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  Inventory Turnover Ratio

Introduction to Inventory Turnover Ratio

There are various items in the store that are slow moving the meaning of that is they are issued to the production after a long time gap. A few items are like that they are never issued to the production because they have become obsolete or outdated and require to be disposed off. For make out these items, it is essential to calculate the inventory turnover ratio. Inventory turnover ratio allows the management to prevent the capital being locked in such types of items. This ratio points out the inefficiency or efficiency by which inventories are maintained. In the following manner Inventory turnover ratio is calculated.

Inventory Turnover Ratio: Cost of material consumed/Cost of average stock held during the year

The cost of average stock here is occupied like the average of opening stock and closing stock. The inventory turnover ratio can also be measured in days as below.

Days during the period/Inventory turnover ratio

Detection of Non-Moving and Slow Moving or Obsolete Materials: It is necessary for any business unit to notice non-moving and slow moving or obsolete materials. Obsolete materials turn into useless or obsolete because change in the product, process, design or technique of production. Obsolete materials are dissimilar from non-moving and slow moving materials. At a slow rate Slow moving materials move. In the case of slow moving materials and non moving materials, capital stay blocked not necessarily and also cost of storing carry on to be incurred of these materials are kept in the store in excess of the needs. Management should create suitable investigations into slow moving and obsolete materials and aim to minimize the capital investments in the same. It is essential to comprise an efficient Management Information System that will enable to generate usual reports to observe the situations relating to these stocks that's why the non-moving and obsolete stocks can be disposed off in time.

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