You can’t make strategic production and sales decisions with inaccurate or missing finished goods inventory data. Closely monitoring this inventory means you can slow or speed up production as necessary to meet fluctuating customer demands and pivot when supply chain issues arise.
Learn how to find finished goods inventory totals and explore the advantages of monitoring your stock of customer-ready products.
What are finished goods?
Finished goods are ready-to-purchase products. They’re the polished outcome of raw materials transformed through production, assembly, and quality check phases. Examples of finished goods range widely, from smartphones and furniture to clothing and packaged foods — each representing the final sellable product.
The raw materials to finished goods journey covers three essential steps:
- Production: This phase involves converting raw materials into components for the final product.
- Assembly: Here you combine various work-in-progress (WIP) parts and components to assemble the final product. For products like electronics and vehicles, this might involve part assembly, wiring, and software installations.
- Quality assurance: Finally, your team ensures products meet quality standards. This includes testing, conducting inspections, and making necessary adjustments to guarantee consumer satisfaction.
In most industries, the finished product’s value surpasses raw materials and labor costs. Businesses often measure this inventory in monetary terms or unit count, with the former revealing the finished products’ numerical value.
The importance of tracking finished goods inventory
Tracking finished goods is crucial for aligning production with market demand and optimizing cash flow. This knowledge provides a clear picture of available stock and the capacity to satisfy customer needs.
Say a customer wants a newly released 85-inch TV, and it’s unavailable at their nearest store. An effective finished goods inventory system lets staff quickly source the item from another store or distribution center, ensuring customer satisfaction.
Typically, businesses use inventory management software like Fishbowl to monitor these goods alongside WIP and raw materials. This software offers real-time inventory updates, helping businesses adapt to stock level fluctuations. As businesses sell finished goods and produce items, the value and volume of their inventory fluctuate, highlighting the importance of efficient inventory tracking.
Here are some more ways calculating and tracking finished goods benefits businesses:
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More accurate budgeting: By closely monitoring finished goods inventory, you gain precise insight into the value of a company’s most significant assets. This lets you create accurate financial statements and budgets, offering clarity on your inventory’s worth.
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Less waste: Excessive materials storage ties up capital and increases obsolescence and waste risks, especially for perishable goods. Accurate inventory management ensures you order and store only what you need, reducing holding costs and minimizing saving resources.
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Enhanced demand forecasting: Tracking inventory costs and trends over time reveals seasonal fluctuations and other demand changes. This insight lets you adjust production, prioritizing high-demand items and reducing manufacturing for slower-moving products.
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Greater asset clarity: Differentiating between materials, WIP, and finished goods enhances your grasp of stock levels, which is vital for making more informed material acquisition and production decisions.
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Streamlined inventory workflows: Tracking finished goods inventory provides clarity into product availability and demand fulfillment. This oversight lets businesses efficiently adjust production schedules and inventory levels, reducing overstock and stockouts.
The difference between finished goods and other inventory
Understanding the transformation of different materials’ value and liquidity throughout the manufacturing process lets you make informed decisions about inventory management and financial planning. And it ensures you use resources efficiently, aligning production with market demand.
Raw materials
Raw materials are the inputs required to produce finished goods. They stay in your inventory as assets, valued at their initial purchase cost, until they enter the production process. Since they’re unmodified, you have the flexibility to resell these materials to recover their initial purchasing costs.
For example, if a manufacturer over-purchases copper wire for electronic devices, selling the surplus helps recoup the initial expenditure.
Work-in-progress
WIP inventory refers to unfinished products in the manufacturing process. Once raw materials undergo any modification, like cutting and assembling, they transition into WIP items. This represents a critical point where assets are less liquid, posing challenges for resale. While you can still return unused raw materials and put finished products to market, partially completed items typically lack a resale market.
For businesses with swift production cycles that transition raw materials to finished goods directly, bypassing detailed WIP accounting might be feasible. But industries with extended manufacturing timelines, such as automotive manufacturing, require precise WIP tracking to accurately reflect the production status and inventory value of these sectors.
How to calculate finished goods inventory
No matter your industry, calculating your finished goods helps you understand available stock and plan for future sales. But you need to make a few calculations before using the main formula.
Make initial calculations
First, you need to determine the cost of goods manufactured (COGM). This represents the total cost of producing goods during a certain period. Here’s how to calculate it:
COGM = Beginning WIP inventory + Total manufacturing costs – Ending WIP inventory
Then, figure out the cost of goods sold (COGS), which calculates how much it costs to produce the goods you sell:
COGS = Beginning Inventory + Purchases during the period – Ending inventory
With COGM and COGS in hand, you can determine the value of your finished goods inventory:
Finished goods inventory = (COGM – COGS) + Value of previous year’s finished goods
Choose a consistent time period
Establish a specific time frame for your calculations for consistency across all formulas. If you’re focusing on Q4 of 2023, all data must be from this period. Also make sure your start and end dates match across all formulas.
