Finished goods is the type of inventory that is ready for delivery to a customer. It is the final product of a production cycle.
When raw materials inventory in introduced to the production process, it becomes a work-in-process inventory. Addition of labor and overheads converts it to finished goods inventory.
Like any other inventory, finished goods is measured at lower of cost or market and in accordance with the three main cost flow assumptions, namely FIFO, LIFO and weighted average cost methods.
Finished goods at the start of period
+ Finished goods produced
− Finished goods sold
= Finished goods at the end of a period
Glucose Labs manufactures glucose for use in medicine. On 1 December 2012, the company had 5 tons of sucrose (which is a raw material) costing $5,000, during the month it purchased 200 tons for $220,000, 3 tons remained at the year-end costing $3,000. Its labor cost amounted to $10,000 while its overheads were $15,000. Work-in-process inventory on 1 December 2012 was worth $10,000 while the work-in-process inventory as at 31 December 2012 was $8,000. Finished goods inventory as at 1 December 2012 was $25,000 while cost of goods sold for December amounted to $240,000. Find the finished goods.
Finished goods produced = opening raw materials inventory ($5,000) + raw materials purchased ($220,000) − closing raw materials inventory ($3,000) + labor ($10,000) + overheads ($15,000) + opening work in process inventory ($10,000) − closing work in process ($8,000) = $249,000
Finished goods at the end of a period = finished goods at the start of period ($25,000) + finished goods produced ($249,000) − finished goods sold ($240,000) = $34,000.