Stock Turnover Formula

Stock Turnover Formula

Stock Turnover formula has been given below; this formula has been explained with an example.

Stock Turnover =      Cost of Sales during the Year              .                                   Closing Inventory or Average Inventory

Stock Turnover is calculated to show how many times inventory sold during the year. It is pertinent to mention that stock turnover vary industry to industry, some industries have low stock turnover (Like Tires, Cloths), other industry has high turnover (food industry).

Stock Turnover Formula Example

Cost of Sales = 90,000

Inventory = 15,000

Calculate Stock Turnover

Solution

Stock Turnover =     Cost of Sales    

                                Inventory

= 90,000/15,000

= 6 (times sold)

Significance of Stock Turnover Calculation

Stock turnover calculation simply shows that how many times stock sold during the year. This information is a tool for controlling the performance of sales department. Stock turnover information of different periods is compared to evaluate performance of sales department. Stock turnover information is also compared with stock turnover of the industry.

High Stock Turnover

High stock turnover level is normally show good performance of the sales teams. High turnover is also preferred, because it reduces the risk of obsoletes. In some industries high stock turnover helps in designing customer specific product.

Low Stock Turnover

Low stock turnover shows the poor performance of the sales team. Furthermore, low stock turnover reflect the overstocking of the inventory which is not recommended, because stock holding involves a number of costs.

 Stock Turnover Formula Practice Question

Cost of Sales of Company = 120,000

Closing Inventory = 25,000

Calculate Stock Turnover

Stock Cycle Formula

Stock Cycle Formula

Stock cycle formula is shown below. This formula has been explained with an easy example;

Stock Cycle =     Number of Weeks in a Year                                 Number of Order

 Stock Cycle Formula Example

Number of Weeks in a Year = 52

Number of order placed during year= 15

Calculate Stock Cycle?

Solution

Stock Cycle =     Number of Weeks    

                          Number of Order

=52/15

=3.46 weeks or 3.46 x7 =24.22 Days

Stock cycle basically tell about the frequency of order placement. Stock cycle may be calculated in week or days. Stock cycle may either be directly calculated in days by using following formula, or weeks may be converted into days.

Stock Cycle =     Number of Days in Year                                  Number of Order

Example

Number of Days in a Year = 365

Number of order placed during year= 15

Calculate Stock Cycle?

Solution

Stock Cycle =     Number of Days in Year    

                           Number of Order

=365/15

=24.33 Days

Significance of Stock Cycle Calculation

Stock cycle helps management in placing the stock orders. Management knows the timing of each order. With the help of stock cycle calculation, a tentative schedule of stock orders can be prepared.

Average Stock Level Formula

Average Stock Level Formula

Average stock level formula has shown below. Average stock level formula has been explained with an example.

Average Stock Level= Minimum level + (Reorder level/2)

Average Stock Level Formula Example

Minimum level Requirement= 40,000

Re order level or Point = 30,000

Calculate Average Stock Level?

Solution

Average Stock Level = Minimum level + (Reorder level/2)

= 40,000 + (30,000/2)

= 55,000 (Average Stock Level)

Advantage of Average Stock Level

Average Stock level offers a balanced solution, and therefore is preferred by many organizations. Average stock level is above the minimum level and below the maximum level.

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula
Re Order Level Formula

Material Usage Variance Formula

Material Usage Variance Formula

Material usage variance formula is given below. Material usage variance formula can be explained with an example.

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

 

Material Usage Variance Formula Example

Quantity Consumed (Actual) = 12000 kg

Standard Price (Per unit) = $ 10

Units produced by Company=2000

Standard usage per unit = 8 kg

Actual Price of Material = 70,000

Calculate Material Price Variance

Solution

Standard consumption = Units produced x standard usage per unit

=2000 x 8

=16,000 kg

Material usage Variance = Standard Price x (Standard Quantity- Actual Quantity).