Gather necessary data
Next, collect data relevant to your chosen time period, including:
- Beginning and WIP inventory
- Total manufacturing costs
- Beginning and ending inventory levels
- Purchases made during the period
- Value of the previous year’s finished goods
For illustrative purposes, we’ll use these values in upcoming examples:
- Beginning and WIP inventory: $1,000
- Total manufacturing costs: $200
- Beginning and ending inventory levels: $200
- Purchases made during the period: $300
- Value of the previous year’s finished goods: $200
Calculate COGM and COGS
Next, calculate the COGM and COGS:
COGM = ($1,000 + $200) – $200 = $1,000
COGS = ($300 + $500) – $200 = $600
Apply the finished goods inventory formula
Finally, use the finished goods inventory formula to determine your inventory value:
Finished goods inventory = (COGM – COGS) + Value of previous year’s finished goods
For our example, this is ($1,000 – $600) + $200 = $600.
How an inventory management system helps with finished goods management
Managing finished goods inventory helps you maintain production flow, meet customer demand, and control costs. An inventory management system like Fishbowl organizes and optimizes finished products from end to end. Here’s how.
Track finished goods your way
Fishbowl gives you full control over how you track finished goods. It supports lot numbers, serial numbers, revision levels, and expiration dates — ideal for industries like food and pharmaceuticals where traceability matters.
But you’re not limited to the defaults. Create custom tracking fields based on what matters most to your operation, like creation date, product size, or packaging type. No matter how your team organizes product data, Fishbowl adapts, making inventory audits and reporting much easier to manage.
Streamline BOM management
Fishbowl makes it easy to build and manage bills of materials (BOMs) that match the complexity of your production. Each BOM includes the parts, raw materials, labor, and instructions needed to manufacture a finished good, leading to more consistent batches and accurate records.
Fishbowl also lets you create standard, reverse, disassemble, repair, and custom work orders depending on what your operations require. This way, you’re not forced to rewrite BOMs for every exception — a common frustration with more rigid inventory management platforms.
Understand raw material consumption
It’s not always possible to predict how much raw material you’ll actually use in production. Sometimes you produce more or fewer finished products than you expected, so the raw materials listed on your BOM don’t match actual usage. This is especially common in food and beverage industries, where factors like spoilage and spillage often come into play.
When this happens, many manufacturing inventory management solutions force you to revise your BOM to reflect the difference, which can distort your records over time. But with Fishbowl, you can record actual raw material usage without altering the original BOM. This keeps your data accurate and your operations flexible.
Add labor costs to COGM and COGS
Fishbowl doesn’t just track parts and finished products. Add labor costs to your BOMs to get a more accurate measure of your COGM and COGS.
Including labor in your cost calculations helps you price finished goods correctly and improve margin visibility. It also gives you a clearer picture of the true cost behind each product, which lets you identify inefficiencies in your production process.
Accurate costing also helps you plan production runs more precisely and maintain tighter control over your bottom line. So, you want inventory costs to include not only the value of raw materials but also labor, overhead costs, and any additional expenses directly tied to production, like equipment usage.
Replenish raw materials automatically
Fishbowl’s Manufacture Order (MO) to Purchase Order (PO) functionality keeps your production line moving smoothly. Once a manufacturing job is complete, the system automatically generates purchase orders to replenish raw materials used in that manufacturing run. This means you’re always ready for the next production cycle and your finished goods pipeline is full and predictable.
Gain better inventory insights with Fishbowl
Calculating finished goods inventory offers valuable insight into your supply chain and stock management practices. But to turn this insight into actionable strategies, you need Fishbowl.
Fishbowl Inventory not only enhances your inventory management practices but also transforms your supply chain efficiency, ensuring you always meet customer demands. And Fishbowl’s seamless integration with QuickBooks means it’s a complete solution for managing every order fulfillment stage.
Book a demo today to discover how this comprehensive tool can assist your team.
FAQs
How do you record finished goods inventory?
From a financial standpoint, you record finished goods inventory by moving costs from the WIP inventory account to the finished goods account once production is complete. These costs include all direct materials, direct labor, and allocated manufacturing overhead used to produce the goods.
On your balance sheet, finished goods are a current asset under inventory for as long as you hold them. Once sold, their cost goes from finished goods inventory to COGS on your income statement.
How do you find finished goods in inventory?
To locate finished goods in your inventory, use an inventory management system that tracks product status, location, and quantity in real time. Fishbowl, for example, lets you search for finished goods by name, description, tracking number, or location. Instantly see where inventory is stored and how many units are available.
This visibility is key for fulfilling orders quickly, managing warehouse efficiency, and maintaining accurate stock levels — especially when your operations involve multiple production stages or storage locations.
What inventory classification is finished goods?
There are three primary inventory classifications in manufacturing: raw materials, WIP, and finished goods. Raw materials and WIP include all the items that haven’t yet completed the production process. Finished goods are fully manufactured products that are ready for storage, shipment, or sale.
Once a product leaves the production line and passes quality checks, it’s reclassified as a finished good in your inventory system. This is important for accounting and inventory tracking purposes because it reflects the item’s final value and status as a current asset. It also helps you calculate key financial metrics: COGM, COGS, and inventory turnover ratio.
What are examples of finished goods?
Finished goods are products that have completed the manufacturing process and are market-ready without further transformation. Examples include packaged food, bottled beverages, electronic devices, furniture, apparel, and vehicles. These items are ready to be sold to consumers or distributed to retailers.
Items that aren’t ready for sale are not finished goods and shouldn’t be recorded that way. For example, a jacket missing buttons or a car awaiting inspection still falls under WIP inventory.
Properly classifying finished goods in your inventory system maintains accurate inventory counts and avoids fulfillment mistakes. It also helps you generate clearer financial reports by ensuring only truly sellable products count toward your inventory value.
