Average stock, or average inventory, is equal to stock at the beginning of the period plus stock at the end of the period divided by two. It represents the investment a business has made in its inventory. Average stock is arrived at using the following formula: Average Stock = (Opening Stock + Closing Stock) / 2. The figure can be calculated for each class of stock, namely raw materials, work in progress, and finished goods. Companies may prepare separate trading accounts for each department; hence, they need to calculate the average stock held in each department to control it. The reasons for carrying stock are clear: a good stock base ensures customers receive a wide choice, orders are met more quickly, purchases made in bulk attract better discounts, production planning for larger amounts saves set-up overheads, and so on. However, having too high an average stock creates disadvantages. If the goods are easily procurable, there is little need to carry a high level of stock. John Trading Concern has opening stock of $570,000 and closing stock of $630,000 for the year 2016. Calculate the average stock. Average stock = (570,000 + 630,000)/2 = $1,200,000/2 = $600,000Formula
If a company is dealing with different types of products, it can calculate the average inventory of each one. For example, a company dealing in food items may have separate departments for solid foods, drinks, and food additives.Reasons for Carrying Stock
For instance, the cost of carrying stock would be high, losses can occur through pilferage, breakage and obsolescence would be high, and the company’s ability to react to changing demand or fashion patterns would be restricted.
On the other hand, if availability is governed by seasonal fluctuations, having a higher average stock is often prudent and profitable. Therefore, the right balance is integral. Often, the most reliable indicator of the right balance is the industry average.Example
Solution
Average Stock FAQs
Average stock, also referred to as simply "average," is an inventory valuation that calculates the amount of goods on hand at any given point. This type of calculation allows businesses to more accurately determine levels of inventory without having to tally up exact numbers each time it's needed.
A number or quantity that is representative of a set, population, or distribution as a whole.
Stock is the supply of goods held by businesses to trade with or sell to customers. It includes raw materials, items in the production process and finished products awaiting sale.
Some major retail chains calculate the average amount of merchandise displaying their logo in each store, which is representative of their brand identity. This figure gives customers confidence that they will find similar products elsewhere if they choose to shop elsewhere.
The formula for average stock is: average stock = (opening stock + closing stock) / 2. This simple equation allows you to find out how much inventory a company has on hand, averaged across its entire inventory. You can use this information to create an average inventory target.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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