In a business that sells goods or utilizes materials, it is essential to learn about different types of inventory. In simple words, inventory is the stock of goods held by the business. The goods are raw materials, work-in-progress, or finished products. These types assist in tracking stock, enhancing planning, and ensuring the availability of products at all times. There are three types of inventory that are raw materials, finished goods, and work-in-progress (WIP). But when you dig into the topic, there are more than just three. How many types of inventory are there? The other types of inventory besides the three (raw material inventories, WIP inventories and finished goods inventories) are maintenance, repair and operations (MRO) inventory, transit inventory, cycle inventory, decoupling inventory etc. Each of these has a distinct function within business operations. This article will look at all the primary types of inventories, how they work, and how they are utilized. We will also define: The types of inventory management, The types of inventory management systems, types of inventory models, & types of inventory control system that a business uses.
What are Different Types of Inventory?
All the goods a business uses or sells. They may be goods you purchase from vendors or create yourself. When we refer to what are the different types of inventory, we refer to a categorization of the stock a business holds, whether by levels or by the stage of production played. Inventory can be viewed a variety of ways. However, the most common inventory types are generally:
Raw Materials Inventory
Raw-materials are the basic items used to produce finished goods. Well management of raw materials, helps businesses not run out of stock. It also saves money by buying in bulk. As an example, cotton is raw material for clothes. Cars need steel, as a raw material.
- That’s how businesses keep surplus raw materials.
- They are used in the initial stage of production.
- This makes it important to keep a sufficient amount of raw materials to avoid delays.
WIP inventory (Work-in-Progress inventory)
WIP inventory may also include tests that haven’t been done yet. These are goods that are at different phases of production. WIP inventory can help you track your production flow. It aids in breaking down problems in the process.
- For example, a half-painted chair in a furniture factory.
- It is included in the product but not yet for sale.
Finished Goods Inventory
The products that are ready to sell are called finished goods. A business must also find a balance of how much finished goods to have on hand without the need of storing excess. This means the right stock of expensive products. Not having enough products can result in lost sales.
- Example: A crowd of smartphones in a box.
- This is the end product that will be sent to customers.
MRO Inventory, Maintenance, Repair, and Operations
Maintenance, repair and operation (MRO) items are not included in the product. But they are necessary to keep machines and operations operating. MRO inventory tracking helps minimize downtime.
- An Example of Demand Forecasting: Oil for machines, safety gloves, cleaning tools.
- MRO Inventory is necessity for smooth daily operations of businesses.
Transit Inventory
Transit inventory means inventory in current transit from one location to another location. To know when things will arrive lets you track transit inventory.
- It could be on a truck or a ship.
- It belongs to the business, just not in the warehouse.
Cycle Inventory
Cycle Inventory: Cycle inventory is what is used to satisfy normal demand. What determines how much stock you keep in storage? And it saves on storage costs.
- It is the stock companies maintain for routine purchase.
- It gets utilized, then supplanted in cycles.
Decoupling Inventory
The additional stock that is kept between stages of production is known as decoupling inventory. It complements large manufacturing setups.
- It helps prevent any delays if a single machine stops.
- You can continue processing each stage without blocking.
Types of Inventory Management
To ensure business runs smoothly, businesses employ types of inventory management to properly track, order, and utilize stock. In this section we will look at the various types of inventory management and what their importance is.
- Periodic Inventory Management: Businesses take stock at regular intervals. It’s a straightforward method, but it does miss out on the real-time data. This can be on a weekly, monthly, or yearly basis. They record each count and update records accordingly.
- Perpetual Inventory Management: Here, companies update their inventories in real time. It provides more control and accuracy. Each sale or purchase updates the record automatically. It’s barcodes, scanners and software.
- JIT (Just-In-Time) inventory management: It stands for just-in-time, meaning that stock is ordered only when needed. JIT is dangerous if supplies are late. Yes, it does save money if you get it right. It reduces storage costs. It requires excellent relationships with suppliers.
- ABC Analysis: This technique clusters items through value. It helps you focus on the right stock by doing ABC analysis.
A Items: High-value, low-quantity.
B Items: Medium-value, medium-quantity.
C Items: Low-value, high-quantity.
Types of Inventory Management Systems
Some companies rely on software and systems for stock management. These systems aid in tracking, controlling, and analyzing inventory. Understanding the different types of inventory management systems can help you choose the right solution for your business.
