Logistics23 B6 - Day4 - Types of Inventories

LOGISTICS AND
SUPPLY CHAIN
MANAGEMENT
Day 4: Types of Inventories
Dr. Ramil David Solis, DBA

Professor
Types of Inventories TOPIC PRESENTATION
• Raw Materials Inventory
• Raw materials definition
• Types of raw materials
• Importance of raw materials
• Raw materials formula
• Work In Process Inventory
• Work in process - a definition
• Work in process formula
• Difference between work in
process and work in progress
• Finished Goods Inventory
• Definition
• How to calculate Finished
Goods
• Importance to calculate
Finished Good
What is
Inventory?
It is one of the biggest and most

important assets of the company.
It refers to goods, items,

merchandise, and component parts
to be sold
This includes as well as raw materials

uses in production to produce
products or repair products in order
to make a profit.
• Inventory is such an important part of a business
to make a profit,
• It’s important to have an understanding of key

aspects of inventory such as inventory management
Inventory Management helps in having an

effective way to purchase, receive, store, sell
and dispatch inventory and turnover of
inventory which is one of the primary
sources of revenue generation and
subsequently earnings for the company’s
shareholders.
Raw Materials
Definition
These are all the components,

subassemblies, and supplies
currently in stock that are or will
be used to produce products.
After the product is completed the

raw materials/components are
unrecognizable and are
completely in different forms or
shapes.
For example, sugar, cacao beans,

and butter make your favorite
chocolate bar.
• TYPES OF RAW MATERIALS
• Even though all raw materials are obtained organically, they can be classified into three groups based on their origin.
• Plant/tree-based: Plants and trees provide raw materials such as vegetables, fruits, flowers, timber, resin, and latex.
• Animal-based: animal-based raw materials include leather, flesh, bones, milk, wool, and silk.
• Mining-based: minerals, metals, crude oil, coal, and other resources are mined from the soil.
Importance of Raw Materials
Raw materials are essential for the manufacturing process of
various industrial products, from food and clothing to electronics
and automobiles.
These materials can be natural, such as wood, cotton, and

minerals, or synthetic, such as plastics and chemicals.
Raw materials are essential to the production process, as they are

used to create the final product.
Poor quality materials can lead to defective products, which can

result in significant financial losses for the manufacturer.
It is essential to source high-quality materials that meet the

required specifications and standards, and to have a reliable supply
chain that can provide them with the necessary raw materials.
Raw Materials Calculation Formula
To know how much raw material is applied in the manufacture process, we can
use the below formula is as follows.
WORK-IN-
PROGRESS (WIP)
• WIP (work-in-progress) is a manufacturing and supply-
chain management phrase that refers to partially finished
goods that are waiting to be finished.
• Raw materials, labour, and overhead expenditures for items

in various manufacturing process phases are referred to as
WIP.
• WIP is a component of the inventory asset account on the

balance sheet.
• These expenses are then transferred to the finished goods

account, and then to the cost of sales account.
• WIPs are one of a company’s balance sheet’s components.
• WIP figure solely reflects the value of products in various

stages of production. This does not include the value of raw
materials that have not yet been incorporated into a product
for sale.
Work-in-Progress
Calculation
• Work-in-progress inventory can be

calculated in a variety of methods in
accounting.
• Typically, the percentage of total overhead,

labour, and material costs incurred by the
company is used to compute the number of
partially produced products in WIP.
• A construction company, for example, may

bill a client based on the project’s progress,
such as when it is 25% or 50% complete, and
so on.
Work in Process vs.
Work in Progress
• Work in process typically refers to short-term

assets, while
• Work in progress refers to long-term assets.
• The difference between the two is time to

completion.
• Often, construction projects are considered

work in progress while goods manufacturing is
work in process.
• Again, the key difference between the terms is

time to completion.
• Works-in-Progress vs. Finished Goods
WIP and finished goods is determined by the state of completion of an
inventory in relation to its overall inventory. The terms “work in progress”
(WIP) and “completed items” denote the intermediate and end stages of
the inventory life cycle,
What is Finished
Goods Inventory?
• Finished goods inventory is the

total stock available for customers to
purchase that can be fulfilled.
• Using the finished goods inventory

formula, sellers can calculate the
value of their goods for sale.
• 'Finished goods' is a relative term,

as a seller's finished goods may
become a buyer's raw materials.
Niche Bakers,
Finished • For example, is a baked goods firm based in Canada. While

their completed goods are ready-to-sell sweets (such as cakes and
Goods cookies), the assets that contribute to the finished goods are
Example supplies, cookware, and any labour required for preparation.
Finished Goods Inventory Calculation
The value of finished goods and basic inventory valuation is calculated
by all types of businesses.
This calculation can assist business owners in determining the value of

their assets to avoid waste and assure profitability.
It is an examination of the link between product input and output.
This ensures that inventory isn’t created at a rate that sales can’t keep
up with and prevents goods from being sold when it isn’t available.
The formula is straightforward:
Why Finished Goods Inventory Is Important
It requires an operating
budget of successful firms
It is important aspects of an
operational budget
It assigns a numerical value to

each factor contributing to the
end product’s manufacturing.
You can better calculate the

prices at which the product
must be sold
Understanding the costs, you

can alter the sales price
For example, if you needed to cut costs, one simple method

(using the bakery as an example) could be to reduce food
waste. If you are a company producing a product with an
expiration date, understanding your finished goods inventory
is even more crucial.

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LOGISTICS AND

Day 4: Types of Inventories

Dr. Ramil David Solis, DBA

It is one of the biggest and most

It refers to goods, items,

This includes as well as raw materials

• It’s important to have an understanding of key

Inventory Management helps in having an

These are all the components,

After the product is completed the

For example, sugar, cacao beans,

These materials can be natural, such as wood, cotton, and

Raw materials are essential to the production process, as they are

Poor quality materials can lead to defective products, which can

It is essential to source high-quality materials that meet the

• Raw materials, labour, and overhead expenditures for items

• WIP is a component of the inventory asset account on the

• These expenses are then transferred to the finished goods

• WIPs are one of a company’s balance sheet’s components.

• WIP figure solely reflects the value of products in various

• Work-in-progress inventory can be

• Typically, the percentage of total overhead,

• A construction company, for example, may

• Work in process typically refers to short-term

• Work in progress refers to long-term assets.

• The difference between the two is time to

• Often, construction projects are considered

• Again, the key difference between the terms is

• Finished goods inventory is the

• Using the finished goods inventory

• 'Finished goods' is a relative term,

Finished • For example, is a baked goods firm based in Canada. While

This calculation can assist business owners in determining the value of

It is an examination of the link between product input and output.

It assigns a numerical value to

You can better calculate the

Understanding the costs, you

For example, if you needed to cut costs, one simple method

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