Finished Goods Inventory Formula – Definition
Finished goods inventory is the total goods available for customers to purchase that can be fulfilled. It is majorly used by manufacturing companies for accounting.
Significance of Finished Goods Inventory Formula in an E-commerce Business
Using finished goods inventory, your business can easily calculate the value of the goods for sale. There are various advantages to using finished goods inventory which include the following-
- Helps to identify gross profit- Finished goods contribute majorly to a company’s inventory. When the value of a finished good inventory is calculated, it helps identify the company’s gross profit.
- Reduces wastage of money and material- It helps companies know the exact amount of finished goods, thus reducing the cost of acquiring the big warehouses.
- Brings out accuracy in current assets– Accurate finished good inventory helps companies know product demand and reduces missed sales and loss in revenue.
Application of Finished Goods Inventory Formula
The finished goods inventory formula is used to ensure that the total value of a company’s product is ready for sale. Some basic applications of the finished goods inventory formula are as follows:
- Finished goods inventory can easily track work-in-process (WIP) inventory. It helps maintain balance sheets, financial statements, and other financial documents.
- Knowing the finished goods inventory allows you to track direct labor and manufacturing costs to find various opportunities to improve production processes.
Finished Goods Inventory Formula
Definition of Each Element Used in the Finished Goods Inventory Formula
The finished goods inventory formula contains the following element-
- Beginning finished goods- Finished goods inventory of the last accounting period.
- Cost of manufacturing goods- Component of calculation for the cost of goods sold.
- COGS- Cost of goods sold to produce a business’s product or services. It can be calculated using the following formula:
COGS = Beginning Inventory + Purchases – Ending Inventory
How To Use the Finished Goods Inventory Formula To Calculate a Business’ Turnover Ratio?
Let’s say a coffee brand ended the last period with ₱40,000 in finished goods inventory, making the beginning finished goods inventory ₱40,000.
Now let’s say the COGM for the period is ₱70,000, and their COGS is ₱50,000.
Here’s how to calculate the finished goods inventory formula:
Finished Goods Inventory = ₱40,000 + ₱70,000 – ₱50,000
Finished Goods Inventory = ₱60,000
Thus, ₱60,000 worth of the finished inventory will be the next accounting period’s beginning finished goods inventory.
What Can You Infer From the Result of the Finished Goods Inventory Formula?
Using a finished goods inventory formula, a business can identify gross profit, record the number of current assets and optimize the spending on waste material.