How to Calculate the Average Age of Inventory

What is the formula to calculate the average age of inventory?

A. Inventory turnover divided by 365
B. 365 divided by inventory turnover

Answer:

The correct formula to calculate the average age of inventory is B. 365 divided by inventory turnover.

Calculating the average age of inventory is essential for businesses to understand how efficient they are in managing their stocks. By knowing this metric, companies can make informed decisions regarding their inventory levels and order quantities.

The formula to calculate the average age of inventory is determined by dividing 365 by the inventory turnover ratio. This calculation provides the average number of days an item stays in the inventory before being sold.

It's important for businesses to regularly monitor their average age of inventory to ensure that they are not overstocked or understocked, which can impact their profitability and customer satisfaction. By maintaining an optimal average age of inventory, companies can improve their cash flow and operational efficiency.