how to calculate finished goods inventory?
how to calculate finished goods inventory?
This lesson explains what finished goods inventory is, how it is calculated, and the activities that will cause a finished goods inventory to increase or decrease. Examples to illustrate finished goods inventory are provided.
What Is Finished Goods Inventory?
Finished goods are the items you have in inventory that are ready to be sold. The manufacturing and production process is complete, and the items are complete. The finished goods inventory is the amount of stock a company has to fulfill orders, ship to customers, and send to wholesale accounts. In accounting records, finished goods inventory is considered an asset item in the company’s records.
Let’s use an example of a craft store. As the owner, you order craft supplies to stock your shelves, and you also order many of the same supplies to create products that consumers can purchase as a completed projected. Most recently, you have started crocheting scarves that you sell in the store. You find that some of your customers don’t know how to crochet or don’t have the time to make their own scarves. But they love having a handmade scarf to wear or give as a gift.
It’s time to place your order, and you decide to buy 100 skeins, or packages, of yarn at $1 per skein. You intend to put 80 skeins in inventory out in the store for customers to purchase. These 80 skeins of yarn are considered finished goods and are ready to be sold as is.
The other 20 skeins will be kept for the scarves you will crochet. These skeins are considered supplies because they must be produced into another product. They are not finished goods until they are ready to be sold after you have completed the manufacturing process and crocheted the yarn into scarves.
Calculation
There are three steps to calculating finished goods inventory:
Visually, the formula looks like this:
Finished Goods Inventory = Previous Finished Goods Inventory + Inventory Purchases – Inventory Deductions
To find the elements of the formula, the following information will need to be determined:
1. You need to identify the finished goods amount from the previous accounting period. If you update your books every month, you take the finished goods inventory, often referred to simply as inventory, from the end of the previous month. For our example, let’s say you had $4,175 in inventory at the end of the previous month.
2. Add in the total purchase of finished goods purchased in the current month. The total of the invoices/orders you receive for inventory throughout the month is the total purchase of finished goods. For instance, if you ordered $500 in inventory during the month, you will add in $500.
3. Subtract the amount of finished goods inventory that was sold or no longer available for sale. During the month, you sold $2000 in inventory. Unfortunately, you had $50 of inventory stolen during the month. You also had $25 in broken items and returned $100 in inventory to suppliers. The amount that will be subtracted is $2175, the total of all the items that are no longer available for inventory.
The remaining amount is the amount of finished goods inventory you have available for sale:
Finished Goods Inventory = Previous Finished Goods Inventory + Inventory Purchases – Inventory Deductions
Finished Goods Inventory = $4,175 + $500 – $2,175
Finished Goods Inventory = $2,500
You have $2,500 in inventory available to sell to customers.
Lesson Summary
Finished goods inventory is the amount of products a business has available for sale. The amount of finished goods inventory is decreased when items are sold, stolen, broken/damaged, or returned to the supplier. The total of the finished goods inventory is increased when inventory is purchased and new items are received for resale.