Semi-finished goods are important building blocks that help businesses to make their production process more organized and successful. One must understand how manufacturing industries work to know what semi-finished products are and how they benefit industries.
For example, a bakery uses flour to make bread instead of using wheat crops and then processing it into flour. Semi-finished goods have less value than finished goods, making the production process less complex and faster.
In this article, we will learn about semi-finished goods and how they affect the production process.
Define Semi-Finished Goods
Semi-finished goods are called subassemblies, processed raw materials that still need to be ready for customers. It allows companies to save time and speed up production rates. These are natural materials that are processed but still need to be finished. They are also called intermediate goods.
These goods are used as an inventory product in the manufacturing industry, and after some process, they are ready to sell. Semi-finished goods range from steel sheets to electrical appliances to complete engines for car manufacturing. These goods might be raw materials for one industry but finished products for another, but they are yet to be ready for market.
Understanding Semi-Finished Goods
Companies buy raw materials from different manufacturers or even process raw materials independently. If a company buys semi-finished goods from another company, these goods are final products for raw materials, while finished goods are for the other. That is why it is also known as intermediate goods.
- Raw materials are products from natural sources, like minerals, ore, or wheat.
- Finished goods are the products that consumers buy.
- In between these two, many trades are present.
With each process, one industry believes in or sells semi-processed goods to others, and these processes add value to products.
Production and Semi-Finished Goods
While calculating the Gross Domestic Product (GDP) for a country, economists avoid counting semi-finished goods as it can lead to double counting in the economy. GDP is a key factor in measuring productivity in a country. And double counting in the economy can result in overstating GDP.
There are many stages of product trade between raw materials and finished products between industries. Each step adds value to the product after a few processes. For example, yarn may be a final product for one company, while others use yarn to make clothing or home goods.
Semi-Finished Goods in the Calculation of GDP
GDP, or gross domestic product, is the value of the final product produced in a country. Let’s try to understand the concept of semi-finished goods with an example:
- A farmer sells grains to industry A for 100 Rs.
- Industry A converts wheat into flour and sells it to Industry B at 150 Rs. Here 50 Rs in profit.
- Industry B converts flour into bread and sells it at 250 Rs to consumers. Here 100 Rs in profit.
Raw material cost was earlier 100 Rs. And the final product cost is 250 Rs. And these two values will contribute to GDP. Intermediate goods will not add value to the GDP of an economy.
Examples of Semi-Finished Goods
Here are some examples of different semi-finished goods and industries in which they play a major role.
1. Manufacturing
For example, automobile industries use carbon steel sheets for manufacturing as raw materials. They also use glass suppliers as windows. All manufacturing industries use semi-finished goods as raw materials to produce finished goods.
2. Baking
Like the manufacturing industry, the baking industry also uses intermediate goods as raw materials, like sugar and yeast. They sometimes also sell cake batter or semi-processed products to other bakeries.
3. Construction
Materials like wood planks, steel structures, and plywood are raw materials for construction firms but are semi-finished products.
What Are Intermediate Goods, Capital Goods, and Consumer Goods?
Intermediate goods are semi-finished products that businesses trade with each other to deliver finished goods. Customers cannot consume these before processing. Many industries use these intermediate goods as raw materials and process them to make value-added products.
Capital goods are artificial foods that help in production operations. It is helpful as it performs functions but is not part of the product. For example, robots are capital goods in a car factory. It welds, paints, and works on the assembly line.
Consumer goods are the final products industries sell in the markets. Consumers can buy these goods and use them without further processing. For example, a car manufacturing company sells cars to its consumers.
Track Semi-Finished Goods With the Help of Inventory Management Software
Inventory management helps businesses track and manage inventory, raw materials, and trade with the company. Solutions like real-time access to lists, demand-based planning, and decision-making according to the right stock level based on demand. Such applications simplify process management and calculate exact inventory levels with sales forecasts.
Track and Manage Semi-Finished Goods With TranZact
TranZact helps Indian SMEs simplify and improve the production process. With the help of inventory management systems and enterprise resource planning applications, companies can keep track of inventory and update it as demand changes. With TranZact, simplify and improve production operations with ease.
FAQs on Semi-Finished Goods
1. What is the definition of semi-finished goods?
Semi Finished goods definition states that goods that are processed a few times but have yet to be finished are called semi-finished goods. For example, flour and sugar used by bakeries are semi-finished goods.
2. What is the difference between finished and semi-finished goods?
Differences between Finished and semi-finished goods are that finished goods are ready to consume or sell in the market. And semi-finished products are used as raw materials by different industries. For example, steel is a semi-finished good, and stainless steel utensils are finished goods.
3. What do you understand about the consumption of semi-finished goods?
Industries do the consumption of semi-finished goods only to produce finished goods. Semi-finished products could be better for consumer use. For example, aluminum alloy is a semi-finished product used by automobile industries.
4. What do you mean by accounting entries for goods issued for semi-finished goods?
Accounting entries for goods issued for semi-finished goods are data that the accounting department keeps track of and takes decisions for inventory, production process, and operation accordingly.
5. What are the components of semi-finished goods?
Components of Semi-finished goods include various expenses, labor, and inventory costs. These are less than finished goods expenses, but it has all the processes semi-finished products go through.
6. Are semi-finished goods part of GDP?
No, semi-finished goods are not part of GDP. Semi-finished products are separate from GDP, as economists don't count them while calculating GDP to avoid double counting.
7. What is GDP?
GDP stands for Gross domestic product and is the monetary value of a country's economy and explains the production of goods and services in a year.
