The term 'finished goods' is a crucial one, when it comes to manufacturing and inventory management. Understanding finished goods and their role in inventory management is essential for businesses that want to optimize their production processes, reduce waste, and improve their bottom line. This article discusses the importance of finished goods inventory, finished goods terminology, how to calculate finished goods inventory, and more.
What Are Finished Goods?
As the name suggests, finished goods are final products that are the outcome of the complete manufacturing process. These products have normally passed through all the stages of production including procurement of raw materials, assembly, manufacturing, packing, and labeling.
They are ready to ship products that are all set for delivery to wholesalers, retailers, and consumers. A few examples of finished goods (FG) include ready-to-wear clothes, electronic items, equipment or machinery, food items, and furniture, among others.
Finished Goods Inventory Defined
Finished goods inventory refers to the stock of completed products or finished goods that any company holds at any given point for sale. It is one of the major critical components behind any company for sustainability in the market.
Holding an adequate amount of finished goods inventory is important to meet the growing customer demands at any given point in time. Finished gods inventory accounts for products that have undergone the manufacturing and packaging process and are ready to be shipped or sold to customers.
Ensuring an adequate stock of products is crucial to avoid stockouts, which can directly impact the company's reputation and result in lost sales and lower revenue generation.
Importance of Finished Goods Inventory
The ability to meet growing customer demands and maintain smooth operations throughout is extremely critical to remain competitive in the market and have a positive brand image and reputation among the public. Finished goods inventory is one of the most important aspects to sustain in the present market.
Some of the reasons why finished goods inventory is important are:
Fulfilling orders
FG inventory is a must to fulfill customer orders on time. Without finished goods inventory, product delivery will get delayed and will negatively impact customer satisfaction and loyalty.
Supporting sales
Adequate finished goods inventory can support sales as it means that products would be available whenever the customers wish to purchase. This can lead to increased profits.
Meet customer demands
Maintaining adequate stock of finished inventory goods allows any company to satisfy customer needs and quickly fulfill their orders either by shipping or selling directly.
Smoother operations:
Having a sufficient amount of finished goods stocks and managing adequate inventory helps companies avoid stockouts and facilitates maintaining smooth operations preventing production disruptions.
Seasonal demand of goods
Specific products have higher demand at certain peak seasons. Having sufficient FG stock helps companies meet the increased consumer demand during these periods.
Competitive advantage
Companies with excess inventory of final products can provide enhanced customer satisfaction by fulfilling customer orders faster. This includes faster delivery times and high product availability which helps build a positive brand image among consumers and increase customer retention rates.
Steps to Make Finished Goods
Manufacturing of finished goods involves a thorough process before the products are made available for sale. Scrutinization at every step of the production process, beginning from acquiring the right and high-quality raw materials is essential for companies to ensure they produce and distribute quality goods to their target customers effectively and efficiently.
Generally, there are 6 critical steps involved in making finished goods which are as follows:
Raw Material Acquisition
The very first step involved in making finished goods is sourcing the relevant raw materials. Raw materials are usually sourced from bulk suppliers.
Planning
Once the raw materials have been sourced, the next immediate step is production planning. This means laying down a blueprint of the step-by-step process to convert the raw materials into finished products and calculating the estimated time, labor required, and necessary equipment needed.
Manufacturing
The most important step of all is manufacturing. This involves a sequential series of processes to convert the raw materials into finished goods. This may include mixing, assembling parts, and cutting using specialized equipment.
Quality Inspection
Quality inspection or Quality Control (QC) is the next step in the process to ensure the finished goods meet the expected quality standards. This usually involves checking for defects, visual inspection, identifying potential bottlenecks and rectifying them, and making sure that the end product complies with industry standards pertaining to safety regulations.
Packaging and Labeling
After quality assurance is done, the end product is packed. This might involve the packing of goods in boxes, bags, or containers before shipping them. Labeling is also done for branding and generally contains information about the product, barcodes, details about the product, and the name of the manufacturer.
Storage and Distribution
Last but not least, the finished products are either stored in a storage facility or shipped to retailers, distributors, or consumers directly. During the distribution of final products, it is important to count on numbers to meet customer demands until the next stock arrives and also to prevent overstocking.
Finished Goods Examples
For example, a car is a complex and advanced machinery that is readily accessible to customers across the globe. It is a finished good that is manufactured by combining various components such as engines, transmissions, body parts, wheels, and chassis.
Most of these components are manufactured individually by separate mechanical plants, which are then combined together before selling it to the customer.
Electronic products, such as mobile phones, televisions, computers, and small gadgets are leading examples of final products. These devices are created using electronic components such as circuit boards, processors, and displays.
Each of these individual components is normally outsourced from a separate manufacturing unit that only deals in the creation of that component in bulk. These parts are then assembled together, packaged, and labeled before shipping the end product across the globe.
Finished Goods Terminology
It is important to understand finished goods terminology if you are involved in manufacturing, distribution, or product sales. Understanding the important terms makes communication between manufacturers, wholesalers, suppliers, and retailers better and can help in making informed business decisions.
Given below are the most commonly used terminologies related to finished goods.
COGS - Cost of Goods Sold
COGS refers to the internal costs involved in producing or acquiring the finished goods that have been sold within a specific period. This typically covers the costs of raw materials, labor, and any overhead expenses that have been incurred during the production processes of the finished goods.
COGM - Cost of Goods Manufactured
COGM refers to the total cost incurred during the manufacturing process of the finished goods within a specified period.
WIP - Work in Progress
WIP refers to the unfinished products and goods that are still undergoing production processes. These products have undergone some production processes, such as the acquisition of raw materials and production planning, but still have a few processes to undergo before the output comes in the form of a finished product.
