Manufacturing Inventory – Meaning, Inventory, and More

Manufacturing inventory or Production inventory is one of the many types of inventory. It includes stock of all parts and materials that is available with a manufacturing firm for use. For a manufacturing company, this is an essential type of inventory. Irrespective of the size of the company, it is crucial for a firm to have the right amount of product inventory. Production inventory is very different from the stock of work-in-process. The latter refers to the goods that are already in the production process.

Importance of Manufacturing Inventory

Without production inventory, a company can’t take up production. So, it is an integral part of the supply-chain process. Manufacturers add significant value to the distribution process by first purchasing the raw materials and then using the production process to convert the raw material into finished goods. The manufacturer then sells the finished goods to the distributor, wholesaler, or directly to the consumers.

A company must continuously update this list to ensure that it meets its current and projected manufacturing needs. To correctly know the amount of the manufacturing inventory, a company needs to understand the manufacturing processes and the usage of the raw materials.

Managing Production Inventory

Managing inventory levels require proper care and planning. The objective of a manufacturing company should be to ensure the availability of the right inventory all the time. Or the aim should be to have the right amount of stock that it can sell and is left with no or little stock at the end of the period. The stock, as you know, has carrying costs. So, the company must strive to minimize this cost.

Manufacturing Inventory

For this, a company needs all the information about the inventory, such as quantity, storage, usage, etc. Thus, it should develop a proper inventory management system. Such an approach will have all the data a company needs to manage its inventory efficiently.

Accounting of Manufacturing Inventory

Recording and accounting of production inventory are some of the most challenging things to do. It is because there are many factors involved. A manufacturing company considers the production inventory when they value the raw materials for production.

Like valuing other inventory, a company has two options to value production inventory. These two methods are LIFO (last-in, first-out) and FIFO (first-in, first-out). In FIFO, the materials that come first go into production, while in LIFO, the recent materials go into production first. At the time of inflation, the LIFO method helps to lower the tax liability.

Quality Control

It is another crucial element of the product inventory. The quality control concept relates to inspecting raw materials, finished items, and work-in-progress when they are in the production stage. The inspection manager checks the raw materials before they are put into the processing to identify the defect. Identifying defects at the early stage helps to ensure that the finished good is defect-free.

Any materials that are not as per the quality are sent back to the suppliers. The company will need to adjust this return in the manufacturing inventory to ensure the numbers are accurate.

Final Words

Manufacturing inventory is very important for a company. In its absence, a company can’t survive. However, like other inventory, this also needs an effective inventory management system to get the results as per the expectations.

Quiz on Manufacturing Inventory

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Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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