- Manual Inventory System: Business use the old fashion way of writing stock on paper or recording it on an Excel sheet. It suits small businesses. It’s cheaper, but slower. Manual systems are prone to errors.
- Barcode Inventory System: Products have barcodes which are scanned. It reduces human error. It helps inventory records update in the blink of an eye. They are quick and simple to operate.
- RFID Inventory System: RFID tracks items using chips. It doesn’t require line-of-sight scanning. It is capable of reading many items simultaneously. It is expensive but highly accurate.
- Cloud-Based Inventory System: All data is stored online. It’s accessible from anywhere to businesses. It encourages real-time updates and collaboration. Cloud systems are an excellent choice for growing companies.
Types of Inventory Control
Inventory control is the practice of checking and managing what you have in stock It assists in preventing excess stock or stockouts of products. Understanding types of inventory control is essential for saving costs and ensuring business operations run smoothly.
- Minimum and Maximum Stock Levels: Businesses establish a lower and upper threshold. They repurchase when hitting minimum stock. They do not buy more than the maximum you can buy. This maintains stock levels safely and stably.
- Economic Order Quantity (EOQ): EOQ to determine the ideal order size. It is a trade-off between the order cost and storage cost. It cuts down on waste, and it saves money. EOQ is one of many types of inventory models.
- Reorder Point System: They set a reorder point, which is the threshold at which an order should be placed. Once they reach this point, they order again. It varies based on usage and delivery time.
Types of Inventory Cost
Cost of inventory types are examples of how much total money you spend on stock. There are numerous costs associated with buying and storing inventory for businesses. Inventory cost types are various types of costs that a company incurs in the course of managing inventory. These expenses begin with purchasing the goods and extend beyond, to including storing, managing and occasionally running out of inventory. Being able to quantify these costs enables better scheduling, less waste, and higher profit margins. All three costs figure into total inventory expenditures for a company.
| Type of Cost | Meaning |
| Purchase Cost | Cost to buy inventory items |
| Ordering Cost | Cost of placing and receiving orders |
| Holding Cost | Cost to store and maintain inventory |
| Shortage Cost | Cost when stock is unavailable |
Each cost affects profit. So, managing them is key to success.
Types of Inventory Models
These models rely on math and data to determine how much to order and when. It is the type of inventory models that guide the businesses to determine the quantity of the stock and the timing of ordering the stock. The models utilize data and formulas to schedule inventory according to demand, costs and timing.
- Fixed Order Quantity Model: This cow orders the same quantity each time. This is good in stable demand periods. Easy to use and manage.
- Fixed Period Model: This is a model for checking stock at regular times. It orders according to current stock levels. Ideal if order dates are set in stone.
- Single Period Model: For items with a short life. For instance: Tickets to events or goods that are in season. So you focus on not ordering too much. The ideal model depends on the product and demand.
Types of Inventory Control System
Inventory control means the tools and methods to keep inventory in check. These systems help minimise waste, prevent pilfering and improve stock management. Types of inventory control system ensure inventory is kept at the right amount, at the right time, and in the right location.
- Centralized Inventory Control: All inventory is maintained at one central location. Better for uniform decisions. Reduces duplication.
- Decentralized Inventory Control: Every branch or unit manages its stocks. Faster local decisions. Ideal for large companies or companies that have multiple offices.
The size, type, and need of businesses decide the choice.
Types of Inventory Vouchers in Tally.
Tally is accounting software. It is also used to manage the inventory through vouchers. The types of inventory vouchers in tally is used to record various stock movements. Inventory vouchers are used to record different types of inventory transactions like stock movement, purchase, sale and returns etc. Need of these vouchers in Tally to maintain correct stock records.
- Receipt Voucher: Used when receiving inventory from a supplier
- Issue Voucher: When inventory is sold or consumed.
- Rejection In & Rejection Out: For returned items. These vouchers document in and out returns.
- Physical Stock Voucher: It was used to keep track of real stock count.
Tally to easily record all inventory activity in one place.
Relevance to ACCA Syllabus
As a ACCA student, it’s important you understand types of inventory as they are relevant to Management Accounting (MA) regarding costing techniques, Financial Reporting (FR) concerning asset classification, as well as Financial Management (FM) related to working capital and stock valuation. It helps to make more accurate decisions regarding budgeting and reporting.
Types of Inventory ACCA Questions
Q1: Which of the following is NOT a main type of inventory?
