Finished Goods Inventory: Importance, Examples, and How to Calculate It

Have you ever tried to buy a product online or in-store, only to find it out of stock? Frustrating, right? For businesses, that situation often points to challenges in managing finished goods inventory. Finished goods are products that have completed the production process and are ready for sale, but if they aren’t properly tracked and managed, companies can lose sales, upset customers, and tie up unnecessary capital.

In this blog, we’ll break down what finished goods inventory is, why it matters for businesses, and how effective management can improve operations, cash flow, and customer satisfaction. Whether you’re a manufacturer, retailer, or just curious about supply chain processes, understanding finished goods inventory is key to making smarter business decisions.

What Are Finished Goods?

Finished goods are products that have completed the entire manufacturing process and are ready to be sold to customers. Simply put, these are the items you see on store shelves, ready for purchase. Finished goods can also be stored in warehouses or distribution centers, waiting to be shipped to retailers or directly to consumers. Managing this inventory effectively ensures products are available when demand arises.

Key Takeaways

• Knowing the quantity and value of finished goods inventory helps a company understand profits and plan future budgets.

• Proper management of finished goods ensures products are available to meet customer demand, reducing stockouts and lost revenue. Understanding finished goods inventory can help a company cut wasteful spending on raw materials and storage.

• Finished goods inventory appears under current assets on a company’s balance sheet.

• Tracking finished goods by item or SKU is essential, but can be labor-intensive.

Finished Goods Inventory Defined

Finished goods inventory is the final stage of inventory for manufacturing companies, representing products that are ready to sell to customers. Products start as raw materials, move into work-in-progress (WIP) during production, and become finished goods when fully manufactured and ready for distribution.

In accounting, inventory value flows from raw materials to WIP and finally to finished goods through entries in different general ledger accounts. This workflow allows manufacturers to track the value of inventory at each stage. Retailers who purchase ready-made products may only carry finished goods inventory, skipping the first two stages.

Finished goods inventory is expressed in dollar value, not item count. Because these goods are expected to sell within 12 months, they are classified as current assets on the company’s balance sheet.

Why Is Finished Goods Inventory Important?

Finished goods inventory is very important for manufacturers and retail stores. Tracking it helps a company know how much stock is ready to sell. This shows how many orders the business can fill at any time. For example, if a parent calls a store about a gaming console, a good inventory system can quickly tell if it is in stock. It can also show which other stores have it and how many are left.

Looking at past inventory helps a company plan. It can reveal trends, like seasonal demand or sales changes. This shows which products sell fast and which do not. It also helps analyze cash flow and how much money is tied up in inventory. Inventory turnover is a key performance indicator (KPI) that tells how long it would take to sell current finished goods. Slow turnover can mean too much money is tied up. Items that stay too long in inventory may cost more due to storage fees, damage, obsolescence, or production costs.

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3 Steps to Becoming Finished Goods

A product becomes a finished good by going through three accounting stages that match its production process. To explain, let’s look at a made-up rowboat company, Oar Master Inc. (OMI).

• Raw materials: These are the items needed to make a product. For OMI, this includes wood, oarlocks, and carbon-fiber plastic to build the boat’s shell. It’s important for OMI to keep enough raw materials in stock to keep production running and make the right amount of finished goods.

• Work in progress (WIP): Items being produced but not yet complete are WIP inventory. They aren’t ready for sale or shipping. For example, a rowboat shell without seats or oarlocks is WIP. Its value includes materials, labor, and direct overhead costs.

• Finished goods: The completed rowboat, fully painted and fitted with seats and oarlocks, is finished goods inventory. It is ready to be shipped to stores or distribution centers.

Finished Goods Examples

Everything people buy is a finished good. This includes the device you’re using to read this article. The groceries you bought last time are finished goods. The car you drove to the store is a finished good. Even the wallet holding your cash and cards is a finished good.

Finished goods from one company can be raw materials for another. For example, a company that makes nails, screws, bolts, or washers produces finished goods. Another company may use those items as raw materials to make products like a backyard swing set, a generator, or a rowboat.

Finished Goods Terminology

To understand finished goods inventory and how to calculate its value, it’s important to know the key components that make up this inventory. These terms help businesses track, manage, and value their finished products accurately.

• COGS (Cost of Goods Sold): COGS represents all of the direct costs a company incurred to create the finished goods it sold in a given period, such as a month, a quarter or a year. It includes the costs of materials and labor but excludes indirect expenses, such as distribution and sales costs. For example, if you run a printing business, COGS would include the paper, ink, binding materials and labor needed to produce printed materials, but not the shipping costs to deliver the finished goods to the destination point. COGS calculations reflect several different expense accounts and are shown as a subtotal on an income statement. Because COGS shows a business the true cost of the products it sells, it is a crucial input for setting customer prices that ensure an adequate profit margin.

• COGM (Cost of Goods Manufactured): COGM calculates the total cost of all finished goods a company produces during a specific period, whether or not they are sold. It includes the direct costs of materials, labor, and manufacturing overhead. It also accounts for the value of work-in-progress (WIP) inventory at the beginning and end of the period. The main difference between COGS and COGM is what they measure. COGS covers the costs of goods that were sold during a period. COGM covers the costs of goods that were manufactured during that period. For example, a car company could sell pickup trucks from existing inventory, incurring COGS, even if the factory was closed that month and no new trucks were produced, meaning COGM would be zero.

• WIP (Work in Progress): Work in Progress (WIP) is inventory that is being processed but is not yet ready for sale or distribution. It is also called work in process, and the terms are often used interchangeably. WIP sits between raw materials and finished goods. WIP can include items waiting for packaging, quality checks, or other finishing steps. For example, a crayon manufacturer might count both unwrapped crayons and wrapped-but-unboxed crayons as WIP inventory.