Lead time
Lead time refers to the time taken from the initiation of the production process, beginning from sourcing the raw materials to the time taken for the finished goods to be delivered to the end consumer. It takes into account the time for transporting goods as well.
Safety stock
Safety stock is the surplus inventory that companies keep in hand to minimize the risk of stockouts and meet the surged customer demands. Surplus stock helps avoid any unnecessary production delays and maintain a positive relationship with customers, along with protecting brand reputation.
SKU - Stock Keeping Unit
SKU is a unique code or number that is assigned to every unique deliverable in an inventory. These help businesses track their stock effectively by coating a unique identifier to every single product.
Finished Goods
Finished goods refer to the end products that have undergone all the manufacturing processes and are now ready-to-be-sold units to the customer. These products have gone through all six stages of production and are thoroughly inspected for quality and comply with industry standards.
Understanding these terminologies is of crucial importance for businesses. While COGS and COGM provide data about company profitability, WIP provides insights into the unfinished products in the production stage.
Why It's Important to Calculate Finished Goods Value?
Calculating the final value of final products is important for businesses to determine profitability, identify areas of revenue leakage, repair potential bottlenecks in the process, and effectively manage inventory.
By accurately determining the value of finished goods, companies can make more informed and data-driven decisions about product pricing, promotions, and restocking. Calculating the value of final goods also helps identify potentially obsolete products due to negligible market demand and adjust production processes accordingly to mitigate losses and maximize profits.
Moreover, the final value of finished products is also a strict point of consideration for financial reporting and taxation purposes. With accurate and error-free calculations of the value of finished products, companies can ensure they are paying the right amount of taxes and avoid any non-compliance fines or penalties.
How to Calculate Finished Goods Inventory?
Calculating Finished goods inventory requires determining the total value of all finished goods at the end of the specific accounting period.
The calculation involves determining the total cost of all finished goods manufactured during the specified period and then subtracting the total cost of all finished goods sold during that period.
Formula:
Finished Goods Inventory = (Total cost of finished goods manufactured) - (Total cost of finished goods sold)
To calculate the total amount of finished goods manufactured, businesses need to sum up the total cost of sourced raw materials, manual labor, and all incurred overhead expenses for accurate calculation.
Formula:
Total cost of finished goods manufactured = (Cost of raw materials) + (Cost of labor) + (All overhead expenses)
To accurately calculate the total cost of finished goods sold, businesses need to multiply the cost per unit of the product by the total number of units that have been sold during the specified period.
Formula:
The total cost of finished goods sold = (Cost per unit) x (Total units sold)
Let us summarize the formula in a quick glance. For instance, a business procured finished goods totaling INR 5,00,000 in a month and sold goods worth INR 3,00,000 during the same period.
So, the finished goods inventory at the end of the said month will be:
Finished Goods Inventory = 5,00,000 - 3,00,000 Finished Goods Inventory = INR 2,00,000
Hence, the finished goods inventory at the end of the specified period will be valued at INR 2,00,000.
Finished Goods in Accounting
With companies investing significant amounts of resources in producing and storing their finished goods, managing inventory levels has become a critical aspect of business operations.
One of the key challenges that companies face in the finished goods segment is the effective management of supply and demand and corresponding inventory records with respect to accounting. Some common terminologies used in finished goods for accounting are:
COGS - Cost of Goods Sold
This covers the costs of raw materials, labor, and any overhead expenses that have been incurred during the production processes of the finished goods.
COGS = Beginning Inventory + Purchases of Production Costs - Ending Inventory
Gross Profit
This represents the total money earned by a company from its sale of finished goods before deducting other expenses such as administrative costs, taxes, and interest.
Gross Profit = Revenue from the sale of finished goods - COGS
Inventory Turnover
This is an industry-standard measure of how quickly a company can sell its finished goods inventory.
Inventory Turnover = COGS / Average Inventory
Days Sales of Inventory
This is a measure of how many days it takes for any company to sell its total inventory of finished goods.
DSI = (Average Inventory / Cost of Goods Sold) x 365
Managing Finished Goods With TranZact
Finished goods are products that have completed all six tiers of the production process and are now ready-to-sell units to the end customer. Calculating the effective value of finished goods is quintessentially important for SMEs to maintain profitability, ensure sustainability, and comply with relevant laws and regulations.
Managing finished goods with TranZact is a streamlined and more effective method to handle inventory, production, and logistics for businesses. TranZact's enterprise management systems and business intelligence dashboards allow for real-time monitoring of inventory levels with the capability of forecasting market demand that can help prevent companies from overstocking and stockouts.
TranZact's software solutions also provide comprehensive insights into tracking and monitoring finished goods in transit, finished goods testing, and quality checks. With powerful abilities to provide real-time updates on shipment locations, estimated delivery times, and potential delays, TranZact helps businesses ensure that their final products are delivered on time and in the expected quality condition.
FAQs on Finished Goods
1. What is included in finished goods?
Finished products are the end outcome of a production process that includes sourcing raw materials, involving manual labor, utilization of necessary machinery, and converting them into sellable final products while complying with industry standards and ensuring quality. Therefore, it includes all manufactured items that are ready for the final use of customers such as furniture, automobiles, supermarket items, plastic containers, and trolley bags to name a few.
2. What are non-finished goods?
Non-finished or semi-finished goods are opposite to finished goods. They include goods that are in the manufacturing and designing process and are not fully processed to become commodities for sale yet.
3. What is the difference between finished goods and stock in trade?
There is a thin line of difference between finished goods and stocks in trade. For instance, you should know that a finished goods inventory includes the value of the resources and materials accounting for the final products or used to create the finished product. On the other hand, the worth of all the goods and products a business has on hand and is willing to sell to clients is referred to as stock in trade. It is essential for determining a company's revenue, profitability, and overall financial health.
