Take into account your inventory details and the stocks that are at hand in order to be able to handle processes and operations more effectively while being able to keep track of all the spend records and inflows as well as the outflows.
Definition of Inventory and Examples
The definition of inventory changes slightly depending on the industry. Here’s a small list of definitions
Most common definition
Inventory refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit.
Example: If a newspaper vendor uses a vehicle to deliver newspapers to the customers, only the newspaper will be considered inventory. The vehicle will be treated as an asset.
In a manufacturing business, inventory is not only the final product manufactured and ready to sell, but also the raw materials used in production and the semi-finished goods in the warehouse or on the factory floor.
Example: For a cookie manufacturer, inventory will include the packets of cookies that are ready to sell, the semi-finished stock of cookies that haven’t been cooled or packed yet, the cookies set aside for quality checking, and raw materials like sugar, milk, and flour.
In a service industry, since there is no exchange of physical stock, the inventory is mostly intangible in nature. So the service industry inventory mostly includes the steps involved before completing a sale.
Example: For a research consultancy firm, inventory consists of all the information collected for a project. In the hotel industry, a vacant room is inventory for the owner.
Raw materials consist of all the items that are processed to make the final product. In a cookie manufacturing company, the raw materials are items like milk, sugar, and flour that are used in the different stages of production.
When we talk about raw materials, it is essential to understand that raw materials used by a manufacturing company can either be sourced from a supplier or be a by-product of a process. In our cookie manufacturing company, the raw materials will be mostly sourced from various suppliers. However, in a sugar manufacturing company, only the sugarcane is brought in from different farmers. When it is processed in the factory to extract the juice, the residual substance is known as bagasse. The juice is sent for boiling and the bagasse is used as a fuel. Here, the sugarcane, juice , and bagasse will all be treated as raw materials.
The concept of raw materials as inventory items exists only in the manufacturing industry. In a trading industry, there is no processing or manufacturing involved, so there are no raw materials.
Work in progress
When raw materials have been sent for processing but have not yet been approved as finished goods, this stage is known as work in progress. In a cookie manufacturing company, after the raw materials have been processed and the cookies have been molded, they go for a quality check before they are passed for final packaging. All the cookies which are waiting for their quality check are considered work in progress. To put it in simple words, the work in progress category consists of all the items that have been processed but not sent for sale.