Finished goods

What it means

Finished goods are stock the company has completed by its own activity and holds for sale. Completion separates them from work in progress; origin separates them from goods for resale, which are bought in ready.

They are valued neither at selling price nor at acquisition cost but at own production cost. That covers direct materials, direct labour and production overhead; administrative overhead and selling costs stay out of the valuation.

Only what is meant for sale counts as finished goods. If a company puts one of its own products to use in its operations, a machine or a shelving system it built itself, say, the item becomes tangible fixed assets or material, and the cost of making it is capitalised as own work, not booked through sales.

How it works in practice

The valuation rests on a costing the company sets out in an internal directive and applies the same way all year. Additions and releases run through the change in internal inventories, so costs land in the period that produced them.

At the year end the quantity is verified by stocktaking and compared with production records. Goods that will no longer fetch their carrying amount get a valuation allowance, an accounting cost that does not reduce the tax base: the value reaches tax only when the stock is sold or written off.

A joinery s. r. o. finishes a kitchen on 20 December and hands it over in January. At 31 December that is a product in stock, not revenue. Before the year-end close we therefore ask the client for a list of finished but undelivered orders so they go into inventory and can be checked against the stock records.

What to watch out for

Finished goods get valued at direct materials alone and the whole production overhead stays in the year’s costs. Stock and profit are understated; a tax inspection recalculates the valuation, the tax base rises and interest is added to the assessed tax.

Products are handed out as gifts to business partners or the managing director takes some for himself. A free supply carries output VAT if the company deducted input tax, and the cost is usually a non-deductible expense. Without a stock issue document an inspection finds it by comparing production with sales.