For example, let’s say that a business started the month with $10,000 worth of finished goods in inventory. During the month, they incurred $15,000 in costs related to manufacturing new products. And finally, they sold $20,000 worth of finished goods to customers. In this case, their ending finished goods inventory would be calculated as follows:
$10,000 + $15,000 – $20,000 = $5,000
So their cost of finished goods inventory for the month would be $5,000.
Of course, this is just a simple example. In reality, businesses usually have a much more complex inventory system with multiple types of raw materials, products, and finished goods. But the basic principle remains the same — businesses can calculate their ending finished goods inventory for any given period by tracking all of the inputs and outputs.