Non-availability of space for other business activities.Ĥ. Over stocking requires more go down space.ģ. Impact of Low Inventory / Stock Turnover Ratioģ. Closing stock is increased just to take the advantage of expected rise in selling price or to meet the estimated rise in future sales.ģ. Reasons for Low Inventory / Stock Turnover RatioĢ. Besides, there is no rules of thumb or standard inventory turnover ratio. Hence, there is a need of further investigation before interpreting the stock turnover ratio to get final results. In this situation, high profits cannot be earned by the company. This is possible due to keeping of low level of inventory in relation to demand or following conservative method of valuing inventories at lower values or the policy of the company of buying inventory in small lots frequently. Sometimes, a company has high stock turnover ratio. Only high stock turnover ratio yields more profits. It means that high stock turnover ratio shows effective management of inventory and vice versa. This ratio indicates the degree of effective management of inventory. Significance of Inventory / Stock Turnover Ratio Work in Progress Turnover Ratio = Cost of Completed Work /Average Work in Progressįinished Goods Turnover Ratio = Cost of Goods Sold /Average Stock of Finished Goods Raw Materials Turnover Ratio = Raw Materials Consumed / Average Stock of Raw Materials They are Raw Materials Turnover Ratio, Work in Progress Turnover Ratio and Finished Goods Turnover Ratio. If a company is engaging manufacturing activities, three more ratios are calculated in addition to Inventory/Stock Turnover Ratio. If average stock cannot be ascertained due to non-availability of required information, closing stock may be treated as average stock. = Value of Stock at the end of each month / 12 months If a company is trading or manufacturing seasonal products Generally, the term stock or inventory refers to stock of raw materials, stock of working progress and stock of finished goods.Īverage inventory or stock may be calculated as under. Total Cost = Raw Materials Consumed + Labour + OverheadsĬost of Goods Sold = Sales – Gross Profit The cost of Goods sold may be calculated as under.Ĭost of Goods Sold = (Opening Stock + Purchase of Raw materials + Direct Expenses) - Closing StockĬost of Goods Sold = (Total cost+ Opening Stock Finished Goods) – Closing Stock of Finished Goods. ![]() The main requirements to calculate Inventory / Stock Turnover Ratio are cost of goods sold and average inventory. of days in a year / Inventory or Stock Turnover Ratio or Stock VelocityĬost of Goods sold is otherwise called as cost of sales. Inventory Conversion Period (or) Average Age of Inventory = No. In this case, the following formula can be used to find the inventory conversion period. An analyst can find the average time taken for clearing the stocks. It is otherwise called as Average Age of Inventory. NOTE: If stock velocity is to be computed in period (days / months) than the last formula is used.Īverage Inventory = (Opening Stock + Closing Stock) / 2 Inventory Conversion Period Inventory / Stock Turnover Ratio (Or) Stock Velocity = (Average Stock x 365/12) / Cost of Sales Inventory / Stock Turnover Ratio (Or) Stock Velocity = Net Sales / Inventory Inventory / Stock Turnover Ratio (Or) Stock Velocity = Net Sales / Average Inventory at Selling Price ![]() Inventory / Stock Turnover Ratio (Or) Stock Velocity = Cost of Sales / Average Inventory Inventory / Stock Turnover Ratio (Or) Stock Velocity = Net Sales / Average Inventory at Cost Inventory / Stock Turnover Ratio (Or) Stock Velocity = Cost of Goods Sold / Average Inventory at Cost The following formulae are used to calculate the Stock Turnover Ratio. In other words, Stock Turnover Ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.
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