In this article, we will explore what the finished goods inventory formula is and its importance. We will also cover how to apply the formula using an example. Read on to learn more.
The finished goods inventory formula is used to calculate the value of the finished goods that are ready for sale at the end of an accounting period. It is a part of the overall inventory that includes raw materials and work-in-progress.
The formula is:
Finished Goods Inventory = Beginning Inventory + Cost of Goods Manufactured − Cost of Goods Sold
Where:
Calculating the finished goods inventory formula is important for a number of reasons, some of the most common include:
The finished goods inventory formula helps in accurately reporting the value of inventory on a company's balance sheet. It is crucial for investors, analysts, and stakeholders to assess the company's financial health and liquidity.
It aids in effective inventory management by tracking the amount of finished goods available. This ensures that there is an optimal level of inventory to meet customer demand without overstocking which can lead to increased holding costs.
By monitoring finished goods inventory levels, companies can better manage their cash flows. It helps in identifying excessive inventory that can be sold to improve cash inflows or identifying low inventory levels that require production scaling to meet demand.
The formula provides insights into production efficiency and sales performance. Managers and leaders can use this data to make informed decisions about production scaling, marketing strategies, and resource allocation to maximize profitability.
Here are our steps to apply the finished goods inventory formula:
Gather data on the beginning inventory, cost of goods manufactured, and cost of goods sold.
Finished Goods Inventory Formula:
Finished Goods Inventory = Beginning Inventory + COGM - COGS
For example:
Applying the formula:
Finished Goods Inventory = $10,000 + $20,000 - $15,000
Finished Goods Inventory = $15,000
Analyze the resulting finished goods inventory value. It provides insights into the unsold inventory at the end of the accounting period which is essential for planning sales strategies, managing storage, and optimizing production schedules.
Use the finished goods inventory information to make informed decisions. It can influence production scaling, resource allocation, and cash flow management to enhance profitability and meet customer demand effectively.
Sunset Fashion Boutique is a small clothing retailer that needs to calculate its finished goods inventory at the end of September to prepare for the fall season. Here’s how they calculated their finished goods inventory:
The company has gathered the following data:
Using the Finished Goods Inventory Formula:
Finished Goods Inventory = Beginning Inventory + COGM - COGS
For Sunset Fashion Boutique, plug in the values:
Finished Goods Inventory = $30,000 + $40,000 - $35,000
Finished Goods Inventory = $35,000
Sunset Fashion Boutique knows it has $35,000 worth of unsold inventory at the end of September. They can analyze this data to understand their stock levels and sales performance.
With this information, Sunset Fashion Boutique can make informed decisions about future production, ordering, and sales strategies. They can decide whether to produce or order more goods, plan for sales promotions, or even delay production to avoid overstocking.
We hope that you now have a better understanding of what the finished goods inventory formula is and how to calculate it.
If you enjoyed this article, you might also like our article on inventory items or our article on the work in process inventory formula.