Inventory Turnover & Analysis
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define inventory turnover
➛ Calculate inventory turnover ratio
➛ Calculate average inventory
➛ Interpret inventory turnover results
➛ Calculate days inventory outstanding
➛ Analyze inventory efficiency
➛ Apply inventory ratios to business decisions
Key Vocabulary
➛ Inventory Turnover
➛ Average Inventory
➛ Cost of Goods Sold
➛ Days Inventory Outstanding
➛ Inventory Efficiency
➛ Slow-Moving Inventory
➛ Overstocking
What Is Inventory Turnover?
Inventory turnover measures
➛ How many times a business sells and replaces its inventory during a period
It shows efficiency in inventory management
Key Formulas
1. Inventory Turnover Ratio
Inventory Turnover = COGS ÷ Average Inventory
Key Formulas
2. Average Inventory
Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
Key Formulas
3. Days Inventory Outstanding
DIO = 365 ÷ Inventory Turnover
Shows how many days inventory stays before being sold.
Example Calculation
Given
Beginning Inventory = $20,000
Ending Inventory = $30,000
COGS = $100,000
Step 1
Average Inventory
(20,000 + 30,000) ÷ 2 = 25,000
Step 2
Inventory Turnover
100,000 ÷ 25,000 = 4 times
Step 3
Days Inventory Outstanding
365 ÷ 4 = 91.25 days
Interpretation of Results
Result
High turnover
Low turnover
High DIO
Low DIO
High turnover
Low turnover
High DIO
Low DIO
Meaning
Efficient sales, low holding cost
Slow sales, possible overstock
Inventory held too long
Faster inventory movement
Efficient sales, low holding cost
Slow sales, possible overstock
Inventory held too long
Faster inventory movement
Important Insights
➛ High turnover is generally good but too high may mean stock shortages
➛ Low turnover may indicate obsolete or excess inventory
➛ Industry comparison is important
True or False
➛ Inventory turnover measures how quickly inventory is sold
➛ Higher turnover always means poor performance
➛ DIO measures the number of days inventory is held
➛ Average inventory uses beginning and ending inventory
Fill in the Blanks
1. Inventory turnover = COGS ÷ __________
2. Average inventory = (Beginning + Ending) ÷ __________
3. DIO = __________ ÷ Inventory Turnover
4. Low turnover may indicate __________ inventory
Calculation Practice
A business reports
Beginning Inventory = $15,000
Ending Inventory = $25,000
COGS = $80,000
Tasks
Calculate average inventory
Calculate inventory turnover
Calculate DIO
Interpretation
State whether each situation is Good or Bad and explain
➛ Very high inventory turnover
➛ Very low inventory turnover
➛ High DIO
➛ Low DIO
Mini Case Study
A retail company has declining inventory turnover over three years.
Questions
➛ What does declining turnover indicate?
➛ What problems might the company face?
➛ Suggest two ways to improve inventory turnover
➛ How does turnover affect profitability?
Quick Quiz
➛ What is inventory turnover?
➛ How is average inventory calculated?
➛ What does high DIO mean?
➛ Why is inventory turnover important?
➛ Name one way to improve inventory turnover.
Answers ➧ Here
Introduction to Cost Accounting ➧ Here