Intermediate Goods Explained: Types, Examples, and Impact on Business
- mark599704
- 7 days ago
- 10 min read
Manufacturing needs one or more "ingredients" to make a finished product. Businesses call these ingredients intermediate goods. Intermediate goods can be a finished product from one company. Another company buys it to use in making its own product. Or, a company can make intermediate goods and put them into its own finished products. Here is a look at the important role intermediate goods play in the full production process.
What Are Intermediate Goods?
Intermediate goods, also called producer goods or semifinished goods, are items used to make another item. This other item can be a finished product or another intermediate good further along the production process. Intermediate goods are always either added to another product or changed in some way during manufacturing.
A company can make intermediate goods and use them in its own products. Or, it can sell them to another company. In that case, the item is a finished product for the maker, but it is an intermediate good for the company that buys it to make its own finished products.
Intermediate vs. Consumer Goods
Intermediate goods are the parts used to make a product. Consumer goods are the finished products ready for people to buy and use. Consumer goods often include intermediate goods.
A good can be intermediate or consumer, depending on the situation. It depends on its purpose and place in the supply chain or production process. For example, salt and sugar are intermediate goods when used to make pasta or desserts in a restaurant. But they are consumer goods when bought in a supermarket by a home cook for a family meal.
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Intermediate vs. Capital Goods
Capital goods are things used to make finished products, like factories, tools, and machines. Unlike intermediate goods, capital goods are not changed during production. They help in making products or providing services.
For example, the pot and stove used to boil pasta in a restaurant are capital goods. Robots in a car factory line are also capital goods. But the engines, doors, body panels, and brakes bought by the carmaker are intermediate goods. The finished car you buy is a consumer good.
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What’s the Difference Between Intermediate Goods, Raw Materials, and Final Goods?
This is where many people get confused. Let’s make it simple.
Intermediate Goods vs. Raw Materials
Raw materials are basic inputs in their natural or slightly processed form. Intermediate goods have been partly processed or manufactured already.
Example Chain
Product | Raw Material | Intermediate Good | Final Good |
Textile | Cotton (harvested) | Yarn or fabric | Finished shirt |
Food | Wheat grains | Flour | Packaged bread |
Furniture | Timber logs | Processed wood planks | Assembled table |
The line can be blurry. For a cotton farmer, cotton is the final product. For a textile mill, cotton is the raw material and fabric is the finished product. For a garment maker, the fabric is an intermediate good. What matters is your role in the chain. If you process it further before selling, it is an intermediate input for you.
Intermediate Goods vs. Final Goods
Final goods are ready for the customer. No more production is needed. Intermediate goods are used to make final goods.
Simple test:
Do you sell this item directly to a customer as it is? → Final good
Do you use it to make something else to sell? → Intermediate good
Example: A tire manufacturer sells tires to consumers. Those tires are final goods. But if a car manufacturer buys the same tires to put on cars, they are intermediate goods. The same item can be classified differently depending on how it is used.
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Intermediate Goods Explained
Intermediate goods are changed as part of making a product. They help produce a consumer good or another intermediate good used later. In other words, they are either added to a finished product or changed a lot during production. Partially finished goods on the factory floor are not intermediate goods. They are called "work in process."
Because intermediate goods are part of finished goods, economists do not count them in a country’s GDP. Counting them would be double-counting, since their value is included in the finished product. In business accounting, intermediate goods are counted in the company’s cost of goods sold (COGS). COGS includes all the direct costs of making a finished product.
Why Do Intermediate Goods Matter for Your Business?
Understanding intermediate goods is not just theory; it affects four key areas of your business.
1. Cost Calculation and Pricing
Intermediate goods make up most of your cost of goods sold (COGS). In manufacturing, they often account for 40-60% of total production costs. If you misclassify or don’t track them correctly, your cost per unit will be wrong. This can lead to:
Underpricing and losing profit
Overpricing and losing customers
Not knowing which products are truly profitable
For example, some garment makers didn’t track fabric waste properly. They thought their margins were 30%, but the real margin was only 18%. The difference came from intermediate input costs they didn’t capture.
Practical tip:
Identify your top 20% of intermediate inputs, which often drive 80% of costs. Track them carefully. Use tools like ProfitBooks to categorize purchases so your reports show true production costs.
