What Is Average Inventory?
Let me explain average inventory to you directly—it's a calculation that estimates the value or number of a particular good or set of goods during two or more specified periods. This figure might differ from the median value of the same data set. You compute it by averaging the starting and ending inventory values over that period.
Key Takeaways
- Average inventory figures can be used as a point of comparison when looking at overall sales volume.
- Average inventory figures can allow a business to track inventory losses.
- Moving average inventory allows a company to track inventory from the last purchase made.
- Inventory management is a key success factor for companies as it allows them to better manage their costs, sales, and business relationships.
Understanding Average Inventory
Inventory represents the value of all the goods ready for sale or the raw materials to create those goods that a company stores. As someone managing a business, you know successful inventory management is crucial—it lets you handle your overall operations better in terms of sales, costs, and relationships with suppliers.
Two points don't always accurately show changes in inventory over different periods, so you often calculate average inventory using the number of points needed to reflect activities more accurately across a certain time frame.
For example, if you're trying to calculate the average inventory over a fiscal year, it's more accurate to use the inventory count from the end of each month, including the base month. You add the values from each point together and divide by the number of points—in this case, 13—to get the average inventory.
These average inventory figures serve as a comparison point when examining overall sales volume, helping you track losses from theft, shrinkage, damaged goods due to mishandling, or expired perishable items.
The formula for average inventory is straightforward: Average Inventory = (Current Inventory + Previous Inventory) / Number of Periods. You use this often in ratio analysis, like calculating inventory turnover.
Moving Average Inventory
You might choose to use a moving average inventory if your company can maintain a perpetual inventory tracking system. This approach lets you adjust the values of inventory items based on the last purchase information.
In effect, it helps you compare inventory averages across multiple periods by converting all pricing to the current market standard. Think of it as adjusting historical data for inflation on stable items—it simplifies comparisons for volatile products.
Example of Average Inventory
Consider a shoe company aiming to manage its inventory better. The current inventory in its warehouse is $10,000, aligning with the previous three months' values of $9,000, $8,500, and $12,000.
To calculate a three-month inventory average, you add the current $10,000 to the previous three months—$9,000, $8,500, and $12,000—and divide by four data points. This gives an average inventory of $9,875 over the examined period.
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