Finished Goods Inventory Formula and Guide (2025)

What is finished goods inventory?

Finished goods inventory is the amount of products that have moved through the full manufacturing process and are ready for sale on store shelves or have moved to warehouses awaiting shipment to retailers and distributors. Finished goods are the last of three accounting classifications for inventory used by manufacturing companies. These are goods that have exited the manufacturing process and are now ready for sale. Clothing and household products on store shelves or stacked in warehouses are examples of finished goods. Retailers, distributors, and many ecommerce businesses typically only deal with finished goods.

Finished goods vs. work-in-progress vs. raw materials

Finished goods inventory measures how many completed products you have ready to sell. The other two classes of inventory are raw materials and work-in-progress inventory. 

Raw materials are the basic ingredients for a product before processing or assembly. For example, vegetable oil, salt, herbs, and spices are among the materials used to produce condiments. Glass and plastic containers would also count as raw materials. A condiment maker would purchase the containers from a manufacturer, which would count these items as its own finished goods.

When raw materials undergo any amount of processing before completion, they are considered a work in process (WIP). Work-in-progress inventory includes part of the cost of materials, labor, and overhead spent in the production process that is not yet complete. For example, a furniture maker must cut wood into table tops and legs, sand and varnish them, and use hardware to attach legs to table tops. A half-assembled, unvarnished table at the end of a specified period (such as a quarter) would be considered work-in-process inventory.

Inventory accounting for manufacturers follows the production workflow from raw materials to WIP to finished goods through bookkeeping entries for each stage, moving progressively based on the level of completion and value. Finished goods inventory has the highest value because it reflects total production costs. Finished goods are recorded on a company’s balance sheet as a current asset, meaning the business expects to sell them soon, typically within one year. 

Why is finished goods inventory important?

• Meets demand
• Controls storage costs
• Avoids deadstock
• Improves budgeting

Finished goods inventory management is important for manufacturing companies because it helps with the following:

Meets demand

Companies need the ability to fulfill customer orders, especially if demand increases. Keeping track of finished goods helps them manage inventory turnover and restock products so they can keep up with customer demand and avoid running out of stock. Stockouts and backorders can frustrate customers, potentially causing some to cancel their orders and shop elsewhere. Regular finished goods inventory checks can help companies assess how much product they need to meet demand. 

Controls storage costs

At the same time, companies don’t want surplus goods piling up. Figuring out their optimal finished goods inventory can help businesses save money by holding only what’s needed, avoiding extra warehouse costs for excess inventory. 

Avoids deadstock

If finished goods aren’t sold in time, a company risks losing some inventory value through obsolescence; consumer tastes might change, or products can languish past a sell-by date. This unsold inventory is known as deadstock. Tracking finished goods inventory can help businesses find the right balance to fulfill customer orders while minimizing deadstock losses.

Improves budgeting

When a company correctly accounts for its finished goods inventory value, it’s better prepared to create accurate financial statements and develop operating budgets for future periods. For example, finished goods inventory is listed on a balance sheet as a current asset, valued at cost of production. As inventory is sold, the revenue is listed on an income statement, and the associated cost is moved from the balance sheet to the income statement as cost of goods sold (COGS). How quickly the inventory is turned into sales can influence planning for future production, spending, and profit forecasting. 

How to calculate finished goods inventory

To determine your finished goods inventory, you need to know your cost of goods manufactured (COGM), as well as your cost of goods sold (COGS). For accuracy and consistency, you should use metrics from the same period.

The formula for calculating finished goods inventory is

Beginning finished goods inventory + COGM – COGS = Finished goods inventory

The three elements of the formula are:

1. Beginning finished goods inventory: This is simply your ending finished goods inventory from the previous period, carried over to the current period. So, for example, if you ended the first quarter with $25,000 of finished goods inventory, that becomes your beginning finished goods inventory for the second quarter.

2. Cost of goods manufactured: Your COGM is the total cost of finished goods manufactured in a period, even if the goods were not yet sold. Costs include materials and labor—which are direct costs—along with indirect costs or overhead, as well as the difference between beginning and ending work-in-process inventory.

3. Cost of goods sold: This pertains only to goods sold in the period. COGS includes direct costs of materials and labor but excludes overhead such as shipping and distribution costs, rent, and utilities. Businesses use COGS as the best gauge for pricing their products for profitability.

Example of a business using finished goods inventory

Let’s use a hypothetical condiment company as an example of how finished goods inventory is tracked.

Your company started the second quarter with $50,000 in finished goods inventory, carried over from the first quarter. The cost of goods manufactured for your condiments totaled $500,000, while the cost of goods sold was $450,000. Using the formula, your finished goods inventory at second quarter’s end is:

$50,000 + $500,000 – $450,000 = $100,000

You repeat this process each quarter. In this case, $100,000 becomes the third quarter’s beginning inventory, and your condiment company begins tracking COGM and COGS through the quarter. In this example, finished goods inventory has doubled to $100,000 from $50,000.

Whether an increase in finished goods inventory is good or bad depends on a business’s industry and customer demand. If sales growth is strong, a business might quickly sell its finished goods inventory. If sales are stagnant or slowing, a backlog of unsold goods could become a problem. Each business must judge what their right amount of finished goods inventory is to meet customer demand while minimizing inventory costs.