What is Inventories? Types of Inventory Costs for Business

Inventories are something that has to be added in our balance sheets of accounts. It is a kind of assets that the company owns and especially the manufacturing ones. Since it converted into the revenue within a year, it listed on the current holdings on balance sheets.

The piece of converting information is necessary for every company and especially the manufacturing ones because the conversion of inventories will decide how much money the company earns or going to receive.

Types of Inventories:

The most important types of inventories are raw materials, the work in progress (WIP) inventory, and the finished goods. There are some others, but they are not as vital as they did so, we have added them.

types-of-inventories

#1 Raw Material Inventory:

For a manufacturing company, the raw material is the first need, and it is available from the suppliers only. This process is too long and to be instant, let me tell you by showing an example. For a bread manufacturing company, the raw material they need is flour to produce bread as their final products & the same will be done by other companies as well. This process continues, and, that’s how raw material inventory.

#2 Work in Progress (WIP) Inventory:

Work in progress is a type of inventory where the products company is going to make is semi-finished. In other words, the in-between process of making any final product is called work in progress inventories. Example from flour, which is a raw material goes half to finish into the final product.

#3 Finished Goods Inventory:

This is the last stage of inventory for any manufacturing company. In this stage, Products are fully finished to come up in the market and to sell. The sales they are going to get is fully convertible to their revenue and the same will mentioned in your balance sheets, and that is what finished goods inventory is called.

Cost of the Inventories:

It is an investment that made for purchasing & manufacturing to prepare the final goods. It categorized into three headings and which are:

  1. Ordering Cost
  2. Carrying Cost
  3. Shortage or stock out Cost & Cost of Replenishment

#1: Ordering cost:

This is the cost which the company spent on ordering the raw materials, and that will also include the cost of logistics used to transfer the raw material from one place to another. The price of the order is depended upon the amount of raw material you are purchasing.

Example, a supplier, always discount the manufacturer for purchasing the raw materials in bulk quantity.

#2 Carrying Cost:

Carrying costs include the storage of raw materials and the cost of management for producing the final items. Does this seem to be a headache? Isn’t it. Running a manufacturing company is not easy at all.

#3 Shortage or stock out Cost & Cost of Replenishment:

This is the cost where the company needs to spend on the shortage of raw materials and workers. Also, the cost of replenishment after the semi-produce of the final items.

Inventories will always be an asset for the company as the raw materials are getting finalized into the final product. The final product is somehow is the asset of a company, and the same has been added in the balance sheet as well.

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