$ 10 x (16000-12000)

= $ 8 x 4000

= $32,000 (material usage variance)

Material Usage Variance Calculation

Material usage variance is primarily a difference between standard quantity of material (should have been used) and actual quantity of material and such difference is measured at standard cost. Material usage variance may be favorable or adverse. Adverse material usage variance suggests that more material used than expectation, where favorable material usage variance suggest that less material consumed than standard.

Significance of Material usage Variance

Material usage variance provides useful information about the usage of material in the production process. Such information can be used to take appropriate decision for improving the material usage during the production process.

Reasons for adverse material usage variance

Reasons for adverse material usage variance includes use of unskilled labour, old or outdated production techniques, and using low quality material. These factor or reasons would increase the material usage quantity and hence result in adverse material usage variance.

Reasons for favorable Material usage variance

Reasons for favorable material usage variance include using skilled labour, new or modern technology and using premium quality material. These factors will lower the material consumption and thus would result in favorable material usage variance.

Other name of material usage Variance

Other name of material usage variance is material quantity variance. Because this variance is related to consumption of material, therefore words like usage or quantity are used to describe this variance. (Material usage or material quantity variance)

Other Related Formulas

Material Price Variance Formula
Labour Efficiency Variance Formula
Labour Rate Variance Formula
Material Price Variance Formula

Material Price Variance Formula

Material Price Variance Formula

Material Price Variance Formula is given below. The material price variance concept has been explained with example.

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance Formula Example

Actual Quantity of Material Consumed = 7000 kg

Standard Price per unit of Material = $ 7

Actual Price or cost incurred on Material = 63,000

Calculate Material Price Variance

Solution

Actual Price = 63,000/7 = 9

Material Price Variance = Actual quantity x (Standard price- Actual Price).

Material Price Variance = 7000 (7 – 9)

=7000 (-2)

=-14,000 (Adverse Material Price Variance)

Material Price variance can be calculated as difference between standard price and actual price. This Price difference is multiplied of actual quantity consumed during the production. There are two possible situation, one standard price is high than actual price, this is favorable situation, and second situation is standard price is low than actual price, this is adverse situation.

 Reasons for Favorable Material Price Variance

Reasons for favorable material price variance includes deflation in the economy, using low quality material, discount offered on bulk purchases, review of supply chain for lowering the costs, high competition in the supply market , and the low demand of material in the market.

 Reasons for Adverse Material Price Variance

Reasons for adverse material price variance include inflation in the economy, rise in the demand of material in the market, withdrawal of major competitor from the market, artificial shortage of material, real shortages due to natural disasters.

 Significance of Material Price Variance

Material price variance immediately reflects the price level of material consumed. Favorable material price variance reflects the low price level than expectation or standard.  Adverse material price variance reflects high price level than expectations.

Adverse material price information can be used to investigate the reasons for high level of price. Thus adverse material price variance an effective tools for identifying and investigating the high price level.

Favorable material price variance may used to determine the reasons for low price level in the market. This favorable material price variance is a tool of identifying and investigating low price level.

Material Price Variance Formula Example

Quantity Consumed (Actual) = 8000 kg

Unit Standard price= $ 10

Actual Price of material = 93,000

Calculate Material Price Variance

Other Related Formulas

Material Price Variance Formula

Labour Efficiency Variance Formula 

Labour Rate Variance Formula

Material Price Variance Formula 

Maximum Stock Level Formula

Maximum Stock Level Formula

Maximum Stock Level formula is given below. This formula has been explained with an example.

Maximum Stock level = Reorder level + reorder Quantity- (Minimum usage x Minimum lead time)

Maximum Stock Level Formula Example

Reorder level of Inventory = 20,000

Reorder Quantity (EOQ) = 15,000

Minimum usage of inventory = 5000

Minimum lead time for arrival = 2 weeks

Solution

Maximum level = Reorder level + reorder Quantity- (minimum usage x minimum lead time)

=20,000 + 15,000- (5000 x2)

=35,000-10000

=15,000

 Significance of Maximum Stock Level Calculation

Holding of stock or inventory is not free; rather holding of stock requires reasonable amount of expenditure or cost. Maximum stock level is calculated for reducing holding cost of the company. Any Stock above maximum stock level is not recommended.

