Calculating Cost of Goods Sold Using Inventory Turnover Ratio On the other hand, a low inventory turnover ratio in relation to a particular item indicates its slow movement.Īs such, it indicates to the organization that over-stocking should be avoided for that item and, in certain cases, that immediate disposal is the best option. The inventory turnover ratio shows which material items are fast-moving, and so it provides valuable information that can guide investments in that item. In other words:Īverage stock = (Opening stock + Closing stock) / 2 Inventory turnover ratio = Value of materials consumed during the period / Value of average stock (or inventory held during the period)Īverage stock can be calculated by adding opening closing stocks and then dividing by 2. The inventory turnover ratio is arrived at using the following formula: Formula to Calculate Inventory Turnover Ratio It shows how fast the stock moves in and out of the company. The inventory/material turnover ratio (also known as the stock turnover ratio or rate of stock turnover) is the number of times a company turns over its average stock in a year. The inventory turnover ratio can be calculated by comparing the balance of stores with total issues or withdrawals over a particular period. In this way, capital investment can be minimized in undesirable stock. It is in the best interest of the organization to compare the turnover of different types of (and grades of) material as a measure of detecting stock that does not move regularly. As such, inventory turnover refers to the movement of materials into and out of an organization. Inventory turnover is the rate at which a company sells its inventory.
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