The types of inventory are raw materials, work in progress, finished goods and the supplies used up in making them, often called MRO. A business that buys goods to resell unchanged holds a fifth type: goods for resale, or merchandise. Which types you hold depends on whether you make, resell or serve.
The IFRS Foundation groups a maker's inventories a little differently: raw materials, consumable stores, work in process and finished goods. This guide sorts everyday goods from six trades into types, then values one Kigali workshop's stock type by type, in Rwandan francs.
What are the 4 types of inventory?
The four types follow goods through production: materials in, work on the floor, products out, and the supplies that keep it running. The table gives each with examples.
| Type | What it is | Examples |
|---|---|---|
| Raw materials | Materials bought to make products, not yet used | Cotton for clothing, steel for machinery, timber for furniture |
| Work in progress (WIP) | Products started but not finished | A car on an assembly line, bread dough before baking, a jacket still being stitched |
| Finished goods | Products made and ready to sell | A boxed laptop, bottled juice, medical kits packed for a hospital |
| MRO: maintenance, repair and operations | Supplies that keep production running but don't become the product | Spare machine parts, lubricant, gloves and safety gear |
One business's finished good is another's raw material. Flour is a mill's finished product and a bakery's raw material. The type depends on what you do with the goods, not on the goods.
The fifth type: goods for resale
Most shops, wholesalers and pharmacies make nothing: they buy goods and sell them unchanged. That stock is goods for resale, also called merchandise inventory, and the four-type list leaves it out.
IFRS puts it with finished goods, as assets "held for sale in the ordinary course of business". A supermarket's inventory is almost all of this type.
What IFRS counts as inventory, and where MRO goes
IFRS has no MRO category. Paragraph 13.1 of IFRS for SMEs counts three things as inventory: goods held for sale, goods being made for sale, and a third group. That group is "materials or supplies to be consumed in the production process or in the rendering of services".
The IFRS Foundation's module on inventories then names a maker's four groups: finished goods, work in process, consumable stores and raw materials. Consumable stores are the part of MRO that counts as inventory.
| MRO item | Where it belongs | The basis |
|---|---|---|
| Lubricant used by the machines | Inventory: consumable stores | Example 4: "The lubricants are inventory" |
| Cheap tools worn out within a year | Inventory: consumable stores | Inventory if not used in more than one period |
| Spare parts for machines | Usually inventory | "Spare parts are usually classified as inventory" |
| Major spare parts used over several periods | Equipment, not inventory | They are property, plant and equipment |
| Cleaning products and stationery for the office | Supplies: an expense | Paragraph 13.1: not used in production or in a service you sell |
So the popular list mixes two things. Count consumable stores and most spare parts as inventory, and expense what runs the office. Inventory vs supplies gives the test, and MRO inventory covers managing it.
Types of inventory by trade
The same columns look different in every trade. The table sorts typical goods for six kinds of business.
| Business | Raw materials | Work in progress | Finished goods or goods for resale | Consumable stores |
|---|---|---|---|---|
| Bakery | Flour, sugar, yeast, bread bags | Dough proving, loaves in the oven | Bread and cakes; soft drinks bought to resell | Oven spares, baking paper |
| Tailor | Fabric, thread, buttons, zips | Cut pieces, half-sewn uniforms | Finished uniforms; school socks bought to resell | Machine needles and oil |
| Furniture workshop | Timber, foam, glue, varnish | Frames assembled but not finished | Chairs and beds; mattresses bought to resell | Saw blades, sanding belts |
| Juice maker | Fruit, sugar, bottles, labels | Juice in the tanks | Cartons of juice | Lubricant for the filling machine |
| Pharmacy | None | None | Medicines and cosmetics, all for resale | None |
| Hardware shop | None | None | Cement, paint and tools, all for resale | None |
A pharmacy or a hardware shop holds one type and manages it one way. A workshop holds all of them, and each is bought, counted and valued in its own way, as the next example shows.