Reasons of Stock level above the maximum Stock level

One of the main reasons is low consumption of stock that has resulted in piling up of stock. Therefore stock level may be controlled either by reducing re order quantity or reducing the re order level.

Important factor for Maximum Stock Level Determination

Important factor for determining the maximum stock level includes the storing or holding cost, space availability, seasonal stock consumption fluctuation etc. Therefore stock level formula just provides a general guidance, therefore management decide the actual stock level on the bases above mentioned factors.

Maximum Stock Level Practice Question

Reorder level of Inventory = 30,000

Reorder Quantity (EOQ) = 6,000

Minimum usage of inventory = 4,000

Minimum lead time for arrival = 3 weeks

Calculate Maximum Stock Level?

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula 

Re Order Level Formula 

Minimum Stock Level Formula

Minimum Stock Level Formula

Minimum stock level formula may be calculated by the following formula. Minimum stock level formula has been explained with a simple example.

Minimum Stock Level = Reorder Level - (Average usage x average Lead Time)

Minimum Stock Level Formula Example

Re Oder level of Inventory= 70,000

Average usage per week= 10,000

Average lead time for inventory = 5 weeks

Solution

Minimum Stock Level = Reorder Level - (Average usage x average Lead Time)

= 70,000-(10,000 x 5)

=70,000-50,000

=20,000 (minimum stock level)

Significance of Minimum Stock Level

Minimum stock level is very critical level and at this level management should take appropriate actions or steps to ensure the availability of material. It is important to remember that this level is not an ordering level or re ordering level; rather this is a control or safety level.

Advantages of Minimum Stock Level Calculation

First advantage of minimum stock level is to provide management an effective control of the inventory management. Management can take appropriate steps to ensure timely availability. Minimum stock level calculation also helps in ensuring operations of the entity.

Minimum Stock Level and Inventory orders

Ideally inventory order should reach the warehouse before the inventory level touches the minimum stock level. If this is not the case, then operation of organization may be halted for shortage of inventory.

Other name of Minimum Stock Level

Other name of minimum stock level is safety stock level. It means that organization must maintain that level for safety or continuity of its operation. Minimum stock level ensures a safe environment for operations.

Minimum Stock Level Formula Question

Re Oder level of Inventory= 800,000

Average usage per week= 20,000

Average lead time for inventory = 8 weeks

Calculate the minimum stock level?

Other related Formulas

Average Stock Level Formula
Maximum Stock Level Formula
Minimum Stock Level formula 
Re Order Level Formula 

Re order Level Formula

Re order Level Formula

Re order level formula is given below. Re order level is that level of inventory at which order needs to be placed.  Re order level may be calculated by multiplying maximum usage with maximum lead time.

Re order Level = Maximum usage x Maximum Lead Time

OR

Re Order Level = (Average Usage x Lead Time )+ Safety Stock

 

Re order Level Formula Example (Method 1)

Maximum Usage per week = 9,000

Maximum Lead time         = 10 weeks

What would be Re order level?

Solution

Re order Level = Maximum usage x Maximum Lead Time

= 9,000 x 10

=90,000 units

Re order Level Formula Example (Method 2)

Average Usage per week = 10,000

Lead time         = 5 weeks

Safety stock= 4,000 units

What would be Re order level?

Solution

Re order Level = (Average usage x Lead Time) + Safety

= (10,000 x 5) + 4,000

=54,000 units

Significance of Re order Calculation

It means that when stock level reaches at 90,000 (unit), we must place a new order. Technically it means that, when the new stock will reach in 10 weeks, then the current stock would have finished. Thus re order level calculation is very important factor for effective inventory management.

