An inventory is an invaluable asset that provides vital insights into a business’s current and future performance. From safety stock, components, raw materials or finished goods – inventory gives an accurate picture of what a company possesses in any given moment.
Predicting and meeting customer demand are also vital parts of manufacturing success. For instance, a pen manufacturer might stockpile components during the summer months in anticipation of back-to-school orders.
A company’s raw materials inventory represents the value of materials on hand as of a given balance sheet date, including direct and indirect costs incurred during production, factory overhead costs and costs related to maintaining this inventory and selling. Accurate tracking is critical in any manufacturing company; without it they can overspend on raw materials or experience lengthy production delays due to shortages.
Raw materials can be divided into two distinct categories. Direct materials refer to components that will become part of a finished product, like wood for cabinets. Meanwhile, indirect raw materials include items like lubricants, oils, rags and light bulbs that won’t make their way into final goods. Companies use reorder points, safety stocks and average daily usage figures to calculate inventory levels for raw materials – these numbers may differ depending on which manufacturer the materials come from.
Business inventories consist of many items. These can range from raw materials (for instance oil for shampoo or wood for furniture) and components to finished goods ready for sale to customers, WIP items (such as semi-finished goods on production line or screw that needs insertion into bolt of cloth), maintenance repair and operations supplies or MROs such as tools used during production processes or office supplies such as pens and pencils.
Businesses often prepare for peak demand by stockpiling components, supplies and finished stock. For instance, pen manufacturers will stock up in advance to meet increased back to school product demand without increasing production time – this process is known as decoupling inventory. Other forms of inventory may include safety stock and cycle inventory which protect against work stoppages by keeping an ample supply on hand in warehouses or production lines.
Works in Progress
WIP stands for Work In Progress and reports the value of goods currently under production, such as raw materials and human labor, along with manufacturing overhead costs allocated specifically for work-in-progress. Similar to other inventory types, you should try to minimize its value before reporting it.
Example: If you make hats, your WIP inventory would start with all of the raw materials currently available to create them. As they’re completed and added to Finished Goods inventory in your general ledger, their cost shifts over into that section. Once finished, their costs get moved onto Finished Goods inventory in your general ledger; at which time their COGM score can be calculated by adding together your beginning and ending WIP inventories along with all direct labor and manufacturing overhead costs.
Though these terms can sometimes be used interchangeably, work in progress and finished goods inventory typically refer to businesses that manufacture physical products while “finished goods inventory” describes tasks or projects which take considerable time and resources such as construction and consulting projects.
Finished goods in a business inventory refers to manufactured items that have completed all production stages and are ready for distribution or sale, such as food items in a grocery store or gaming consoles and clothing in an electronics or department store. Finished goods are considered true-value inventory and appear on the balance sheet, financial statements and reports – knowing their true-value value is critical for profit maximization, budgeting and inventory optimization.
Manufacturers need to carefully monitor the flow of raw materials and work-in-progress into finished goods, but doing so without an inventory management system such as Katana can be extremely challenging. One key distinction between finished and works in progress items is that finished ones are ready for sales while WIP ones may still require further processing or assembly prior to being sold; as a result, calculating an ending finished goods inventory value at the end of every period is key for accurately calculating COGS costs associated with manufacturing.