An inventory is a stock of goods maintained for the purpose of future production or sales. In broad sense, the term inventory refers to all materials, parts, supplies, tools, in-process or finished products recorded in the books by an organization and kept in its stocks, warehouse or plant for some period of time. It is a list or schedule of materials held on behalf of an enterprise.
Types/Classification of Inventory
Direct inventories are those inventories that play a major role in the production and constitute a vital part of finished goods. These inventories can be easily assigned to specific physical units. Direct inventories may be categorized into four groups.
(i) Raw materials
Raw materials are the physical resources to be used in the manufacture of finished products. They include materials that are in their natural or raw form. For example, cotton in the case of textile mill, sugarcane in the case of sugar factory, oil seeds in the case of an oil mill etc. The chief objective of keeping raw material is to ensure uninterrupted production in the event of delays in delivery and also to enjoy the economies of large scale buying.
(ii) Semi-finished Goods
Semi-finished goods are those materials which are not cent per cent (100%) complete in all respects i.e., some processing still remains to be done before the product can be sold. For example, a person who is engaged in the manufacture of furniture, may purchase unpolished furniture from market and sell it after polishing the same.
(iii) Finished Goods
Finished goods are complete products that are ready for sale or distribution. For instance, in case of a hosiery factory, sweaters, shawls etc. are finished products.
(iv) Spare Parts
Spare parts means duplicate parts of a machine. Usually, almost all the industrial concerns maintain spare parts of various machines which they use for manufacture. This will enable them to ensure smooth running of machines which in turn provide for uninterrupted production.
Indirect inventories include those items which are necessary for manufacturing but do not become component of the finished goods. They normally include petrol, maintenance materials, office materials, grease, oil lubricants etc. These inventories are used for ancillary purposes to the business and cannot be assigned to specific, physical units. These inventories may be used in the factory, the office or the selling and distribution divisions.