Finished Goods

Click on the picture to visit our YouTube page.

  Finished goods are products or end items that are sold as a complete item or unit.  These items are commonly subject to a customer order, sales order or purchase order that is linked directly to a customer.  Finished goods and products are an extension of your inventory. They are materials or products that have reached a point in either the manufacturing or transformative process where they are available for consumption. You can calculate finished goods using a formula that will also help create an inventory ratio which determines the value of your goods for sale.  Finished goods inventory is generally considered a short term asset.  Short term assets are expected to sell in less than a year as opposed to long term assets which are typically investments that will be kept for longer than a year.  Let’s look at an example of finished goods.

Example​ 
  Finished goods are based on a number of different criteria that are typically specific to a company. For example, Karebears Cafe is a company that bakes different types of cookies, cakes and pastries. While the cafe’s finished goods are the baked goods that are complete and ready to be sold, the assets that contribute to the finished goods include various ingredients used in baking, cookware, and any labor needed to produce the finished goods.  Another example might be a car manufacturer.  The car manufacturer’s finished goods would include the end item car or other items that are available directly to the consumer.  You may be thinking, how do I calculate the total amount of finished goods inventory?  Well, let’s take a look.
Calculating Finished Goods Inventory
  Calculating your finished goods inventory can help you better understand the assets that you have on hand.  In addition it can help reveal waste and allow you to assess where you stand in terms of profits.  Performing an analysis of product input versus product output can give you a clear view of mismatches in input and output balance as well as make sure that inventory is not being produced at a quicker rate than sales can keep up with.  One more benefit with regards to calculating finished goods is that it prevents selling items that are not in stock or available for orders.  You’re probably wondering, what is the formula?  The formula is:

• (Cost of Goods Manufactured - Cost of Goods Sold) + Previous Period Finished Goods = Finished Goods Inventory.

  Let’s look at an example from KareBears Cafe.  Let’s say that KareBears Cafe Bakes $2000 dollars in delicious treats.  Lets then say they sell $1000 dollars worth of treats.  Now, on the previous day the Cafe finds that they had $500 in treats.  Working with our formula we apply the following:

• ($2000 - $1000) + $500 = $1500 in finished goods inventory.

Keep in mind that templates for any equation are available in either the resource section, assignments or the description of the video.  Managing inventory can be quite complex, especially as finished goods inventory grows.  For these types of situations you may consider looking into Inventory Management Software.
​  You now know what Finished Goods Inventory is, why it's beneficial to calculate and a formula that you can use to calculate your finished goods inventory.  Don’t forget that a Template is Available in the resource section, assignment section or the description of this video.  So, check it out.  Also, we’d like to leave you with a fun little challenge. 
Challenge

• Assuming you have $5000 in Cost of Goods Manufactured, $3000 in Cost of Goods Sold and your previous periods finished goods inventory totaled $250, what would your Finished Goods Inventory Be?  Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.

Learn more about finished goods online!