2. Inventory Tracking and Accounting
Intermediate goods should be treated as inventory until they are used in finished products.
This affects:
Working capital: More intermediate goods in stock = more cash tied up
Profit & loss: They become COGS only when the final product sells
Balance sheet: Intermediate goods appear as inventory (an asset)
If you expense intermediate goods immediately, your financials will be misleading. Profits will appear lower in months you stock up, even if nothing is sold yet.
Common mistake:
Many small businesses expense intermediate goods immediately instead of counting them as inventory. This distorts monthly profits and hides cash flow. When you track costs in ProfitBooks, it helps separate inventory (assets) from operating expenses. Your P&L will reflect the costs correctly.
3. GST and Input Tax Credit
In India, you can claim input tax credit (ITC) on intermediate goods used in production.
To do this, you must:
Classify purchases correctly
Match invoices accurately
Track which inputs are for taxable vs. exempt supplies
If you misclassify an intermediate good as an expense, you may miss credits. Or worse, claim credits incorrectly and face audit problems.
Example:
A packaging company buys printed cartons (intermediate goods) and office stationery (expenses). Both have GST, but the treatment is different. Cartons qualify for full credit because they are used in a taxable supply. Stationery may have restrictions. Getting it right means knowing which goods are intermediate inputs in your production.
4. Supplier Negotiation and Supply Chain Decisions
When you know which intermediate goods cost the most, you can:
Negotiate better prices for key inputs
Diversify suppliers to reduce risk
Decide make vs. buy produce in-house or outsource?
For critical inputs that affect quality or have only one source, ensure reliability and contracts. For commodity inputs, focus on cost competition.
Example:
A furniture maker found 40% of their COGS came from three intermediate materials. By renegotiating contracts and finding alternate suppliers, they cut costs by 12% without changing the final product.
Vertical integration decision
Should you make an intermediate component yourself? Compare buying costs versus in-house production costs, including capital and management overhead. Only produce in-house if scale, quality, or IP protection makes it worthwhile.
How Do Intermediate Goods Work?
Sometimes an intermediate good can also be a consumer good, depending on the situation. Usually, intermediate goods “disappear” into the final product. They become part of a larger product, like brake fluid in a car, or are completely changed, like baking soda used to make pretzels. Intermediate goods can be changed many times while making a finished product. For example, steel can be made into sheets. Some sheets are shaped into body panels, fitted with fasteners, painted, and joined with other panels to make a car body. Steel is also mixed with rubber to make brake lines.
Categories of Intermediate Goods
There are three main types of intermediate goods. Each supports different kinds of operations.
B2B Finished
In business-to-business (B2B) finished goods, one company sells a product to another company to use in a final product. Some B2B finished goods can be sold as independent products, but they are usually used as inputs for more complex items. For example, tire makers sell tires to car manufacturers, who use them to build cars. The tire company could also sell the tires directly to consumers as a finished product.
B2B Intermediate
B2B intermediate goods are sold during production and need more work before they become part of a finished product. For example, a steel company sells steel to a car maker. The car maker uses steel to make car bodies. The steel is not a finished product, but it moves between companies before becoming part of a final product.
In-house
A company makes these goods for its own use in making another product. For example, a company might make its own paint to use in making toys instead of buying it from another company. Manufacturers usually use both in-house and bought intermediate goods to get the parts they need to make finished products.
9 Examples of Intermediate Goods
Here are some widely used intermediate goods. Some of them can also act as finished products. These include both raw materials and manufactured items.
1. Car Parts
Cars need many parts to work properly. Batteries give power, tires grip the road, and engines make cars move. Each part is important. These parts are often made by different companies. Car makers buy the parts to assemble the vehicles. The number of parts needed makes car manufacturing very complex. Some car parts can be sold as finished goods, like tires, wheels, windshield wipers, and oil filters. Other parts, like steel and semiconductors, are only intermediate goods.
2. Gold, Silver, and Other Metals
Gold is good for electronics because it conducts electricity. Silver is reflective and antibacterial, so it is used in mirrors and medical tools. Copper and aluminum are used in construction, cars, and packaging. Most metals are rarely sold as finished goods. They are usually intermediate goods used in manufacturing. Precious metals like gold, silver, and platinum are valuable. This makes storing them less risky for manufacturers.
