Inventory Turnover and Average Age of Inventory Calculation

What is the formula to calculate the average age of inventory?

A. 365 divided by inventory turnover

B. 365 times inventory turnover

C. 365 minus inventory turnover

D. 365 plus inventory turnover

Answer:

The statement is true. The average age of inventory is calculated by dividing 365 by the inventory turnover rate.

Inventory turnover is a crucial metric for businesses to assess how efficiently they manage their inventory. It measures how many times a company sells and replaces its inventory over a specific period.

The formula to calculate the average age of inventory is 365 divided by the inventory turnover rate. This calculation helps companies understand how long, on average, their inventory stays in stock before being sold. A lower average age of inventory indicates better inventory management as it implies faster turnover and reduced carrying costs.

By monitoring the inventory turnover and average age of inventory, businesses can optimize their inventory levels, avoid overstocking or stockouts, and improve their cash flow. It also enables companies to identify trends, plan inventory purchases more effectively, and enhance overall operational efficiency.