Here is a quick guide to the different types of inventory. There are two basic types: merchandising and manufacturing. Manufacturing is further divided into three more components: raw material, work in process and finished goods.
Merchandise inventory: If you buy items from other artists and crafters to sell in your own gallery or shop, you'll have a merchandise inventory. Remember though - any items in your shop on consignment are not part of your inventory.
Manufacturing inventory: If you make your own arts and crafts, you'll have a manufacturing inventory. The term 'manufacturing' might not seem to fit a hand crafted type of business, but a quick review of the classifications within the term, will make the relationship clearer.
A manufacturing inventory consists of three different parts: raw materials, work in process and finished goods. Using a leather crafting business as my sample craft company, here are definitions and examples of the three:
Raw materials: Everything the crafter buys to make the product is classified as raw materials. That includes leather, dyes, snaps and grommets. The raw material inventory only includes items that have not yet been put into the production process.
Work in process: This includes all the leather raw materials that are in various stages of development. For the leather crafting business, it would include leather pieces cut and in the process of being sewn together and the leather belts and purse etc. that are partially constructed.
In addition to the raw materials, the work in process inventory includes the cost of the labor directly doing the work and manufacturing overhead. Manufacturing overhead is a catchall phrase for any other expenses the leather crafting business has that indirectly relate to making the products. A good example is depreciation of leather making fixed assets.
- Finished goods: When the leather items are completely ready to sell at craft shows or other venues, they are finished goods. The finished goods inventory also consists of the cost of raw materials, labor and manufacturing overhead, now for the entire product.
Inventory is probably one of the largest costs for merchandising and manufacturing businesses.. Find out how to account for inventory regardless if you are a retailer or manufacturer.