Inventory Metrics: Turnover, Days and Carrying Cost
Calculate inventory turnover, days inventory and carrying cost with consistent periods, valuation bases and clearly separated estimates.
Inventory turnover compares cost of goods sold with average inventory value for the same period. Days inventory converts that rate into time, while carrying cost needs its own defined components and assumptions.
A turnover ratio can look precise while mixing annual COGS with a month-end quantity or sales revenue with inventory cost. Keep the period, valuation basis and unit consistent before comparing factories or years.
Calculate turnover and days inventory
Illustrative annual figures: COGS ā¹12,000,000 and average inventory ā¹3,000,000.
| Metric | Calculation | Result | Interpretation limit |
|---|---|---|---|
| Inventory turnover | ā¹12m Ć· ā¹3m | 4.00 times | Does not show stockouts or product mix |
| Days inventory | 365 Ć· 4.00 | 91.25 days | Annual average, not an item lead time |
| Average inventory | (Opening ā¹2.8m + Closing ā¹3.2m) Ć· 2 | ā¹3.0m | Two points can hide seasonal variation |
Use more frequent observations when inventory changes sharply during the period. Keep raw material, WIP and finished-goods boundaries consistent between the numerator and denominator.
Build carrying cost from components
Carrying cost may include financing, storage, handling, insurance, damage, shrinkage and obsolescence risk. Document which components are included and whether the rate is an observed cost or an estimate. Do not add the same warehouse or finance cost in two categories.
IAS 2 Inventories provides the accounting context for inventory measurement. Use the applicable accounting policy and professional advice for financial reporting.
Use Optiwise records for repeatable measurement
Optiwise connects item and UOM masters, stock movements, receipts, issues, production demand, WIP-related records and finished stock. These source records support consistent extracts for operations and finance review.
Use Optiwise inventory to inspect movement and balances. Connect production context through production before interpreting a high or low ratio.
Read the metrics together
Higher turnover can reflect better flow, lower safety stock or repeated shortages. Lower turnover can reflect excess stock, a planned build, long lead-time material or product mix. Pair the ratio with service, shortage, ageing and write-down evidence.
Questions from manufacturing teams
Should inventory turnover use sales or COGS?
Use COGS when average inventory is valued at cost, with both covering the same period.
Is higher inventory turnover always better?
No. It can also accompany shortages, unstable supply or a changed product mix. Review service and ageing evidence.
How do we calculate days inventory?
Divide the number of days in the chosen period by the inventory turnover for that same period.
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