Question

Harlan enterprises manufactures smart phones. currently, harlan has $14,000 in raw materials and $25,000 in finished goods in its warehouse. it also has $18,600 in work-in-process goods on its assembly line. harlan erroneously includes the work-in-process goods as part of finished goods inventory, listing work-in-process inventory as $0. what effect with this have on harlan's total inventory?

Answer 1

Ideally;
Inventory = Cost of raw materials + Cost of finished goods + Cost of work-in-progress

Assuming this ideal case, Harlan's inventory would be;

Inventory = $14,000+$25,000+$18,600 = $57,600

However, if work-in-progress inventory was listed as $0;

Then, the new work-in-progress would be;
Inventory = 57,600-18,600 = $39,000

This would reduce the inventory for Harlan Enterprises which may affect other financial ratios such as inventory turn-over ratio. As a result, such ratios will not reflect the exact position of the company.