As the name itself suggests, the process of manufacturing has been
completed unlike in Work-in-process. The
product is ready for sale. In fact goods purchased in completed forms before
sale to customer is generally known as merchandise.
Cars, food, furniture and dresses are popular examples of finished
Finished goods refer to the last stage in the processing of goods.
There are many words that denote finished goods. Some of them are end product, outcome, final
product, final result, so on.
Finished goods are crucial for the very functioning of Supply Chain.
From the point of delivery plant to the point of sale to the customer, all
activities are Supply Chain activities that actually refer to the movement of
the goods, from production to
Before discussing finished goods inventory cost, it is essential that inventory reduction must
be given due attention. In fact reduction in inventory requires strategic
planning beginning from the purchase of raw materials to storing finished goods
passing through the intermediate phase of warehousing.
Reduction in inventory in the final
analysis saves money; as the popular saying goes, money saved is money earned.
In business it is exactly a fact. Money not saved is money spent; it may be
ill-spent as well. Money saved through reduced inventory places some strength
in the finance of the company; it can plan and spend, rather, invest
productively. Reduced inventory proves in many ways sources of cost saving;
buying less raw materials, lesser production leading to lesser labour cost and
even lesser shipment expenses. All these activities are generally undertaken in
the background of a sound strategic planning that includes, among other things,
acute market sensibility; an efficient and responsive planning.
The cost of finished goods includes
three major components that go into the process of production of goods: Direct
lobour, Direct materials and Overhead. Let us briefly study these three facts.
The cost of the direct labour depends
on the kind of goods produces, the kind of machines used, the number of
labourers involved and the number of hours required for the production of
goods. Of course, with proper accounting taking into consideration all the
above factors, the cost for one unit of inventory may be calculated.
All the raw materials needed in the
production of the goods are included in the cost of the direct materials. Raw
materials cover not only the essential things required for the production but
also those ancillary things like threads and labels. Any small item if used in
the process of production naturally costs some money, however little it might
All the expenses other than those
included in Direct Labour and Direct Materials come under this category called
Overhead. For example, cost of insurance and taxes, of depreciation of
infrastructure and equipments. All these involve some money. These are brought
In the next session, we shall look into