Finished goods inventory

Finished goods inventory also known as tangible current assets are materials that are purchased to be able to use them for own needs, processed or manufactured goods and services ready for sale or semi-finished products, work in progress and purchased goods that will be resold in the raw state. These assets must be designated for sale or exploitation no longer than 12 months after the date of poverty. It is also possible that the normal operating cycle specific to the unit lasts longer than 12 months. In this case, we focus on the consumption of purchased materials during the period.

Record keeping methods

The person setting the rules for recording business transactions regarding inventory trading is the head of the business unit. Entries regarding these records are described in the company's chart of accounts. An enterprise is required to specify a method for recording inventory valuation. There are several approaches to inventory records:

• quantitative approach (turnover and stocks are presented in natural units),
• quantity and value (turnover and sums are recognized in natural and monetary units),
• value recognition (turnover and stocks are presented in monetary units).

Stock classification and characteristics

Materials are current assets intended for consumption for all types of economic activity. They are obtained from suppliers. They are completely consumed during one production cycle, while their value will be recognized in the balance sheet as manufactured products. As the material you can include: raw materials, packaging, fuel, basic and auxiliary materials, spare parts and waste from production.

• Work-in-progress contains a collection of semi-finished and work-in-progress products, which, when combined with finished products, form work products. Work in progress is a product that cannot be stored due to the unfinished production procedure.
• Semi-finished products are best suited for storage in a warehouse; they are partially processed products, awaiting further technological processes or production activities. It also often happens that they are transferred for sale due to the

fact that their processing takes place in another company.

• Finished products are those that comply with quality standards and have been approved by the technical control, meet the

acceptance conditions by contractors and are directly suitable for selling products of their own production. These include, for example, services rendered, design work, and finished goods. They only occur in manufacturing companies.

• Goods are purchased goods, which, without processing interference, will be resold in the unaltered state to further contractors.

Stock of finished products in the flow of information

According to Hosang Jung, the stock of finished products and its availability greatly improves customer contact and builds an information path by itself “With the rapid development of information and communication technologies, inventory information sharing between a manufacturer and its suppliers is becoming easier than ever. In line with this trend, we focus on the virtual warehouse where only inventory information on all of the material provided by the suppliers can be stored and shared. Unlike traditional supplier management, the manufacturer constructs and operates this virtual warehouse to check the inventory levels of all the required material at the same time, but each supplier can access only the information about its inventory. This virtual warehouse-based approach can foster a tight relationship between the manufacturer and its suppliers and can handle suppliers as a single company without a large investment in constructing a physical warehouse." (Hosang Jung, Sunkjae Jeong, 2018)

The virtual warehouse-based policy

In order to determine whether establishing the virtual warehouse-based policy is profitable and useful from the business point of view the research was carried out. This is elaborated on by Hosang Jung and Sunkjae Jeong: "The virtual warehouse-based approach seems to be more economically sustainable. To investigate the effect of inventory information sharing via the virtual warehouse, we developed and analyzed a system dynamics-based simulation model. The experiment results show that sharing the inventory information of the suppliers via the virtual warehouse can help manufacturers to achieve better operational performance on several important measures, such as the reduction of finished goods inventory, parts purchasing quantity, degree of backlogs, and total cost.” According to the described research, the virtual warehouse is the most profitable idea and can contribute to preventing generaing excessive costs in the enterprise. (Hosang Jung, Sunkjae Jeong, 2018)

Examples of Finished goods inventory

• Finished clothing: Finished clothing refers to apparel that is ready to be sold to customers in stores or online. This includes items such as shirts, pants, dresses, skirts, hats, and accessories.
• Automotive parts: Automotive parts are components that are used in the construction, maintenance, and repair of cars and trucks. Examples of finished goods inventory in this category include engines, transmissions, brakes, steering systems, and fuel systems.
• Electronics: Electronics are devices that use electricity to process and transmit information. Examples of finished goods inventory in this category include televisions, computers, tablets, and phones.
• Furniture: Furniture is designed to provide support, comfort, and aesthetic appeal. Examples of finished goods inventory in this category include chairs, sofas, beds, and tables.
• Food products: Food products are items that are consumed for nourishment and enjoyment. Examples of finished goods inventory in this category include canned goods, cereal, snacks, and beverages.

Advantages of Finished goods inventory

The advantages of maintaining a finished goods inventory include:

• Increased efficiency of production, as materials are readily available when needed.
• The ability to provide customers with faster delivery times.
• Reduced risk of stock-outs, as the inventory is constantly monitored and replenished.
• The ability to meet customer demand more accurately, as the inventory can be adjusted to meet changing demand.
• The ability to take advantage of quantity discounts by purchasing in bulk.
• Reduced costs associated with storage and warehousing, as the inventory can be kept in a secure and safe location.
• Increased cash flow, as the inventory can be used as collateral for a loan or line of credit.
• The ability to invest in new products or services, as profits from the sale of the finished goods can be used to fund new projects.

Limitations of Finished goods inventory

• Finished goods inventory can be costly to purchase and store, especially for businesses with limited space or capital.
• There is the risk of inventory becoming obsolete due to changing market trends or customer preferences.
• Overstocking can lead to financial losses if the excess inventory cannot be sold or used.
• If the finished goods inventory is inadequately monitored, it could lead to stock shortages and lost sales opportunities.
• Finished goods inventory can be vulnerable to theft or damage, resulting in further financial losses.
• It can also be difficult to track inventory levels, leading to difficulty in accurately forecasting demand.

Other approaches related to Finished goods inventory

• Just-in-time (JIT) inventory: This is a type of inventory management system that is used to reduce costs and improve efficiency by only ordering the necessary inventory when it is needed.
• Lean inventory: This is an approach that involves eliminating excess inventory, reducing lead times, and controlling inventory levels.
• Kanban inventory: This is a type of inventory control system based on visual cues and signals. It is a pull system, where inventory is replenished only when needed.
• Vendor-managed inventory (VMI): This is a collaborative approach between the vendor and the buyer, where the vendor is responsible for managing the buyer’s inventory.
• Automatic replenishment: This is an automated approach to inventory management, where the system is programmed to order inventory when it reaches a certain threshold.

In summary, other approaches related to Finished goods inventory include Just-in-time (JIT) inventory, Lean inventory, Kanban inventory, Vendor-managed inventory (VMI), and Automatic replenishment. These approaches can help to reduce costs and improve efficiency in inventory management and control.

Finished goods inventory — recommended articles

Inventory record — Principles of Supply Chain Management — Finished product — Bin card — Operating cycle — Dependent demand — Inventory system — Productize — ABC analysis

References

• Jeong S., Jung H., (2018),The Economic Effect of Virtual Warehouse-Based Inventory Information Sharing for Sustainable Supplier Management , "Sustainability 10(5)"
• Jun M.,Shin H., Wood C. C., (2016),Does Effective Inventory Management Improve Profitability?: Empirical Evidence from U.S. Manufacturing Industries, International Journal of Information "Systems and Supply Chain Management 9(3)"
• Verma M., (2015), Inventory Management Accounting for Obsolete Inventory, "IUP Journal of Accounting Research & Audit Practices 14(1), 55"

Author: Kamila Nawara