The average stock retention period ratio provides another way to examine the average stock and rate of stock turnover. It is calculated to show the period, in weeks or months, for which stock remains with a business before it is sold off.

Obviously, if the rate of stock turnover is high, the average stock retention period will be low, and vice versa.

The average stock retention period (in weeks) is calculated as follows:
Average Stock Retention Period
In manufacturing businesses, the average stock retention period is calculated for each class of stocks.

The average stock retention period for raw materials is calculated as follows:
Average Stock Retention Period For Raw Materials
The average stock retention period for work-in-progress is calculated as follows:
Average Stock Retention Period For Work-in-Progress
The average stock retention period for finished goods is calculated as follows:
Average stock retention period

Example

The following information relates to ABC Trading Company:

Required: Calculate and interpret the average stock retention period for ABC Trading Company.

Solution

Average stock retention period = (Average stock / Cost of goods sold) × 12
= (600,000/3,600,000) × 12
= 2 months

Interpretation

Generally speaking, an average stock period of 2 months is quite high for a trading concern.

However, it’s important to consider ABC Trading Company’s nature of business and the goods it sells. Industry norms should also be analyzed before passing a judgment on the efficiency or suitability of this ratio.

Frequently Asked Questions

How is "average stock" calculated?

Average stock is calculated simply by adding opening stock, closing stock and cost of goods sold then dividing the total by 3.

How does one know if a “'highest or lowest’’ value of an average is exceptional?

An investor, auditor or analyst would have to look at the industry they are in and compare the number to other companies in that industry to determine if the value is exceptional.

How is "average stock" turnover calculated?

The average stock turnover ratio is the total sales divided by the average stock.

What do you mean by "total cost of sales"?

When someone calculates the average stock period, their calculations will include the opening and closing inventory values as well as costs of goods sold. Closing costs of goods sold and opening inventory values are variable costs. Closing sales and opening inventory values are also recognized as the cost of inventory sold.

How is the "average stock" turnover ratio calculated?

The average stock turnover ratio is calculated by dividing the sales for a period by the average stock.

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