Average Inventory: Definition, Calculation Formula, and Example

Average inventory estimates the quantity or worth of a particular commodity or collection of commodities over two or more designated periods. The mean inventory value within a specific time frame is called average inventory, calculated by averaging the beginning and ending inventory values across that time frame. It may differ from the median value of the same data set.

Comprehending Average Inventory

The value of all the products held by a business and are either ready for sale or all the raw materials needed to make those products is known as inventory. Businesses rely heavily on successful inventory management because it helps them better manage their complete operations, including sales, expenses, and supplier relationships.

Average inventory is sometimes computed using the number of points required to better correctly depict activities over a certain period, as two points may not always accurately indicate inventory changes across different periods.

For example, it could be more realistic to use the inventory count at the end of each month, including the base month, if a company was trying to figure out the average inventory throughout a fiscal year. To determine the average inventory, add the values for each point and divide the total by the number of points—in this case, 13.

When comparing total sales volume, an organization can measure inventory losses resulting from shrinkage, theft, or mishandled items that cause damage by using the average inventory data as a benchmark. It also takes expired perishable goods into account.

The following is an expression of the average inventory formula:

(Previous Inventory + Current Inventory) / Number of Periods = Average Inventory

In ratio analysis, for example, average inventory is frequently used to determine inventory turnover.

Inventory Movement Average

When keeping up a permanent inventory tracking system is feasible, a business could employ a moving average inventory. This enables the company to modify the inventory items’ values according to data from the most recent transaction.

This effectively converts all prices to the current market norm, making it easier to compare inventory averages over various periods. This makes it comparable to modifying historical statistics for more stable market goods dependent on the inflation rate. It makes it easier to compare things with significant volatility.

An Illustration of Average Stock

A shoe business wants to control its inventory more effectively. There are now $10,000 worth of goods in its storehouse. This corresponds to the inventory values of the last three months, which were $9,000, $8,500, and $12,000.

The shoe manufacturer calculates a three-month inventory average by adding $10,000 from the previous three months, which were recorded as $9,000, $8,500, and $12,000, and dividing the total by the number of data points.

($10,000 + $9,000 + $8,500 + $12,000) / 4 equals the average inventory. Consequently, over the study period, the average inventory was $9,875.

Conclusion

• The average inventory calculation estimates the worth or quantity of a specific commodity or collection of commodities across two or more designated periods.
• The mean value of an inventory during a specific period is called the average inventory, and it could differ from the median value of the same data set.
• A corporation can monitor losses using average inventory statistics as a benchmark for overall sales volume.
• A business can track inventory from the most recent purchase using moving average inventory.
• Inventory management is a critical success element for businesses because it enables them to manage their expenses, revenue, and business connections more effectively.