Finished goods inventory

Definition

Finished goods inventory consists of products that have completed the manufacturing process but have not yet been sold to customers. These goods are ready for sale and are accounted for as an asset on the balance sheet.

5 Must Know Facts For Your Next Test

1. Finished goods inventory is a critical component in job order costing, linking production costs to sales revenue.
2. It includes direct materials, direct labor, and manufacturing overhead costs accumulated during production.
3. The valuation of finished goods inventory affects both the cost of goods sold (COGS) and net income.
4. Accurate tracking of finished goods inventory helps in assessing production efficiency and profitability.
5. Transferring costs from work-in-process (WIP) to finished goods signals the completion of production for specific job orders.

Review Questions

• What three types of costs are included in finished goods inventory?
• How does finished goods inventory affect the calculation of cost of goods sold (COGS)?
• Why is accurate tracking of finished goods important in managerial accounting?

Related terms

Work-in-Process Inventory:

Includes all partially completed products that are still undergoing manufacturing processes.

Direct Materials:

Raw materials directly used in the production process to create finished products.

Manufacturing Overhead:

Indirect factory-related costs incurred when producing a product, such as utilities and maintenance expenses.