Finished Goods Inventory Formula: The Ultimate Guide in 2023

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.

What is the Finished Goods Inventory Formula?

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:

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Finished Goods Inventory = Beginning Inventory + Cost of Goods Manufactured − Cost of Goods Sold

Where:

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• Beginning Inventory: The value of finished goods inventory at the beginning of the accounting period.

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• Cost of Goods Manufactured: The total cost incurred to manufacture products during the accounting period. It includes the cost of raw materials, labor, and overheads used in production.

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• Cost of Goods Sold (COGS): The total cost of goods that have been sold during the accounting period.

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Importance of the Finished Goods Inventory Formula

Calculating the finished goods inventory formula is important for a number of reasons, some of the most common include:

1. Financial Reporting and Analysis:

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.

2. Inventory Management:

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.

3. Cash Flow Optimization:

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.

4. Strategic Decision Making:

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.

How to Apply the Finished Goods Inventory Formula?

Here are our steps to apply the finished goods inventory formula:

Step 1. Gather Data:

Gather data on the beginning inventory, cost of goods manufactured, and cost of goods sold. 

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• Beginning Inventory: Collect data on the value of the finished goods inventory at the start of the accounting period.
• Cost of Goods Manufactured (COGM): Calculate the total cost of goods that have been manufactured during the accounting period. It includes raw materials, labor, and overhead costs.
• Cost of Goods Sold (COGS): Determine the total cost of goods that have been sold during the accounting period.

Step 2. Apply the Formula:

Finished Goods Inventory Formula:

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Finished Goods Inventory = Beginning Inventory + COGM - COGS

Step 3. Perform the Calculation:

For example:

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• Beginning Inventory: $10,000
• COGM: $20,000
• COGS: $15,000

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Applying the formula: 

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Finished Goods Inventory = $10,000 + $20,000 - $15,000 

Finished Goods Inventory = $15,000 

Step 4. Analysis and Interpretation:

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.

Step 5. Strategic Decision Making:

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.

Example

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: 

Step 1. Gather Data:

The company has gathered the following data:

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• Beginning Inventory: At the start of September, the boutique had a finished goods inventory valued at $30,000.
• COGM: During September, new clothing items were produced and stocked which cost $40,000.
• COGS: Sunset Fashion Boutique sold clothing amounting to a total cost of $35,000 during the same month.

Step 2. Apply the Formula:

Using the Finished Goods Inventory Formula:

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Finished Goods Inventory = Beginning Inventory + COGM - COGS

Step 3. Perform the Calculation:

For Sunset Fashion Boutique, plug in the values:

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Finished Goods Inventory = $30,000 + $40,000 - $35,000 

Finished Goods Inventory = $35,000 

Step 4. Analysis and Interpretation:

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. 

Step 5. Strategic Decision Making:

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. 

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We hope that you now have a better understanding of what the finished goods inventory formula is and how to calculate it.