FINISHED PRODUCT: CHARACTERISTICS, INVENTORY, WAREHOUSE - DUDAS - 2025

A finished product is any good that has completed its manufacturing process, but has not yet been sold or distributed to the end customer. The term applies to goods that have been manufactured or processed to add value to them. This is the last stage in the processing of the goods. They are stored in it and are ready to be consumed or distributed.

No processing on the part of the seller is required in terms of the product after this stage. However, it may be that the seller's finished product becomes the buyer's raw material.

Source: pixabay.com

Therefore, the term is relative. The finished products of a seller can become raw materials of the buyer. For example, a flour mill produces flour.

To do this, it buys grains as raw materials that are ground and packaged, and then sold to bakeries as finished products. For bakeries, flour is a raw material used to create their finished goods, bread and cakes.

Stages of product manufacturing

A good purchased as a raw material is used to manufacture a product. A product that is only partially completed during the manufacturing process is called a 'work in progress'.

In contrast, when the good is completed in terms of manufacture, but has not yet been sold or distributed to an end customer, it is called a finished product.

The cost of finished goods is equal to the amount of inventory transferred from the work-in-process account to the finished goods account at the end of a period.

characteristics

- A company with a fast delivery strategy may have to keep a large amount of finished product inventory in stock.

- A company may want to minimize its inventory of finished products if the inventory has a short useful life, and is therefore at risk of deterioration or obsolescence.

- Finished products are considered to have significant collateral value to a lender, as they can be sold without delay to settle a debt.

Ready for sale

A finished product is ready for sale. However, it has yet to be sold. After a product has been sold, it is considered merchandise.

This means that once it has been decided to buy a finished product in the store and it has been reviewed, it is no longer called this. She has bought it, and now it's merchandise.

This technicality is given for accounting purposes. By differentiating between unsold finished products and merchandise, companies can determine how much inventory they have left, compared to the amount of profit they made from selling the product.

Inventory

Finished goods inventory is the third group of inventory owned by a manufacturer and consists of goods that are ready for sale.

These products are completely finished, made through the production process, and ready for consumers to purchase.

Within manufacturing, there are three classes of inventory, arranged chronologically according to the production process:

- Raw Materials.

- Work in progress.

- Finished products.

When a company decides to manufacture a product, it must order the basic stock necessary to manufacture it. This material can be for example steel bars, metal sheets or plastic parts, anything in its original form. This stock is classified as raw material inventory.

These raw materials are transformed or assembled through the assembly process, which can take days or weeks. Meanwhile, these goods are transferred from the raw materials account to the work-in-process inventory account.

After products have passed through the entire assembly line and are fully ready for sale, they are transferred from the work in progress account to the finished goods inventory account.

As you can see, this process allows a manufacturer to keep track of how much inventory it has at any stage of the production process.

At the end of a period, these three categories of inventory are generally itemized separately on the balance sheet so that investors and creditors can understand the value of the inventory, rather than having a consolidated total.

Warehouse

The finished goods warehouse manages and collects the finished goods that arrive from production until they are delivered to customers.

During the acceptance of the products created, their quality is verified and the quantity accepted is reported to the automated system.

The units to be delivered of the finished products are then packed, these units are composed and the packages already completed are stored in the warehouse of completed goods.

The packaging function creates the packages ready to be transported, from the goods that arrive from production.

The composition function organizes the products completed and wrapped during production into units to deliver to customers, providing individual identification for future traceability.

The composition of these units can take place in pallets organized by orders, by customers, by destinations, etc.

The costs of handling finished products in the warehouse are called warehousing costs.

Market penetration

An aggressive market penetration strategy depends on the immediate availability of inventory of finished products in the nearest warehouse so that the good can be available in the short term, in terms of delivery time, at the points of sale in the city.

Any unavailability will lead to a drop in market sales. Therefore, keeping inventory in warehouses becomes a necessity.

How to calculate the cost?

The cost of a finished product is the sum of the costs of all the resources consumed in the manufacturing process of the same.

It is classified into three categories: direct materials cost, direct labor cost, and manufacturing overhead.

-Cost of direct materials

They are the raw materials that become the finished product. Manufacturing adds value to them by applying a set of operations to create a finished product.

-Direct labor cost

It is the cost of workers that can be easily identified with the production unit. The type of labor considered direct labor cost are the workers who participate directly in a production line.

-General manufacturing expenses

They are any manufacturing cost that is not a direct materials cost or direct labor cost. They include all charges that support you in manufacturing.

Indirect labor cost

It is the cost associated with workers such as supervisors and personnel handling the materials, not directly involved in production.

Indirect materials cost

Cost associated with consumables such as lubricants, grease and water, not used as raw material.

Other indirect manufacturing costs

Includes depreciation of machinery, rental of land, property insurance, electricity, or any expense that keeps the factory operating.

-Equation of the cost of finished products

It is calculated by adding the manufacturing costs. This includes all direct materials, direct labor, and factory overhead.

This value is added to the beginning inventory of finished products, and the ending inventory of products in process for the period is subtracted, thus leaving the cost of finished products for that period.

Example

Suppose furniture maker Steelcase had $ 100,000 of finished goods inventory at the beginning of the period. During the period, it spent $ 50,000 on furniture materials, $ 125,000 on workers' wages, and $ 65,000 on rentals and services.

After calculating equivalent units of production, managers determined that the ending work-in-process inventory was $ 75,000.

Therefore, the total cost of finished goods for the period would be $ 265,000, resulting from: $ 100,000 + ($ 50,000 + $ 125,000 + $ 65,000) - $ 75,000.

This means that Steelcase was able to finish furniture worth $ 265,000 during the period.

Examples of finished products

-Food products

Food products are finished products. You can have processed foods and other unprocessed foods, but both fall into this category.

Unprocessed food

Raw foods are grown and then prepared for sale. The fruits and vegetables are collected and cleaned, thus being ready to be eaten or cooked.

The same goes for meat. It is cut and packed to be ready to be used.

The eggs are collected, cleaned and packed in cardboard boxes. It is known that when these foods are purchased, the farmer has done all the necessary processing to make them ready to be sold.

Unprocessed foods go through little or no change before being considered ready to sell.

Processed foods

When a food is processed, they end up turning into other types of finished products, such as cereals, ready-to-eat canned tuna, French fries, sauces, and many other items found in the aisles of a supermarket.

-Components

An industrial products company produces aircraft parts. Customers often place rush orders that are required immediately. The company manufactures thousands of different parts in small production batches, storing them in inventory until a customer order is received.

This allows the company to reduce order delivery time, but generates a large inventory of finished products.

-Cameras

An electronics company makes cameras in small batches based on sales forecasts. Every effort is made to minimize inventory because cameras are frequently upgraded and older models lose value quickly.

As such, the company's finished goods inventory is small, with an average inventory age of less than three days.

References

1. Wikipedia, the free encyclopedia (2018). Finished good. Taken from: en.wikipedia.org.
2. Yuanxin (Amy) Yang Alcocer (2019). What are Finished Goods? - Definition & Example. Study. Taken from: study.com.
3. John Spacey (2017). 3 Examples of Finished Goods. Simplicable. Taken from: simplicable.com.
4. My Accounting Course (2019). What is Finished Goods Inventory? Taken from: myaccountingcourse.com.
5. Wikipedia, the free encyclopedia (2019). Manufacturing cost. Taken from: en.wikipedia.org.
6. My Accounting Course (2019). What is Cost of Goods Manufactured (COGM)? Taken from: myaccountingcourse.com.
7. T Systems (2019). Storage of finished products. Taken from: t-systems.hu.