Re order Level and Lead Time

Lead time is time interval between placing the order and reaching the inventory to the warehouse. Lead time has been classified into three categorize i.e. maximum lead time, minimum lead time and average lead time. Maximum and average lead time is used to calculate re order level by two different formulas as explained above.

Other Related Formulas

Average Stock Level Formula

Maximum Stock Level Formula

Minimum Stock Level formula 

Re Order Level Formula 

Total Ordering Cost Formula

Total Ordering Cost Formula

Total Ordering cost can be calculated formula. Total ordering cost for the year is calculated by multiplying the number of orders to be placed during the year with cost of placing one per order.

Total Ordering Cost =Number of Orders x Cost per order

Total Ordering Cost Example

Number of orders per Year = 40

Cost of per order = 2000

Calculate total ordering cost?

Solution

Number of Orders during the Year x Cost per order

Total ordering cost = 40 x 2000

= 80,000 (Total ordering Cost)

Total ordering cost is important calculation for future budgeting & future planning. It also helps to plan future cash flows.

Average Stock Level Formula

Maximum Stock Level Formula

Minimum Stock Level formula 

Re Order Level Formula 

Number of orders Formula

Number of orders Formula

Number of orders can be calculated by the following formula

Number of order =    Annual Demand of Inventory                                        Quantity per Order

Number of Orders Example

Annual Demand of Inventory = 80,000

Quantity to be ordered= 10,000

Calculate number of orders?

Solution

Number of orders =    Annual Demand of Inventory    

                                    Quantity per Order

= 80,000/10,000

= 8 orders

Significance of Number of Order

Number of order during the year helps in understanding and calculating the future ordering cost. Thus number of order calculation is helpful for future budgeting & planning.

Limitation of Number of orders Calculation

Number of order cannot be calculated alone, rather it is calculated with the help of quantity to be ordered i.e. annual demand is divided by quantity order. Therefore quantity to be ordered is calculated in first place (normally by EOQ Formula).

Example

Annual Inventory Demand = 100,000

Cost of placing order = 120

Holding Cost per unit= .7

Calculate Economic order Quantity and number of Order

Solution

1.    Quantity Ordered

EOQ = √2CoD/C_h

= √2(120)(100,000)/.7

= 5,855 units

2.    Number of Order

Number of orders =    Annual Demand of Inventory    

                                    Quantity per Order

=100,000/5855

= 17 orders.

Number of order information can be used to calculate the total ordering cost for the year i.e. 17 orders x 120 ordering cost = 2040

Economic Order Quantity Formula

Economic Order Quantity Formula

Following is the economic order quantity formula. This formula has been explained with couple of simple examples.

EOQ = √2CoD/Ch

Where

D= Annual Demand

C_{0 =} Cost of Placing an order

C_h= Cost of Holding

Economic Order Quantity Formula Example

Annual Inventory Demand = 80,000

Cost of placing order = 100

Holding Cost per unit= .6

Calculate Economic order Quantity

Solution

EOQ = √2CoD/C_h

= √2(100)(80,000)/.6

= 5,164 units

Significance of economic order Quantity

Economic order quantity formula is used to calculate the most economical quantity to be ordered each time. This formula is based on the assumption that inventory management involved two main costs i.e. cost of order and cost of holding. This formula is used to minimize these both costs.

Assumptions of Economic Order Quantity

Economic order quantity assumes that demand during the remains would remain constant. Therefore such demand can be met by a standard order quantity. Economic order quantity also assumes that ordering and holding cost during the year would remain constant.

Advantages Economic Order Quantity

One of the major advantages of using economic order quantity is inventory order management.  Inventory manager exactly knows the quantity to be order.

Limitations of Economic Order Quantity

Economic order quantity is calculated by a complex mathematical formula. This formula cannot be explained by an accountant. Economic order quantity does not take into account the fluctuation in demand (unrealistic assumption)

Other Related Formulas

Average Stock Level Formula

Maximum Stock Level Formula

Minimum Stock Level formula 

Re Order Level Formula 

EOQ Formula