For example: one workshop's inventory, type by type
For example, a furniture workshop in Kigali lists its stock at the end of June. The figures are illustrative, not a real workshop's.
| Goods | Type | How its cost is built | RWF |
|---|---|---|---|
| Timber in the store | Raw materials | Purchase price and transport | 2,400,000 |
| Glue, screws and varnish | Raw materials, indirect | Purchase price | 180,000 |
| 12 chairs assembled, not yet finished | Work in progress | Materials 360,000 + labour and overheads 120,000 | 480,000 |
| 20 finished chairs | Finished goods | 20 × (materials 45,000 + labour and overheads 20,000) | 1,300,000 |
| 10 mattresses bought to sell with beds | Goods for resale | 10 × 85,000 purchase cost | 850,000 |
| Spare saw blades and sanding belts | Consumable stores | Purchase price | 90,000 |
| Total inventory | 5,300,000 | ||
| Cleaning products and office paper | Supplies | Expensed when bought | Not inventory |
| The table saw | Equipment | Depreciated over its working life | Not inventory |
Raw materials hold nearly half the money, RWF 2,580,000 of RWF 5,300,000. That is where the workshop's buying discipline pays most.
Work in progress and finished goods carry labour and overheads as well as materials, under paragraphs 13.5 and 13.8 of IFRS for SMEs. Valued at materials only, the chairs would show RWF 520,000 less, understating the workshop's inventory by almost a tenth.
Types of inventory by purpose
A second way to sort stock is by why you hold it, and it cuts across the first. A carton of cooking oil can be goods for resale by type and safety stock by purpose.
| Purpose | What it is |
|---|---|
| Cycle stock | What you sell between one delivery and the next; its size is your reorder quantity |
| Safety stock | The buffer for late deliveries and busy days, set as in how to avoid overstocking and stockouts |
| Anticipation stock | Bought ahead of a season or an expected price rise |
| In-transit stock | Bought and on its way, not yet on your shelf: see in-transit inventory |
| Decoupling stock | A buffer between two production steps, so a stop at one doesn't stop the other |
| Consignment stock | A supplier's goods on your shelf, paid for once sold: see consignment inventory |
| Dead stock | Stock that hasn't sold for months: see dead stock |
Why the type of inventory matters
The type decides how you value goods, how you reorder them and how often you count them. Treating a workshop's timber like a shop's soap leads to the wrong order at the wrong time.
| Type | Valued at | Reordered from | Counted |
|---|---|---|---|
| Raw materials | Landed purchase cost | Production use and the supplier's lead time | Costly materials weekly |
| Work in progress | Materials, labour and overheads so far | Not reordered: it is finished | At each period end |
| Finished goods | Full production cost | What sells, and how long a batch takes | With your regular counts |
| Goods for resale | Landed purchase cost | Sales and the supplier's lead time | A section each week |
| Consumable stores | Purchase cost | A simple minimum level | Monthly |
How to keep inventory types apart in ArmPOS
ArmPOS holds every type as products with stock, and categories keep the types apart. It has no production module, so work in progress isn't tracked between steps.
- Make a category per type, such as Raw materials, Finished goods, Goods for resale and Consumables (Categories, brands and units).
- Keep materials out of your online store. On each material's product, set Hide From Online Store under Options (Add your first products).
- Record production with two adjustments. A Subtraction takes off the materials used, and an Addition puts on the finished goods made. Put the run in the Note (Count and adjust stock). The full method is in barcodes in manufacturing.
- Count one type at a time. Count Stock makes a counting sheet for one warehouse and one category.
- Read each type's stock. The Stock Report lists each product's Current Stock with its Category, and Inventory Valuation gives each product's value at cost (Stock reports).
- Keep supplies out of stock. Record office and cleaning supplies as expenses, in a category such as Supplies (Record an expense). Expenses sit under Accounting, which comes with some plans only.
Frequently asked questions
What are the 3 main types of inventory?
Raw materials, work in progress and finished goods: the three stages of production. Most lists add MRO supplies as a fourth.
What are the 5 types of inventory?
The four above plus goods for resale, the stock of shops and wholesalers. Some lists count packing materials as the fifth instead.
Is MRO inventory?
Partly. Under IFRS, consumable stores and most spare parts are inventory, major spare parts are equipment, and office or cleaning supplies are expenses.
What type of inventory does a shop hold?
Goods for resale, almost only. A shop that also prepares goods, such as a butcher cutting meat, holds some raw materials and finished goods too.
Is work in progress an asset?
Yes, a current asset, valued at the materials, labour and overheads put in so far. It becomes finished goods when the work is done.
List your stock this week under the five types, with a value for each: the biggest number is where to start. To keep each type in its own category, create a free ArmPOS account.
