Types of Inventory

Manufacturing-sector companies purchase materials and components and convert them into finished goods. These companies typically have one or more of the following three types of inventory:

  1. DIRECT MATERIALS INVENTORY. Direct materials in stock that will be used in the manufacturing process (for example, computer chips and components needed to manufacture cellular phones). 
  1. WORK-IN-PROCESS INVENTORY. Goods partially worked on but not yet completed (for example, cellular phones at various stages of completion in the manufacturing process). This is also called work in progress.
  1. FINISHED-GOODS INVENTORY. Goods (for example, cellular phones) completed, but not yet sold. 

Merchandising-sector companies purchase tangible products and then sell them without changing their basic form. These companies hold only one type of inventory, which is products in their original purchased form, called merchandise inventory. Service-sector companies provide only services or intangible products and do not hold inventories of tangible products.