From an inventory standpoint, there’s more than one kind of item you can have as a business. In manufacturing, you have a goods inventory of parts and other components that are needed to create completed goods for sale. Then, there’s the merchandise that will be sold to a customer. We call this completed-item inventory “finished goods.”
But how do we define finished goods on a technical level?
Simply put, they are goods manufactured and ready for sale. Depending on your level of manufacturing, these items may have undergone different levels of assembly. For instance, if your company makes screws and bolts, then the finished goods are those screws and bolts. At the same time, the company will have steel or aluminum that gets turned into the bolts. These materials are a different kind of inventory prior to assembly. Likewise, a company that makes electronics would consider the completed electronics, composed of bolts and wires, to be the goods manufactured.
Besides being completely assembled, finished goods have a definite cash value. This value includes the cost of materials, cost of labor, and cost of equipment or overhead. Then, you add the traditional markup to the formula, so the manufacturer makes money.
As part of your accounting process, it’s critical to understand your cost structure. Procurement software and other tools can help with effective inventory management all the way through the production process. Then, you can be confident that goods sold command the right price.