Enhance your sales advisory process for inventory

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since inventory can be one of the largest assets that a business has it needs to be valued this means that monetary value needs to be assigned to the inventory when it comes to manufacturing and inventory valuation this isn't as easy of a process than it is in other industries inventory refers to the goods and materials that a business holds for the ultimate goal of production or resale in today's video we'll start by discussing the inventory involved in manufacturing accounting for inventory in a manufacturing company raw materials when valuing the goods in manufacturing you need to take into consideration not only the value of raw materials but also the value of the work in progress and the value of the finished goods as part of this process as well if there are any ending balances of materials or inventory when the period ends these must also be properly valued before being recognized to further explain the raw materials or the direct material inventory includes all the materials that the manufacturing company uses in order to make its product for example if you're in the computer industry this would include the motherboard metals and so on these products are typically listed on a bill of materials that you receive and will itemize not only the quantities but the cost of materials that you're using work in process inventory the next type of inventory is your work in process inventory this inventory includes anything that is still in the process of being made but has yet to be completed this inventory value is based upon how far along the process of being built it is or how complete it is once the work in process has been completed the inventory is transferred into the finished goods inventory finished goods inventory finished goods inventory includes the costs that are associated with the completed goods and are ready to be sold but have yet to be sold as well the manufacturing costs noted previously whether they be direct or overhead costs are included in this inventory until the products are sold at this stage the cost of completed goods are now called the cost of goods manufactured because they are complete free onboard shipping point means that the customer will own the merchandise as soon as it leaves the manufacturing loading dock the manufacturer is not responsible for the goods during delivery free onboard destination means that the manufacturer owns the inventory until the buyer actually receives the merchandise direct material costs direct material costs include anything that is used specifically for your product in our example noted this would include the metals and motherboards as well as with other industries manufacturing also a direct labor cost the direct labor costs also include anyone on the assembly line that is putting your computer together indirect costs there are also indirect costs and this could include any indirect materials such as screws that the company purchases in bulk and does not assign to specific inventory there is also the expense of indirect labor such as supervisors or support staff that needs to be taken into consideration overhead costs a manufacturing company will have overhead costs as well these costs need to be added together then allocated to the number of units that are being produced within a specific reporting period this is an important cost to remember and needs to be added to the cost of inventory this includes costs that are associated with the manufacturing plant itself this would include any building maintenance taxes insurance utilities depreciation and so on your bookkeeper or accountant will need all these amounts including the raw materials for production the cost of goods manufactured and cost of goods sold in order to prepare the income statement there are schedules that are created so that the allocation can be easily seen the three schedules include the schedule of raw materials the schedule of work and process and the schedule of cost of goods sold each schedule is required in order to fill out the next schedule to make better sense the schedules look at the inventory cost flow equation that is used for each beginning inventory plus purchases equal cost of goods available for sale cost of goods available for sale minus ending inventory equal cost of goods sold as an example some may then add an additional schedule combining the schedule of cost of goods manufactured in the schedule of work and process or they may simply go on to the schedule of cost of goods sold these schedules are typically created for internal use and only the income statement is shared the information that is transferred onto the income statement looks like this as a final note we want to briefly touch on inventory management having inventory for too long of a period of time isn't good for manufacturers business there are not only the concerns over any increase in storage costs but there's also the threat of the goods becoming obsolete while sitting in storage on the other hand having too little inventory also has its share problems you may run into issues with the supply chain system that would then cause the manufacturer to not only lose the profit for potential sales but they may also start to lose market share over time once a customer chooses to purchase this item the retailer will purchase the item from the manufacturer the benefit to the manufacturer is if the product is being promoted to an end user the downside may be that their product is in their inventory for an extended period of time how best to manage your inventory is something worth discussing with your bookkeeper or accountant need help from an expert we know that this can be complicated i'm one of our experts at valley business center help for over 30 years valley business center has been providing comprehensive bookkeeping payroll and tax services to our clients in whistler squamish to see the sky corridor and metro vancouver bc areas valley business center provides reliable and effective services to all clients don't forget to subscribe and hit the notification button hear more helpful information thank you so much for watching you