We give an overview of
inventory turns and inventory accuracy. .
Inventory Turns is one of the key metrics that companies use
to manage their inventory. Inventory Turns or Inventory Turnover is
the number of times that inventory cycles or turns over per
The Inventory Turns Calculation: A frequently used method is to divide the
Annual Cost of Sales by the Average Inventory Level.
Example: For 2003, the ABC Widget company has a Cost of Sales =
The company's Average Inventory during this time = $6,000,000.
$36,000,000 / $6,000,000 = 6 Inventory Turns
Inventory turnover ratio uses the cost of items (what you
paid for them) not sales dollars (what you sold them for).
To calculate the average inventory, record your inventory level at
beginning and midway through the month (some companies do this daily).
However, many companies only capture the month ending inventory. It is important
to use the same costing for the Cost of Sales and the Average
Inventory. This is because you want an "apples to apples" comparison
when it comes to the cost.