STUDENTS' CORNER - 152
As the name itself suggests, the process of manufacturing has been completed unlike in Work-in-process. The product is ready for sale. In fact goods purchased in completed forms before sale to customer is generally known as merchandise.
Cars, food, furniture and dresses are popular examples of finished goods.
Finished goods refer to the last stage in the processing of goods.
There are many words that denote finished goods. Some of them are end product, outcome, final product, final result, so on.
Finished goods are crucial for the very functioning of Supply Chain. From the point of delivery plant to the point of sale to the customer, all activities are Supply Chain activities that actually refer to the movement of the goods, from production to distribution.
Before discussing finished goods inventory cost, it is essential that inventory reduction must be given due attention. In fact reduction in inventory requires strategic planning beginning from the purchase of raw materials to storing finished goods passing through the intermediate phase of warehousing.
Reduction in inventory in the final analysis saves money; as the popular saying goes, money saved is money earned. In business it is exactly a fact. Money not saved is money spent; it may be ill-spent as well. Money saved through reduced inventory places some strength in the finance of the company; it can plan and spend, rather, invest productively. Reduced inventory proves in many ways sources of cost saving; buying less raw materials, lesser production leading to lesser labour cost and even lesser shipment expenses. All these activities are generally undertaken in the background of a sound strategic planning that includes, among other things, acute market sensibility; an efficient and responsive planning.
The cost of finished goods includes three major components that go into the process of production of goods: Direct lobour, Direct materials and Overhead. Let us briefly study these three facts.
The cost of the direct labour depends on the kind of goods produces, the kind of machines used, the number of labourers involved and the number of hours required for the production of goods. Of course, with proper accounting taking into consideration all the above factors, the cost for one unit of inventory may be calculated.
All the raw materials needed in the production of the goods are included in the cost of the direct materials. Raw materials cover not only the essential things required for the production but also those ancillary things like threads and labels. Any small item if used in the process of production naturally costs some money, however little it might be.
All the expenses other than those included in Direct Labour and Direct Materials come under this category called Overhead. For example, cost of insurance and taxes, of depreciation of infrastructure and equipments. All these involve some money. These are brought under Overhead.
In the next session, we shall look into MRO Goods.