How to Calculate Ending Finished Goods Inventory?

Managing inventory is fundamental for manufacturing businesses. Finished goods inventory represents products that have completed the production process and are ready for sale. Calculating this value is important for financial reporting, determining profit margins, and making informed production and sales decisions.

Defining Finished Goods Inventory

Finished goods inventory refers to the final products a company has manufactured and prepared for direct sale to customers. These items are assembled and stored awaiting distribution. Unlike raw materials, which are the basic inputs for production, or work-in-process (WIP) inventory, which consists of partially completed items, finished goods are the culmination of the manufacturing cycle.

On a company’s balance sheet, finished goods inventory is categorized as a current asset. This classification indicates that these assets are expected to be converted into cash, typically within a year. The valuation of this inventory directly impacts a company’s reported profitability, as it contributes to the cost of goods sold. Accurate valuation supports internal decision-making, such as production planning and sales forecasting, and informs external stakeholders.

Components for Calculation

Calculating ending finished goods inventory requires understanding three primary components.

Beginning Finished Goods Inventory

Beginning Finished Goods Inventory is the value of all finished products on hand at the start of an accounting period. This figure is the ending finished goods inventory from the immediately preceding period. It establishes the baseline value of products available when a new period begins.

Cost of Goods Manufactured (COGM)

Cost of Goods Manufactured (COGM) represents the total cost incurred to produce all goods that were completed and transferred from the work-in-process stage to finished goods inventory during the accounting period. This includes all direct materials, direct labor, and manufacturing overhead costs associated with these newly completed products. COGM indicates the financial investment made in transforming raw materials into sellable items.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the direct cost associated with the production of goods that a company sold during a specific accounting period. This expense includes the cost of materials, labor, and factory overhead directly tied to the items that have left inventory and been delivered to customers. COGS is presented on the income statement and is subtracted from revenue to determine gross profit.

Steps to Calculate Ending Finished Goods Inventory

The calculation of ending finished goods inventory follows a formula. The equation is: Beginning Finished Goods Inventory + Cost of Goods Manufactured – Cost of Goods Sold = Ending Finished Goods Inventory.

To apply this formula, first, identify the value of finished goods inventory from the end of the prior accounting period; this becomes the beginning inventory for the current period. Next, add the total cost of all goods that were completed and transferred to finished goods inventory during the current period, which is the Cost of Goods Manufactured. Finally, subtract the Cost of Goods Sold, representing the cost of finished products that were sold to customers during the same period. The result is the value of finished goods remaining in stock at the close of the current period.

Consider an example: a business starts a month with $50,000 in finished goods inventory. During that month, the Cost of Goods Manufactured amounts to $200,000, and the Cost of Goods Sold is $170,000. Applying the formula yields: $50,000 (Beginning Inventory) + $200,000 (COGM) – $170,000 (COGS) = $80,000 in Ending Finished Goods Inventory.

Inventory Costing Methods Impacting Calculation

The choice of inventory costing method significantly influences the values of Cost of Goods Sold (COGS) and, consequently, the final figure for Ending Finished Goods Inventory. These methods determine how the cost of inventory is allocated between what is sold and what remains in stock. While the physical flow of goods might be different, these methods dictate the cost flow for accounting purposes.

First-In, First-Out (FIFO)

The First-In, First-Out (FIFO) method assumes that the first goods purchased or produced are the first ones sold. This means that the costs of the oldest inventory items are expensed as COGS. During periods of rising costs, FIFO typically results in a lower COGS because it uses older, lower costs for sold goods. This leads to a higher reported ending inventory value, as the remaining inventory is assumed to consist of the more recently acquired, higher-cost items.

Last-In, First-Out (LIFO)

The Last-In, First-Out (LIFO) method operates under the assumption that the most recently purchased or produced goods are the first ones sold. Therefore, the costs of the newest inventory items are expensed as COGS. In a period of rising costs, LIFO generally leads to a higher COGS because it uses the more recent, higher costs for sold goods. This results in a lower reported ending inventory value, as the remaining inventory is assumed to be composed of the older, lower-cost items.

Weighted-Average Method

The Weighted-Average Method calculates the average cost of all goods available for sale during a period. This average unit cost is then applied to both the Cost of Goods Sold and the Ending Finished Goods Inventory. This method smooths out price fluctuations by combining the costs of all units available. The weighted-average approach provides a cost figure that falls between the results of FIFO and LIFO, offering a blended valuation for both sold and unsold inventory.