Calculating finished goods inventory for a business that sells products it manufactures is an important part of preparing financial statements. The key to calculating the value of this asset category accurately is ensuring that all of the relevant costs associated with producing each item are included. The expenses should be expressed on a per unit basis. To clarify this process, we will show how a computer manufacturer might measure their finished good inventory.
1 Determine how much it cost to acquire the basic materials needed to produce the good. When a business manufactures a good, it purchases unfinished and finished goods that are components in making the finished product. The raw materials for a computer producer may include plastic that the company molds to create a computer’s casing as well as computer chips produced by another company. For our example, on average $200 of raw materials go into making one computer.
2 Measure the labor expense tied to each finished good by multiplying the average amount of time used to produce the product by the wages of the employees who worked on the item. This is an estimate, as some goods will take longer than others. Use the per hour pay rate for the related employees. In our example, assume a series of workers paid $15 an hour assemble a computer in 10 hours on average. The labor cost per one computer would be $150.
3 Assess the manufacturing variable overhead rate that is applied to each completed good in inventory. The overhead rate measures the amount of resources not directly spent on finished goods, but that are indispensable in the production of the good. Overhead can be broken into two classes: Variable, or expenses that are dependent on the amount of goods produced, and fixed, or expenses that remain constant regardless of production. An example of a variable overhead cost would be the energy bill of the factory. A fixed variable cost would be the salary of a member of the support staff. To determine the per unit overhead cost, divide the overhead expenses accrued during the year by the number of goods produced during the same time period.. For our example, assume each computer has an overhead rate of $50 per computer.
4 Evaluate the cost per completed good by adding the raw material, labor, and overhead expenses. In the computer example, the cost for the completed good would equal $400.
5 Multiply the cost per completed unit by the number of completed units in inventory as of the end of the accounting period. To determine the amount of finished goods in your inventory, consult your inventory system. If you are not confident in your inventory system, or as a means to double check your records, go to where the inventory is kept and count the completed goods.