The Importance of Inventory Turnover for Efficient Management

Question:

How is the inventory turnover ratio computed?

Answer:

The inventory turnover is computed by dividing the cost of goods sold by the average inventory.

Explanation:

Inventory turnover can be defined as a measure of the number of times an inventory is used or sold by an organization within a specific period of time. It is an important metric that indicates how efficiently a company manages its inventory.

The formula for calculating inventory turnover is to divide the cost of goods sold (COGS) by the average inventory held during the period. By doing this calculation, businesses can assess how quickly they are selling products and how well they are managing inventory levels.

High inventory turnover is typically seen as a positive sign, as it suggests strong demand for the company's products and efficient inventory management practices. On the other hand, low inventory turnover may indicate overstocking, slow sales, or inefficient inventory management.

Therefore, it is crucial for businesses to monitor their inventory turnover ratio regularly to ensure they are optimizing their inventory levels and meeting customer demand effectively.