{"id":11083,"date":"2021-11-14T19:20:18","date_gmt":"2021-11-14T13:50:18","guid":{"rendered":"https:\/\/scholarsclasses.com\/blog\/?p=11083"},"modified":"2025-10-09T16:56:42","modified_gmt":"2025-10-09T11:26:42","slug":"inventory-turnover-ratio-formula","status":"publish","type":"post","link":"https:\/\/scholarsclasses.com\/blog\/inventory-turnover-ratio-formula\/","title":{"rendered":"Inventory Turnover Ratio Formula | Free Cost Accounting Articles"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d4f9bc87dce\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d4f9bc87dce\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/scholarsclasses.com\/blog\/inventory-turnover-ratio-formula\/#Inventory_Turnover_Ratio_Formula\" >Inventory Turnover Ratio Formula<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/scholarsclasses.com\/blog\/inventory-turnover-ratio-formula\/#Inventory_Turnover_Ratio\" >Inventory Turnover Ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/scholarsclasses.com\/blog\/inventory-turnover-ratio-formula\/#Inventory_Turnover_Ratio_Formula-2\" >Inventory Turnover Ratio Formula<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/scholarsclasses.com\/blog\/inventory-turnover-ratio-formula\/#Solved_Problem\" >Solved Problem<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"Inventory_Turnover_Ratio_Formula\"><\/span><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\">Inventory Turnover Ratio Formula<\/mark><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img decoding=\"async\" width=\"1024\" height=\"576\" data-src=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-1024x576.jpg\" alt=\"Inventory Turnover Ratio Formula\" class=\"wp-image-11106 lazyload\" title=\"\" data-srcset=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-1024x576.jpg 1024w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-300x169.jpg 300w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-768x432.jpg 768w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-1536x864.jpg 1536w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula-640x360.jpg 640w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Inventory-Turnover-Ratio-Formula.jpg 1920w\" data-sizes=\"(max-width: 1024px) 100vw, 1024px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1024px; --smush-placeholder-aspect-ratio: 1024\/576;\" \/><figcaption class=\"wp-element-caption\">Inventory Turnover Ratio Formula<\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"Inventory_Turnover_Ratio\"><\/span>Inventory Turnover Ratio<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are several items in the stores which are issued to the production after a long gap from the date of purchases. There are several other items that are never issued to the production as they have become outdated which need to be disposed of. These items need to be identified so that management can avoid the capital locked up in such items. It is necessary to compute the inventory turnover ratio for finding these items. <\/p>\n\n\n\n<p>This ratio indicates not only the replacement of stock during the year but the efficiency or inefficiency with inventories are maintained in the organization. This ratio measures how quick sales of inventories is done. It is the test of efficient inventory management. A higher inventory turnover ratio indicates good inventory management. A low inventory turnover ratio may adversely affect the ability of an organization to meet consumers\u2019 demands and not cope up with requirements.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Inventory_Turnover_Ratio_Formula-2\"><\/span>Inventory Turnover Ratio Formula<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This ratio measures the relationship between the cost of goods sold and the inventory level. The Inventory turnover ratio is calculated as follows :<\/p>\n\n\n\n<p><strong>Inventory turnover ratio = Cost of goods sold or material consumed \/ Average Inventory or Stock<\/strong><\/p>\n\n\n\n<p>Where, <br><strong>Cost of material consumed = opening stock + purchases \u2212 closing stock<br>Average Inventory = (Opening stock+Closing stock) \/ 2<\/strong><\/p>\n\n\n\n<p>This ratio can also be calculated in days as follows :<br><strong>Inventory turnover ratio (in days) = Number of days in a year \/ Inventory Turnover Ratio <br><\/strong>                                                          = &#8230;&#8230;&#8230;&#8230;&#8230;&#8230;&#8230;. Number of days<\/p>\n\n\n\n<p>However serious limitation of this approach is that detailed data may not be available in respect of inventory level and cost of goods. In order to overcome this difficulty, another approach for the computation of inventory turnover Ratio is used which is based on the relationship between sales and closing inventory. Alternatively,<\/p>\n\n\n\n<p><strong>Inventory turnover Ratio =  Sales \/ Closing Inventory<\/strong><\/p>\n\n\n\n<p>In short, of the two approaches of calculating inventory turnover ratio, the first relates to the cost of goods sold to an average inventory, and theoretically, it is superior whereas the advantage of second approach is that it is free from practical problems of computations.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Solved_Problem\"><\/span>Solved Problem<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The following data are available in respect of material \u2018Y\u2019 for the year ended 31st March 2015.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\"><strong>Particulars<\/strong><\/td><td class=\"has-text-align-center\" data-align=\"center\"><strong>Rs<\/strong><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">Opening Stock<\/td><td class=\"has-text-align-center\" data-align=\"center\">1,10,000<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">Closing Stock<\/td><td class=\"has-text-align-center\" data-align=\"center\">1,50,000<\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">Purchases during the year<\/td><td class=\"has-text-align-center\" data-align=\"center\">3,20,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Calculate:<\/strong><br>i) <a href=\"https:\/\/youtu.be\/ZvvbTP1JlWg\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/youtu.be\/ZvvbTP1JlWg\" rel=\"noreferrer noopener\">Inventory turnover ratio<\/a>.<br>ii) Number of days for which average inventory is held.<\/p>\n\n\n\n<p><strong>Solution:<\/strong><br><strong>Cost of material consumed <br><\/strong>= opening stock + purchases \u2212 closing stock<br>= 1,10,000 + 3,20,000 &#8211; 1,50,000<br>= 2,80,000<\/p>\n\n\n\n<p><strong>Average Inventory<br><\/strong>= (Opening stock+Closing stock) \/ 2<br>= (1,10,000 + 1,50,000) \/ 2<br>= 1,30,000<\/p>\n\n\n\n<p><strong>i) Inventory Turnover Ratio<\/strong><br>= Cost of goods sold or material consumed \/ Average Inventory or Stock<br>= 2,80,000 \/ 1,30,000<br>= 2.15 times<\/p>\n\n\n\n<p><strong>ii) Number of days for which average inventory is held<\/strong><br>= Number days in a year \/ Inventory turn over ratio<br>= 365 \/ 2.15<br>=169. 76 days OR 170 days<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is Cost Accounting?<\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">Meaning of Cost.<\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">Meaning of Costing<\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">Meaning of Cost Accounting<\/a><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":11106,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[7,1],"tags":[3853],"class_list":["post-11083","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-degree-college","category-misc","tag-inventory-turnover-ratio-formula"],"_links":{"self":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/11083","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/comments?post=11083"}],"version-history":[{"count":4,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/11083\/revisions"}],"predecessor-version":[{"id":39741,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/11083\/revisions\/39741"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media\/11106"}],"wp:attachment":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media?parent=11083"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/categories?post=11083"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/tags?post=11083"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}