To determine average inventory cost, you’d determine the cost per unit with an inventory costing method. Average Inventory CostĬompanies calculate average inventory by assigning a dollar value to the inventory it averages. Be mindful of the fifo method when calculating inventory costs. The mean value of average inventory can apply to two things, though: inventory cost or inventory level. And average inventory on hand is needed to calculate it. Inventory turnover is a fundamental metric when evaluating overall inventory management efficiency. That’s how many times inventory is sold and replenished over a set period of time. From a management perspective, it’s typically used to calculate inventory turnover ratio and inventory days. Divide the sum by two to determine average inventory on hand.Īverage inventory is useful for both inventory management and eCommerce accounting. In this case, the beginning inventory is added to the ending inventory of a time period. Like any other average, it’s calculated by adding two values and dividing by two. What Is Average Inventory?Īverage inventory is the mean value of a company’s inventory over a specific period of time.
#ENDING INVENTORY FORMULA HOW TO#
Let’s take a look at average inventory, why it’s a helpful inventory KPI, and how to calculate it. Average inventory employs an accounting strategy called smoothing that levels out value fluctuations.īy providing accurate and consistent numbers over long periods of time, average inventory helps in many ways.
This is why it's important to know how to calculate finished goods inventory.īut average inventory smooths it out. And that makes inventory costing and calculating the cost of goods sold (COGS) difficult (see inventory meaning). Anyone who’s ever placed a purchase on an online marketplace from suppliers or vendors knows: price change is a constant.
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