What is Average Inventory?
Average inventory is the average level of inventory over a period of time.
How it Works
A business shows closing inventory levels in the balance sheet at period-end.
This valuation is used when calculating the cost of goods sold (C.O.G.S)
Sometimes, management will want to compare closing inventory levels over time.
They may need to know this for financing purposes.
The business will require a certain amount of inventory to support sales.
So they will require a certain amount of finance to cover the cost of inventory.
When ascertaining their finance requirements, the business will examine current inventory.
The problem is, they can’t always rely upon closing inventory of just one period.
Inventory may have been drawn down toward the close of the period.
Or it may have suddenly spiked up due to a large supplier delivery.
So they need to calculate what inventory is over time or average inventory.
Calculating Average Inventory
To calculate average inventory, you find the average of all closing inventories in the series.
You add all inventories together.
Then divide the total by the number of inventories in the series.
The result shows average inventory for the period.
© R.J. Hickman 2020