Inventory is described in Max Muller’s The Essentials of Inventory Management as follows:

“There are three basic types of inventory:

  1. Raw Materials—raw materials inventory is made up of goods that will be used in the production of finished products, e.g., nuts, bolts, flour, sugar.
  2. Work in Process —work in process inventory, or WIP, consists of materials entered into the production process but not yet completed, e.g., subassemblies.
  3. Finished Goods—finished goods inventory includes completed products waiting to be sold, e.g., bar stools, bread, cookies.

Most inventory fits into one of these general buckets, yet the amount of each category varies greatly depending on the specifics of your industry and business. For example, the types of inventory found in distribution environments are fundamentally different from those found in manufacturing environments.

Distribution businesses tend to carry mostly finished goods for resale while manufacturing companies tend to have less finished goods and more raw materials and work in progress. Given these differences, it is natural that the accounting choices vary between distribution and manufacturing settings.”

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