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02/26/2021 Redacted Redacted

searcher Massachusetts Institute of Technology - MIT Sloan School of Management University of Illinois at Urbana-Champaign

Inventory Turn is COGs/Avg. Inventory. 

My question is how to calculate avg. inventory - should it be:

1. (Inventory at the start of year + inventory at end of the year) / 2; OR
2. Avg monthly inventory balance by taking the 12-month inventory month-end balance / 12?

Assuming #2 is a better denominator, but wanted to get the community thoughts.

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searcher Stanford University - Graduate School of Business Texas A&M University - 02/26/2021

It depends on the business and its sales/inventory fluctuations. If inventory is stable throughout the months/years the simple calculation is fine. If inventory fluctuates a lot you want to be more precise, for example:
1. A very seasonal business will have large fluctuations to prepare for peak seasons
2. a growing business will have to build inventory so BOY inventory could be a lot less than EOY inventory

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intermediary The University of Chicago - Booth School of Business Illinois Institute of Technology Cleveland State University - 02/28/2021

I am assuming this is a non-seasonal, non-high-growth business . #2 is the recommended method. But there are many, many other variables. like accounting method changes, product mix changes, costing methods, counting frequency, perpetual, FG/WIP/Raw mix changes, monthly vs YE or QE method changes, etc.. I cover these in my unpublished book and in teachings.

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