When it comes to keeping inventory, it’s a never-ending balancing act. Inventory management will be the backbone of your business ⁠— and the bane of your inventory manager’s existence. https://www.bookstime.com/ Sign up for QuickBooks Online Plus to start using inventory and reporting software today. These solutions allow you to quickly view your manufacturing and material expenses.

In that case, you’d be working with more than two data points like we were above. For example, let’s say you have a small online store, and you start the month with $5,000 worth of inventory. Then, over the course of the month, you sell some items and buy a few more, so your ending inventory is $6,500. Just knowing how to calculate average inventory is not enough unless you are aware of the challenges involved.

How to Use the Average Inventory Formula

By using this report and the data provided within QuickBooks, you can gather the inventory balances you need to use our average inventory calculator. In our example, the inventories purchased experienced a price appreciation. January purchase costs per unit were $130, February purchase costs per unit were $150, and March purchase costs per unit were $200. Therefore, since the periodic system uses the costs of goods available for sale over the entire quarter, more is allocated to the costs of goods sold for the sale of inventory. Although this method is straightforward to calculate, it could not provide you with a complete view of your inventory.

• With the help of the method in this article, you will soon be tracking your inventory like an expert.
• Usually, the inventory balance is measured on the last business day of each month.
• GAAP allows for last in, first out (LIFO), first in, first out (FIFO), or average cost method of inventory valuation.
• And because of it, calculating out the cost of goods sold (COGS) and inventory costs can be challenging.
• Average inventory is the mean value of an inventory within a certain time period.
• Additionally, you can calculate on a smaller time frame by taking up the inventory at the beginning of a month and ending it, then dividing the whole by 2.

It provides you with all the data in an automated manner to calculate the average inventory. Next, add the beginning and ending inventory balances together and divide by 2 to get the average inventory for that period. This calculation provides a more accurate picture of the amount of inventory that the business held during that time, as it takes into account any fluctuations inventory accounting in inventory levels over the period. To calculate moving average inventory, you first need to determine the time period you want to analyze. For example, you may want to look at the average inventory over the past three months. Next, you add up the inventory balance at the end of each month for the time period and divide the total by the number of months.

Inventory Turnover

The inventory turnover ratio is just one tool you can use to measure the health of your business. On the other hand, a low ratio could indicate that the business is struggling to sell its products or that it’s holding onto too much stock. Despite these limitations, an average inventory formula is still a helpful tool for valuing inventory.

However, if their average age of inventory is higher than other companies, then the company may be pricing its products too high, and therefore, is not selling products fast enough. Average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. With proper inventory management, opening inventory is the same as the ending inventory for the last accounting period. However, if you have no clear inventory records, you can use the formula below to calculate the starting inventory.

Beginning Inventory Explained

Lower DSI is usually preferred, but as with the inventory turnover ratio, this varies by industry. To get an idea of performance, compare someone’s DSI to that of peer companies. Alice calculates that she had 5,500 units in stock on average during the previous quarter. For example, someone can track inventory losses due to shrinkage, damage, and theft by comparing the average to overall sales volume in the same period.

• Have too much inventory on hand, and your profit margin will decrease.
• These periods frequently coincide with the changing seasons, and managers must be proactive in preparing for the waxing and fading of demand throughout these critical times.
• By monitoring sales and inventory depletion or replenishment, computerised point-of-sale systems and inventory management software instantly reflect changes in inventory.
• In a nutshell, you add those two numbers together and divide them by the number of periods or months you’re calculating for.
• The average age of inventory is an important metric for managers to use as well.

So if your inventory turnover rate is four and you want to find your annual number, you’d divide 365 by four. With these numbers, your average inventory period would be 91.25 days. If you have a low inventory turnover rate, it’s a sign that you’re not selling through your inventory quickly enough. With a low rate, you might end up stuck holding products that are no longer in demand and losing money.