Therefore the calculation would be the following: If you wish to calculate the days it takes, you can divide the days in the period by the turnover ratio. The inventory turnover ratio of 1.2 means that the company sells its entire inventory 1.2 times during the month. Average inventory - (Beginning inventory + ending inventory) / 2Ī company has COGS of $48,000 and a monthly average inventory of $40,000.Cost of goods sold - Total cost of goods sold during the period.Inventory turnover ratio = Cost of goods sold / average inventory level It looks at the cost of goods sold (COGS) and the average inventory level.īusinesses use the inventory turnover ratio formula to evaluate the efficiency of their inventory management and make decisions about inventory levels. The ITR is an inventory management formula used to calculate the number of times inventory is sold and replaced during a period. Therefore, the carrying cost of the company’s inventory is 16% of the total inventory value. Using the above inventory management formula, we can calculate the carrying cost as follows: It has a total inventory value of $500,000, and the total cost of holding inventory, which includes storage, handling, and financing costs, is $25,000. Inventory carrying cost = Total cost of holding inventory / total value of inventory x 100Ī company that wants to calculate the carrying cost of its inventory. The formula itself looks like this, and it gives you the percentage of your inventory carrying cost: The formula uses the average inventory level and the cost of carrying one unit of inventory per year.Ĭompanies use the carrying cost formula to calculate the cost of holding inventory and make decisions about inventory management. The carrying cost formula determines the cost of holding inventory, including storage, handling, and financing costs. Therefore, the company should maintain a safety stock of 310 units for this product to ensure enough inventory to cover any unexpected demand or lead time variations. Using the safety stock formula, we can calculate the amount of safety stock needed for this product as follows: This product’s estimated daily usage is 80 units, and the maximum lead time is 7 days. The company wants to maintain a safety stock to cover unexpected demand or lead time variations. Suppose a company sells a product with an average daily usage of 50 units and an average lead time of 5 days. Safety stock = (Maximum daily usage x maximum lead time days) – (average daily usage x average lead time days) These particular formulas can get quite complex.Ĭheck out this in-depth article about calculating safety stock for more advanced formulas. There are specific formulas for when you have chaotic demand or are uncertain about your lead times. There are multiple different ways to calculate safety stock. The safety stock formula is used to calculate the additional inventory held to mitigate the risk of stockouts.
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