Average inventory is the mean value of an inventory within a certain time period.
Average inventory period is important because it shows how inventory turnover changes over time. This allows management to better understand its purchasing happens and sales trends in an effort to reduce inventory carrying costs.
Formula to calculate average inventory.
Beginning inventory is the book value of a company’s inventory at the start of an accounting period.
Ending inventory is the value of goods still available for sale and held by a company at the end of an accounting period.
Example:
In the beginning of an accounting period, a firm’s opening stock was worth $ 200,000. At the end of the accounting period the closing stock was worth $ 50,000. Calculate the average inventory of the company.
Therefore, the average inventory of the firm is $ 125,000.
