What is 'Average Inventory'
Average inventory is a calculation comparing the value or number of a particular good or set of goods during two or more specified time periods. Average inventory is the mean value of an inventory throughout a certain time period, which may vary from the median value of the same data set. A basic calculation for average inventory is:
(Current Inventory + Previous Inventory) / 2
!--break--Since two points do not always accurately represent changes in inventory over different time periods, average inventory is frequently calculated by using the number of points needed to more accurately reflect activities across a certain amount of time.
For instance, if a business was attempting to calculate the average inventory over the course of a fiscal year, it may be more accurate to use the inventory count from the end of each month, including the base month. The values associated with each point are added together and divided by the number of points, in this case 13, to determine the average inventory.
For example, when calculating a three-month inventory average, the business achieves the average by adding the current inventory of $10,000 to the previous three months of inventory, recorded as $9,000, $8,500 and $12,000, and dividing it by the number of data points, as follows:
($10,000 + $9,000 + $8,500 + $12,000) / 4
This results in an average inventory of $9,875 over the time period being examined.
Average Inventory Analysis
The average inventory figures can be used as a point of comparison when looking at overall sales volume. This allows a business to track inventory losses that may have occurred due to theft or shrinkage, or due to damaged goods caused by mishandling. It also accounts for any perishable inventory that has expired.
Moving Average Inventory
A company may choose to use a moving average inventory when it's possible to maintain a perpetual inventory tracking system. This allows the business to adjust the values of the inventory items based on information from the last purchase. Effectively, this helps compare inventory averages across multiple time periods by converting all pricing to the current market standard. This makes it similar to adjusting historical data based on the rate of inflation for more stable market items. It allows simpler comparisons on items that experience high levels of volatility.
To learn more about average inventory, read Why is it sometimes better to use an average inventory figure when calculating the inventory turnover ratio?