The average age of inventory is also known as days’ sales in inventory. = 60.8 days' sales in inventory Terms Similar to Average Age of Inventory = ($1 million inventory ÷ $6 million cost of goods sold) x 365 days For example, if a company has average inventory of $1 million and an annual cost of goods sold of $6 million, its average age of inventory is calculated as follows: To calculate the average age of inventory, divide the average inventory for the year by the cost of goods sold for the same period, and then multiply by 365. How to Calculate the Average Age of Inventory This information is especially useful when compared to other businesses in the same industry, to see how well the organization is doing in relation to the competition. In short, it is best to view the average age of inventory in conjunction with the profit margins being earned by a business. In exchange, the business can set higher price points, resulting in higher margins. By default, we define dusty as an item whose last received date is >180 days, and whose last sold date is >180 days. This is the case when a business is presenting customers with a wide range of options and a promise to always have products in stock, which results in a large inventory investment. However, having a longer average age of inventory might be intentional. If these goods cannot be sold off soon, they may be written off entirely and junked. In these cases, the purchasing department will act quickly to unload aging inventory at a discount, resulting in a relatively short average age of inventory figure. Every year, a company has an inventory that. In these cases, a business must sell off its aging stock in short order, before it becomes completely obsolete. An inventory reserve is a contra asset account on a companys balance sheet made in anticipation of inventory that will not be able to be sold. Fast inventory turnover may be essential in industries where product cycles are short, such as consumer electronics and high-fashion clothes.
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