What is Finished Goods Inventory?
Finished Goods Inventory in e-commerce is the inventory of products that have been manufactured and are now ready to be sold. This type of inventory includes items like apparel and consumer electronics but can also include items such as furniture or automobiles.
Knowing the finished goods inventory amount helps to maintain optimal stocks level of popular items and minimize backorders or lost sales.
Significance of Finished Goods Inventory in E-commerce
Finished goods inventory is a critical component of e-commerce operations as it is the physical product that customers are purchasing. The management of finished goods inventory is essential for the success of e-commerce operations.
- E-commerce businesses should have optimal finished goods inventory to meet customer demand, while also controlling the cost of inventory and storage.
- A well-managed finished goods inventory can help minimize stockouts, reduce the cost of returns, and ensure accurate inventory tracking.
- Finished goods inventory helps e-commerce businesses remain competitive, allowing them to get more customers through a streamlined shopping process.
Prerequisites to Calculate Finished Goods Inventory and How It Works
To calculate and manage finished goods inventory, companies can use this formula:
Beginning finished goods inventory + COGM – COGS = finished goods inventory
1. Cost of goods manufactured (COGM): This system should include the ability to track the costs associated with producing the finished goods, including the cost of raw materials, labor, overhead, and any other costs associated with the production process.
2. Beginning of finished goods: IT refers to the finished goods inventory of the last period.
3. Cost of Goods Sold (COGS): This includes tracking the number of finished goods sold and the cost of each item sold.
Use Case With Finished Goods Inventory
A company ABC has 200 pairs of jeans, each costing AUD10 to produce. Beginning inventory amounting to AUD3000.
Thus, COGM = 200 x AUD 10 = AUD 2000
They sold 100 pairs of jeans. Thus, COGS = 100 x AUD10 = AUD1000
Finally, finished goods inventory = AUD3000 + AUD(2000 – 1000)
= AUD3000 + AUD1000