A. Raw materials
B. Work-in-progress
C. Intangible assets
D. Finished goods
Answer: C
Q2: What type of inventory consists of partially finished goods?
A. Raw materials
B. Finished goods
C. Work-in-progress
D. MRO inventory
Answer: C
Q3: In financial statements, inventories are records under which classification?
A. Current liabilities
B. Non-current assets
C. Current assets
D. Expenses
Answer: C
Q4: What is the inventory that allows for smooth production between processes?
A. Cycle inventory
B. Decoupling inventory
C. Transit inventory
D. Buffer stock
Answer: B
Q5: Maintenance inventory, specifically supplies and lubricants.
A. Work-in-progress
B. Raw materials
C. MRO inventory
D. Finished goods
Answer: C
Relevance to US CMA Syllabus
The CMA specifically examines inventory within the cost management, budgeting, variance analysis and internal controls sections of its syllabus. Understanding inventory types is vital for the implementation of cost allocation, performance evaluation, and lean inventory strategies like JIT and EOQ.
Types of Inventory US CMA Questions
Q1: What type of inventory is most affected by Just-In-Time (JIT) systems?
A. Finished goods
B. Raw materials
C. Cycle inventory
D. MRO inventory
Answer: B
Q2: Inventory cost in EOQ models consists of all EXCEPT:
A. Holding cost
B. Ordering cost
C. Stockout cost
D. Marketing cost
Answer: D
Q3: Which of these is cycle inventory?
A. Safety stock
B. Transit inventory
C. Stock reserved for normal demand
D. Goods under repair
Answer: C
Q4: What inventory type prevents production stoppages?
A. Work-in-progress
B. MRO inventory
C. Raw materials
D. Decoupling inventory
Answer: D
Q5: Which of the following describes finished goods inventory?
A. Customer returned items
B. Goods that are available for sale to customers
C. Products in the process of being assembled
D. Raw materials in storage
Answer: B
Relevance to US CPA Syllabus
The CPA exams (especially FAR and AUD) focus on Valuation basis, costing methods (FIFO, LIFO, weighted average), and internal control systems. High-level CPA candidates will need to recognize how inventory types influence asset measurement and financial statement accuracy.
Types of Inventory US CPA Questions
Q1: Which type of inventory would be recorded when materials are in transit between locations?
A. Work-in-progress
B. Transit inventory
C. Decoupling inventory
D. MRO inventory
Answer: B
Q2: Which one of these, is most likely to be counted as part of year-end physical inventory?
A. Goods sold on credit
B. Raw materials not yet used
C. Future orders placed
D. Sales after year end
Answer: B
Q3: Which type of inventory in a manufacturing company consists of partially finished items?
A. Raw materials
B. Finished goods
C. Work-in-progress
D. Spare parts
Answer: C
Q4: When carrying out an audit of production, which of the following inventory types is most relevant?
A. Raw materials
B. WIP and Finished goods
C. MRO inventory
D. Inventory in transit
Answer: B
Q5: Which inventory must a CPA who is preparing financial statements will make sure is placed under current assets?
A. Buildings
B. Finished goods
C. Patents
D. Goodwill
Answer: B
Relevance to CFA Syllabus
In the CFA Program, especially the Level I subject of Financial Reporting and Analysis, candidates examine the impacts of types of inventory on profitability, liquidity ratios, and cost flow assumptions (LIFO vs FIFO). Valuation and investment decisions are informed by inventory insights.
Types of Inventory CFA Questions
Q1: What category of inventory is least likely to be included in cost of goods sold?
A. Finished goods
B. MRO inventory
C. Raw materials
D. Work-in-progress
Answer: B
Q2: What type of inventory is included in Days Inventory Outstanding (DIO) ratio?
A. Raw materials only
B. All inventory types
C. Finished goods only
D. MRO supplies only
Answer: B
Q3: What effect do increased finished goods inventory levels have on return on assets (ROA)?
A. Increase ROA
B. Decrease ROA
C. No effect on ROA
D. Only affect net income
Answer: B
Q4: What type of inventory is most sensitive to market demand changes?
A. Raw materials
B. Work-in-progress
C. Finished goods
D. MRO inventory
Answer: C
Q5: In inflationary periods, a company that uses LIFO will likely show lower values for which kind of inventory?
A. Finished goods
B. Work-in-progress
C. Ending inventory
D. Transit inventory
Answer: C