3. Sugar
Sugar is used in kitchens and food factories. It is an important ingredient in many products. Commercially, it is needed to make pastries, chocolates, soft drinks, and canned goods. Sugar is versatile and easy to use in manufacturing, making it useful in sweet and savory dishes. Like many baking supplies, sugar has two purposes. Manufacturers use it to make finished goods. But it is also sold directly to consumers for personal use.
4. Glass
Glass is used everywhere. It is in smartphones and TV screens, bottles, and windows. Glass is an important intermediate good in both simple and advanced products. Most glass is sold as part of a finished product, not as glass itself. It is a common B2B intermediate good. Consumers usually buy the final product that contains glass, not the raw glass.
5. Paint
Paint adds color and protects products. In cars, paint gives vibrant colors and protects vehicles from dirt, rust, and wear. Paint is also used on toys, furniture, and buildings. It serves both functional and decorative purposes. Like sugar, paint can be bought as a consumer product.
6. Salt
Salt is an intermediate good. Companies use it in many food and non-food products to make the final item.
7. Hardware
Hardware and fittings are intermediate goods. Companies combine and change them to create finished consumer products.
8. Wood
Wood is a common intermediate good. Companies use it in many ways to make household items and building materials.
9. Wheat
Like salt, wheat is an intermediate good. Companies process it to make other products, usually food or food-related items.
10. Steel
Steel is an intermediate good used in many industries. It helps make final goods in construction, transportation, and more.
Tracking And Managing Intermediate Goods
From an operational standpoint, optimizing the stock of your intermediate products is just as important as the way you manage your completed goods. For example, if you produce toys but understock on the materials necessary to create a final good, you’ll experience production delays and may encounter stockouts. But overstocking on intermediate goods increases your carrying costs and could result in dead stock.
The best way to achieve and maintain balance in your inventory is to invest in cloud-based inventory management. A leading solution is your single source of truth, providing real-time transparency into stock levels, demand trends, and other variables that impact your inventory.
Intermediate Goods and GDP
GDP measures the money value of all goods and services produced in a country over a certain period. In the U.S., the government reports GDP every quarter and for the full year. Only finished goods are counted in GDP. Intermediate goods are not counted.
This is done to avoid counting intermediate goods twice. For example, a pasta maker uses three eggs to make one box of pasta. It buys a dozen eggs for $1 and makes four boxes of pasta. It sells each box for $3, so total sales are $12. GDP counts only the $12 from the pasta. The $1 cost of eggs is already included in that $12. Counting eggs, flour, and salt separately, along with the pasta, would make GDP too high.
Conclusion
Intermediate goods are the building blocks of production. They are used to make finished products or other intermediate goods. Understanding them helps businesses track costs, manage inventory, plan supply chains, and make better financial decisions. Knowing the difference between intermediate goods, raw materials, capital goods, and final goods is important. It also helps with pricing, accounting, and tax compliance. By managing intermediate goods well, companies can reduce costs, avoid production delays, and improve profits. For any business involved in manufacturing or production, intermediate goods are essential for success.
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Intermediate Goods FAQs
How can businesses decide whether to make or buy intermediate goods?
Companies should compare the cost of producing in-house versus buying from suppliers. Factors include production cost, quality control, supply reliability, and intellectual property. Making goods in-house is best when it ensures higher quality or cost savings at scale.
How do intermediate goods affect a company’s cash flow?
Buying intermediate goods ties up cash until the finished product is sold. If a company overbuys, it increases inventory costs. Underbuying can lead to production delays. Proper inventory tracking ensures smooth cash flow and efficient production.
Can intermediate goods be both raw materials and finished products?
Yes. Some items, like sugar, paint, or steel, can be sold as raw or semi-processed inputs for production. At the same time, they can also be sold directly to consumers as finished goods. Their classification depends on how the buyer uses them.
Why aren’t intermediate goods counted in GDP?
Intermediate goods are part of the cost of finished products. Counting them separately would double-count their value. GDP only includes finished goods to reflect the true market value of final products produced in a country.
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