Finished Goods Inventory Formula Definition
Finished goods inventory denotes the number of inventory or manufactured goods made available in the stock. The customers can still purchase these goods. Since these are goods manufactured or reformed by a company from raw materials, there is a variation in the product’s condition.
Significance of Finished Goods Inventory in E-commerce Business
The finished goods inventory formula helps manufacturing companies with accounting purposes. It holds utmost importance in business, including:
- It helps businesses to determine what they own, the value of the goods, and how to decrease waste.
- It also indicates the inventory required for the manufacturing process and stockout.
- It assists businesses in preventing scenarios when the client waits so much for the restock of the goods they want to purchase and cancel their order.
Applications of the Finished Goods Inventory Formula
A well-balanced finished goods inventory is important for manufacturing companies to prevent stockouts. Some of its applications include:
- The formula helps determine the finished goods stocks and the number of raw materials used, which helps a business save considerable money in the long term. It saves a business from wasting money on manufacturing excessive products.
- In different types of businesses, the finished goods inventory can help to track manufacturing costs. Moreover, it helps them forecast the cost of logistics and manufacturing and the required products.
Finished Goods Inventory Formula
Definition of Each Element Used in the Formula
- Beginning finished goods inventory value: The value of the finished goods inventory of the previous period.
- Cost of goods manufactured (COGM): The total amount paid to manufacture goods ready for sale during a particular accounting period.
- Cost of goods sold (COGS): The total direct costs of manufacturing the goods sold during a particular accounting period.
How to Use the Finished Goods Inventory Formula to Calculate a Business’ Finished Goods Inventory?
Suppose a company ABC produces school bags. By the end of the year 2021, the company had 1000 finished pieces of school bags in stock that were to be sold. A piece of school bag cost ₱6 each to manufacture. In 2021, the company ABC manufactured 1400 school bags and sold 1000 of them.
Beginning Finished Goods Inventory value = 1000 x ₱6 = ₱6000
COGM = 1400 x ₱6 = ₱8400
COGS = 1000 x ₱6 = ₱6000
Finished goods inventory of company ABC = ₱6000 + ₱8400 – ₱6000 = ₱8400
The finished goods inventory formula helps increase profitability by satisfying demand for its goods, and minimizing the odds of lost revenue and stockouts. This formula informs businesses on how many raw materials they need and when to order.