• Finished Goods: Finished goods are products that are fully made and ready to sell. They are the inventory that can generate revenue for the company. For example, the box of crackers in your grocery cart, the jacket you try on at the mall, or the toy you buy for your child, all of these are finished goods.

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Why It’s Important to Calculate Finished Goods Value?

You can’t manage finished goods inventory well without knowing its value. Accurate finished goods data helps a business meet customer demand and reduces missed sales (stockouts) and lost revenue, which boosts profitability. Finished goods inventory is often a manufacturer’s biggest expense, so calculating it gives insights into gross profit. Regularly calculating finished goods also helps set product prices, create accurate budgets, and determine how much raw material to order and when. This reduces wasteful spending and lowers storage costs.

How to Calculate Finished Goods Inventory in 4 Steps (Formula + Example)

The formula to calculate finished goods inventory is as follows: 

Finished Goods Inventory Formula = (COGM - COGS) + Value of Previous Year’s Finished Goods

To use the finished goods inventory formula, you first need to calculate Cost of Goods Manufactured (COGM) and Cost of Goods Sold (COGS).

Formulas:

• COGM = (Beginning WIP Inventory + Total Manufacturing Cost) - Ending WIP Inventory

• COGS = (Beginning Inventory + Purchases During the Period) - Ending Inventory

Note: Make sure the accounting period is the same for all calculations.

Example:

Imagine your business makes and sells candles. You want to calculate your finished goods inventory for the period.

Step 1: Decide the Time Period

To get accurate results, use the same time period for all your calculations.

For example, imagine you run an e-commerce business that makes and sells candles. You want to calculate your finished goods inventory. Your first step is to choose a time frame. For instance, you could calculate your finished goods inventory for the last quarter.

Step 2: Gather the Necessary Data

Next, collect all the information needed for the three formulas.

In our candle business example, you might find the following from your records:

• Beginning WIP Inventory = $750

• Ending WIP Inventory = $175

• Total Manufacturing Cost = $425

• Beginning Inventory = $250

• Ending Inventory = $200

• Purchases During the Period = $550

• Value of Previous Year’s Finished Goods = $100

Step 3: Calculate COGM and COGS

Now, use the formulas to calculate COGM and COGS.

COGM (Cost of Goods Manufactured):

• COGM = (Beginning WIP Inventory + Total Manufacturing Cost) - Ending WIP Inventory

• COGM = (750 + 425) - 175

• COGM = (750 + 425) - 175

• COGM = 1,175 - 175

COGS (Cost of Goods Sold):

• COGS = (Beginning Inventory + Purchases During the Period) - Ending Inventory

• COGS = (250 + 550) - 200

• COGS = 800 - 200

• COGS = 600

Step 4: Calculate Finished Goods Inventory

Now, use the finished goods inventory formula:

• Finished Goods Inventory = (COGM - COGS) + Value of Previous Period’s Finished Goods

• Finished Goods Inventory = (1,000 - 600) + 100

• Finished Goods Inventory = 400 + 100

• Finished Goods Inventory = 500

Finished Goods in Accounting

From an accounting viewpoint, finished goods are short-term assets because companies expect to sell them within a year. On the balance sheet, they are often combined with raw materials and work-in-progress (WIP) under a single inventory line.

The cost of finished goods helps set consumer prices. The difference between production cost and retail price, called the markup, is a key source of profit. Markups cover indirect costs like salaries and overhead. Markup rates vary by industry, company, product, and over time.

There are several accounting methods to calculate inventory values for COGS and finished goods:

• FIFO (First-In, First-Out)

• LIFO (Last-In, First-Out)

• Specific Identification

These methods can give very different results, especially when material or labor costs change. Companies should apply a chosen method consistently across fiscal periods. Additionally, the U.S. Internal Revenue Service (IRS) has its own rules for calculating COGS, which may differ from GAAP (Generally Accepted Accounting Principles).

Conclusion

Finished goods are the final stage of production and the source of revenue for manufacturers and retailers. Accurately accounting for finished goods inventory and using that information for business decisions ensures companies meet customer demand without running out of stock. Monitoring finished goods inventory helps set product prices, streamline materials procurement, and reduce inventory costs. In short, understanding and managing finished goods inventory is essential for the profitable growth of manufacturing and retail businesses.

FAQs About Finished Goods Inventory 

What Are Examples of Finished Goods?

Finished goods are products that have completed the manufacturing process and are ready to be sold to customers. These goods can be sold in physical stores, through online platforms, or via B2B (business-to-business) channels. Common examples include food and beverages sold in supermarkets, gaming consoles, clothing, toys, furniture, pencils, laptops, smartphones, and sports equipment. Any product that is fully prepared and ready for use by the end consumer is considered a finished good.

What Is Included in Finished Goods?

Finished goods include all costs involved in producing the final product. This starts from raw materials and moves through work-in-progress stages until completion. The total cost includes direct materials, direct labor, and manufacturing overhead. In addition, storage and inventory holding costs for finished goods are also included once the product is ready for sale.

Which of the Following Is an Example of a Finished Good?

For example, consider an ice cream shop that makes ice cream on-site. Ingredients such as milk, sugar, cream, eggs, and flavorings are raw materials. While the ice cream is being mixed and frozen, it is considered a work-in-progress. Once the ice cream is fully prepared and placed into tubs, ready to be sold to customers, it becomes a finished good.

What Are Non-Finished Goods?

Non-finished goods include items that are not yet ready for sale. These consist of raw materials used in production and work-in-progress inventory that is still being processed. Since these items are incomplete and cannot be sold to customers, they are classified as non-finished goods.