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.

Formula

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. 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.

Companies may prepare separate trading accounts for each department; hence, they need to calculate the average stock held in each department to control it.

Reasons for Carrying Stock

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. 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.

If the goods are easily procurable, there is little need to carry a high level of stock. 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

John Trading Concern has opening stock of $570,000 and closing stock of $630,000 for the year 2016. Calculate the average stock.

Solution

Average stock = (570,000 + 630,000)/2
= $1,200,000/2
= $600,000

Frequently Asked Questions

What is an average stock?

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.

What does average mean?

A number or quantity that is representative of a set, population, or distribution as a whole.

What does stock mean?

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.

What are the examples of companies that use the average stock method?

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.

What is the formula for average stock?

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 is a Certified Educator in Personal Finance (CEPF®), 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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