What Is An Ending Finished Goods Inventory Budget?

2 months ago   •   6 min read

By Silverbird Content Team

In order to determine and keep track of the value of your finished goods inventory, you must always update your finished goods inventory budget. This budget figure is usually recorded and stored by the accounting department in your company. However, if you’re the one handling your goods inventory, here are the basics of an ending finished goods inventory budget, and the formula to calculate this figure.


This article at a glance:

1. What is the Ending Finished Goods Inventory Budget?
The ending finished goods inventory is the stock of products that are not yet sold, but are ready for sale. To accurately determine the value of these products, you need to develop a budget known as the ending finished goods inventory budget.

2. Is there an easy way to calculate my budget?
Luckily, yes!

Finished goods inventory = Beginning finished goods inventory + cost of goods manufactured – cost of goods sold

3. I do not know how to get started, is there an example I can reference to?
To make things clearer for you, we have prepared an example budget for your reference. Note that the numbers are based on illustration purposes and your budget may look significantly different depending on your company costs.

Before we dive into the more complicated sections of this article, let’s start off with some definitions of the common terms you’ll come across whilst doing up your ending finished goods inventory budget.


What Are Finished Goods?

Finished goods are the products that manufacturers like yourself actually sell to buyers. When we talk about buyers here, they can mean either vendors, retailers or one-time customers. These finished goods can include raw materials and items involved in every stage of the production that ends up in the finished product inventory.

Note that the term finished goods is used relatively. For example, if you are a wood manufacturer company that produces wood, the material wood is your finished goods. However, this wood can be sold as raw materials to furniture retailers who will use these wood materials and create new finished goods such as tables, chairs and bookshelves.

What Is An Ending Finished Goods Inventory Budget?

The ending finished goods inventory is the stock of products that are not yet sold, but are ready for sale. In order to develop a budget for these products, you need to know the basic costs of your direct materials, direct labour costs and overhead costs. Just in case you aren’t sure of what these costs are, let’s run through them briefly.

Basic costs of direct materials
Also known as material cost, direct material cost and raw material cost, this is the amount of money used to buy the materials used to manufacture a product or provide a service. For example, Nancy has an apparel business, the material cost for Nancy is the amount she used to buy the textile, sewing kit, and everything else that goes into making a T-shirt.

The direct material costs should be formulated by:
Cost of materials per unit X number of ending units in inventory

Direct labour costs
As the name suggests, direct labour costs mean the wages incurred to produce products or to provide a service. It includes the wages paid, payroll taxes for those wages, company-paid medical insurance, life insurance, compensation insurance and other company benefits. Let’s take Nancy as an example. Nancy hires T-shirt makers, dress makers, and staff that maintain her retail and e-commerce store. The wages of the staff and any benefits given to these workers are part of her direct labour costs.

The direct labour costs should be formulated by:
Direct labour costs per unit X number of ending units in inventory

Overhead costs  
Commonly referred to as overhead, these are the business expenses that are not directly linked to creating a product or giving a service, and can be fixed, variable or a mix of both. For example, Nancy owns a retail store to sell her apparels. Her overhead costs will include rent, utilities, and company insurance. For her e-commerce store, it could include the amount needed to host her product or to maintain her website domain.

The overhead  costs should be formulated by:
Amount of overhead cost per unit X number of ending units in inventory

Why Do We Need Ending Finished Goods Inventory Budget?

Now that you have a clearer picture of the types of cost you need to know before developing a budget, let’s move onto the ending finished goods inventory budget.

The main purpose of the ending finished goods inventory budget is to provide the amount of the inventory asset that appears on the budgeted balance sheet. Once you know the amount of the inventory asset, you can then accurately determine the cash needed to invest in assets.

Of course, this is recommended for all companies, but there are some businesses who do not intend to create a budgeted balance sheet. Nonetheless, to help you closely monitor your cash balances regularly, this budget should not only be created in a proper way, but also maintained and updated perpetually.

Having an ending finished goods inventory budget is one of the factors you need to determine the price of the products to be sold. Otherwise, how else would you know if you are covering all costs and are in fact, making a profit?

How to Calculate Ending Finished Goods Inventory Budget?

Now that you know the importance of the ending finished goods inventory budget, let’s get you started on how to calculate your budget. Take note that every organisation’s budget is different, so you can’t base your calculation on other businesses. Luckily, there’s a formula you can follow to count your own budget. Before we start, you need to prepare your company’s inventory and production records on hand.

The calculation formula
Finished goods = number of goods you have at the start of the period + any added manufactured goods throughout the period – manufacturing costs of any goods sold during the period.

By period, we are talking about the entire period you are budgeting for.

Still sounds confusing? Here’s an easier formula.

Finished goods inventory = Beginning finished goods inventory + cost of goods manufactured – cost of goods sold

Example of the Ending Finished Goods Inventory Budget

Still unsure on how to get started? We’ve put together a simple example for your reference. Of course, this is just a simple illustrated example. Your actual budget could include more elements and costs.

Woodpecker Manufacturing Company
Ending Finished Goods Inventory Budget
Period: Year ended December 31, 2021

1st quarter 2nd quarter 3rd quarter 4th quarter
Cost/unit:
Direct materials cost $10 $10 $10.50 $10.50
Direct labour costs $3 $3 $4 $4
Overhead costs $5.50 $5.55 $5.60 $5.60
= Total cost/unit $18.50 $18.55 $20.10 $20.10

You may realise that Woodpecker Manufacturing Company’s direct material costs, direct labour costs and overhead costs increased in the 3rd quarter. This can be due to various different reasons. Just for illustration purposes, here are the possible reasons for these cost increases.

The company expects the cost of wood materials to increase in the 3rd quarter due to an announcement by the government to enforce rules on wood cutting. Because of the same demand and lower supply of wood, the price of wood will increase. Because of this reason, the company decided to also increase labour costs as workers will have to work overtime to settle the lack of wood supply and find ways to cut down on the material usage.

The rent of the factory is also expected to rise from the 2nd quarter onwards, resulting in more overhead costs from the second to fourth quarter of 2021.

1st quarter 2nd quarter 3rd quarter 4th quarter
Ending finished goods unit 8,000 10,000 9,000 12,000
x Total cost per unit $18.50 $18.55 $20.10 $20.10
= Ending finished goods inventory budget $148,000 $185,500 $180,900 $241,200

From the table above, you can see that the total budget for Woodpecker Manufacturing Company is $148,000, $185,500, $180,900 and $241,200 for each quarter.

As mentioned earlier, the finished goods inventory budget must always be updated and recorded by your accounting team, so that your company can always determine the most accurate value of your finished goods inventory. This could help you maximise productivity and efficiency for your company budgeting and accounting issues.

Apart from keeping an accurate finished goods inventory budget, here’s another way to maximise productivity for your company.

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Author: Silverbird Content Team
Illustration: Kate Faldin

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