| Inventory classification in accounting is an aspect of | | | | manufacturer might hold stock of unfinished chairs, |
| the treatment of material costs. It forms the basis of | | | | where a seat needs to be attached, or it might store |
| inventory control, which involves ordering, purchasing, | | | | chair legs that its production department made from |
| receiving, storing, issuing and monitoring inventory. The | | | | the raw materials. Work in process or unfinished |
| first step in controlling inventory is classifying it. This | | | | goods entirely fill the gap between raw materials and |
| helps to determine the purpose and nature of | | | | finished goods. |
| inventory-information that is critical to the production | | | | == Finished goods == |
| process. | | | | For various reasons, businesses might have a large |
| Inventory is classified as follows:a) Raw Materialsb) | | | | quantity of finished goods. Some businesses also |
| Work in progressc) Finished goodsd) Spare parts/ | | | | warehouse and distribute their products. Naturally, it is |
| consumables | | | | vital to track the store of finished goods, to evaluate |
| == Raw materials == | | | | supply in relation to demand and detect |
| Any manufacturing process requires raw materials, | | | | pilferage-among other things. Finished goods are those |
| since production in this sector involves their conversion | | | | that are ready for sale. For many businesses, a |
| into finished products. This category of inventory | | | | production process is only complete when the product |
| refers to inputs into the production process that are | | | | is properly packaged, or else it would be considered |
| not yet processed in full or in part. An entity has a | | | | "work in progress." |
| number of cogent reasons for holding this type of | | | | == Spare parts/ consumables == |
| inventory, including protection against inflation and | | | | Inventory does not always relate to materials that are |
| shortages. | | | | used in the production process, but also materials used |
| == Work in progress == | | | | for the production process. Spare parts for machinery, |
| Some of the stock that an entity holds would be work | | | | tools or equipment used in the production process are |
| in progress or unfinished goods. One cannot classify | | | | also an important part of inventory-part of the material |
| them as raw materials because they are already part | | | | costs (indirect) of production. |
| of the production process. For instance, a chair | | | | |