Finished Goods Inventory Formula, Worked for a Maker

The finished goods inventory formula is: ending finished goods = beginning finished goods + cost of goods manufactured − cost of goods sold. In words, what you had, plus what you made, minus what you sold, valued at what each product cost to make. Cost of goods manufactured is the cost of everything finished during the period: the raw materials used, the labor and the overhead, adjusted for anything still half-made. For a small maker who finishes most batches the same day, it's the cost of the batches made. Below is the formula worked in units and in dollars for one month, how to get cost of goods manufactured, and what to do when the count disagrees.

The short version

• Ending finished goods = beginning + cost of goods manufactured − cost of goods sold.
• Cost of goods manufactured = beginning work in progress + materials used + labor + overhead − ending work in progress.
• Work it in units first, then multiply by each product's cost.
• Check it against a count; the difference is loss, waste or a missed record.
• Finished goods are often the most valuable stock on the shelf, per unit.
• TaroStack keeps finished goods by lot, at their actual cost, as batches and sales happen. More below.

The formulas

Cost of goods manufactured = beginning work in progress
                           + raw materials used + direct labor + overhead
                           − ending work in progress

Ending finished goods      = beginning finished goods
                           + cost of goods manufactured
                           − cost of goods sold

Work in progress is anything started but not finished at the end of the period: dough proofing overnight, soap curing on the rack. For a kitchen that finishes every batch the same day, both work-in-progress figures are zero, and cost of goods manufactured is the cost of the batches made.

One month, in units

Windward Roots, the made-up taro business I use in these examples, makes taro chips and taro sweet bread. September:

Start with units because they're easy to check: you can walk to the shelf and count 640 bags. Dollars come next.

The same month, in dollars

Each bag of chips costs $2.10 to make and each loaf $4.91, all in:

The ending $1,540.40 is the finished goods line on September 30, the same figure as in the month-end count in raw materials inventory example.

Where cost of goods manufactured comes from

The $8,643.20 made in September breaks down like this:

Beginning work in progress          $0.00
+ Raw materials used            $5,907.20
+ Direct labor                  $2,100.00
+ Overhead                        $636.00
− Ending work in progress           $0.00
= Cost of goods manufactured    $8,643.20

The raw materials used come from the raw materials formula: opening raw materials plus purchases minus closing, worked through in the raw materials article. Labor and overhead are the people and kitchen costs your accountant includes in the cost of what you make. How a single batch's cost is built is in batch costing example.

When the count disagrees

In September the count matched: 640 bags. Suppose it hadn't, and the shelf had 628. Twelve bags would be missing, $25.20 at $2.10. Usually it's one of three things: bags that expired or were damaged and thrown out without a record, samples and giveaways nobody wrote down, or a sale that went out without being recorded. Record the difference as a write-off with its reason, so the books match the shelf and the loss shows up where you can see it. The journal entries for that, and for cost of goods sold, are in cost of goods sold journal entry.

Finished goods are worth checking more often than raw materials: a bag of chips carries the taro, the oil, the pouch and the labor, so a missing bag costs more than a missing kilo of taro.

Where this stops working

The formula needs four numbers per product per month: what was there, what was made, what was sold, and what each one cost. On a spreadsheet, the made column comes from a production notebook, the sold column from the till and the invoices, the cost from a costing sheet built last spring, and the beginning from last month's count. Each comes from a different place on a different day, and when the count disagrees, nobody can say which of them is wrong.

How TaroStack does it

TaroStack keeps finished goods the way the formula does, made in and sold out, at what each product really cost, as it happens.

Made goes in by itself. When a batch is recorded, TaroStack takes the ingredients off stock from the lots used and puts the finished goods on, in their own lot with a code and a date, at what the batch actually cost: its lots, divided by what came out good. Every batch is shown against what the recipe says it should cost, so a batch that cost more is visible the day it's made.

Sold comes out by itself. Sales orders, deliveries and Shopify orders take finished goods out, the oldest date first, and a customer's own shelf-life rule is respected. Margins are reported per product on what each one cost to make.

The ending figure is a screen. Stock value is split by type (raw materials, packaging, finished goods) and by site, with a month-by-month history, so the finished goods line at any month end is there without a count night. When you do count, on a phone even with no signal, TaroStack shows what each difference is worth before you post it, and a write-off carries its reason, so the 12 missing bags land in the losses report as expired, damaged or sample. TaroStack also forecasts which finished goods will expire before they're sold, and what they cost.

Stock value, counts, lots and the losses report are on every plan, from $49 a month; recipes and batches that put finished goods on at their actual cost are on Standard at $99. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

How do you calculate ending finished goods inventory?

Beginning finished goods plus cost of goods manufactured minus cost of goods sold. In the example, $1,407.30 + $8,643.20 − $8,510.10 = $1,540.40.

What is the cost of goods manufactured?

The cost of everything finished in the period: beginning work in progress, plus raw materials used, direct labor and overhead, minus ending work in progress. For a kitchen that finishes every batch the same day, it's the cost of the batches made.

What is the difference between finished goods and cost of goods sold?

Finished goods are products made and not yet sold, an asset on the balance sheet. Cost of goods sold is the cost of the ones that were sold, an expense. Each sale moves cost from one to the other.

Why doesn't my finished goods count match the formula?

Usually unrecorded waste, samples or sales. Count, record the difference as a write-off with its reason, and look for the pattern if the same product comes up short every month.