable. In this article, we define finished goods, their importance and the steps needed to calculate finished goods inventory. 

Related: 6 Types of Manufacturing Processes

What are finished goods?

Finished goods are products that have completed the manufacturing process but haven’t been sold. They are the final item, or the finished result, in a manufacturer’s production process. There are three types of production and each builds on the one before it:

  • Raw materials: These are the materials, ingredients or base component parts used to manufacture a product. 

  • Work in process: These are the products and goods that are in the process of being manufactured. Some manufacturing processes are very simple, allowing for raw materials to move straight to finished goods.

  • Finished goods: These are products ready for sale or distribution. Finished goods are the last step in the production process. An inventory of finished goods is what manufacturers depend on to generate revenue. They become merchandise once a retailer or direct customer purchases them. 

The definition and role of finished goods can vary depending on the manufacturer. For example, a flour mill's finished good is flour made from wheat, a raw material. The flour is then sold to a bakery, where it again becomes a raw material before ending up in the bakery's finished products

Related: What Is Manufacturing?

Why valuing finished goods is important

Accurately calculating your finished goods is a necessary step to understand the total value of raw materials, works in process and finished goods in your warehouse. Companies, especially manufacturing businesses, use a formula to calculate finished goods and create an inventory ratio that determines their value. The results can influence future production rates and profitability.

The value of finished goods is classified as true value inventory and appears on the company’s balance sheet and financial statements. Finished goods are considered a short-term or current asset on a company's balance sheet because they are usually sold within a year. 

Understanding your finished goods inventory means understanding the true value of the manufactured items in stock, an important factor in reducing material waste, profit determination and optimization of inventory management. The information is also important to stakeholders who are monitoring the flow of raw materials, finished goods and sold merchandise.

The company’s financial team regulates, maintains and computes finished goods into its accounting regularly such as once every three months. This ensures accurate calculation of inventory and costs, current values and up-to-date information is used when determining valuation, manufacturing, sales and inventory management.

If the amount of finished goods is greater than the number of finished goods sold, production needs to slow down to allow the inventory ratio to balance out. If the amount of finished goods inventory is lower than the number sold, production needs to increase to meet buyer demand.

How to calculate finished goods inventory

Follow these steps to calculate finished goods in inventory:

1. Learn the equation

There is a simple mathematical equation used to calculate finished stock:

Current finished goods inventory = beginning finished goods inventory + (cost of goods manufactured - cost of goods sold)

2. Check inventory records

Check your company's inventory records for the finished goods inventory of the previous period. Use this number as your “beginning finished goods inventory” for the current period. 

Example: If the last period ended with $75,000 in finished goods inventory, $75,000 is the beginning finished goods inventory in the formula for the current period.

3. Add the cost of goods manufactured

Next, add the cost of goods manufactured. This includes the cost of raw materials, direct labor, operational and overhead costs for the period.

Example: If you began with $75,000 in finished goods inventory and added $300,000 of new goods, your total inventory value would be $375,000.

4. Subtract the cost of goods sold

Subtract the costs of goods sold from the last period from your total finished goods inventory value. This number will be your finished goods inventory for the new period.

Example: Of the $375,000 worth of total inventory, you sold goods that cost you $350,000 to manufacture, your finished goods inventory for the new period would be $25,000.

Related: How To Calculate Manufacturing Cost

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