Formula to Calculate Days in Inventory
Days in inventory tells you how many days it takes for a firm to convert its inventory into sales.
Let’s have a look at the formula given below.
Days in Inventory Formula = 365 / Inventory Turnover
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Source: Days in Inventory Formula (wallstreetmojo.com)
As you can see that we need to know the inventory turnover ratio before days in inventory calculation; here’s the formula of inventory turnover –
Inventory Turnover = Cost of Goods Sold / End Inventory
Now, the cost of goods soldThe Cost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more can also be divided by the average inventory (that is the average of the beginning and the ending inventory) to find out the inventory turnover ratio.
Days in Inventory Example
Niti wants to know the inventory days of Company Him. Here are a few details she gathered –
- The beginning and the ending inventories of the year are – $40,000 and $60,000, respectively.
- The cost of goods sold is $300,000.
- The year consists of 365 days.
Find out the Days in Inventory for Niti.
Here, first, we need to calculate the average inventory.
We know the beginning and the ending inventoryEnding InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more of the year. We will use a simple average to find out the average inventory of the year.
- The average inventory of the year = (The beginning inventory + The ending inventory) / 2
- Or, Average inventory of the year = ($40,000 + $60,000) / 2 = $100,000 / 2 = $50,000.
Now, we will find out the inventory turnover ratioFind Out The Inventory Turnover RatioInventory Turnover Ratio is a measure to determine the efficiency of a Company concerning its overall inventory management. To calculate the ratio, divide the cost of goods sold by the gross inventory. read more.
- Inventory turnover ratio = Cost of Goods Sold / Average Inventory = $300,000 / $50,000 = 6 times.
- Therefore, the inventory days would be = 365 / 6 = 61 days (approx.)
Explanation of Days in Inventory Formula
It is used to see how many days the firm takes to transform inventories into finished stocks.
Since a major part of “days in inventory formula” includes the inventory turnover ratio, we need to understand the inventory turnover ratio to comprehend the meaning inventory days formula.
The inventory turnover ratio helps us understand the efficiency of the company to handle the inventories. It shows how good the company is to reduce overspending on inventory and also how well a company can convert the inventory into finish stocks.
For example, if a firm’s inventory turnover ratio is 10, then it means that the firm turns inventory into finished stock 10 times in a year.
And here comes the value of inventory days formula.
If we consider that there are 365 days in a year, we can see the days it takes for the firm to transform inventories into finished stocks. All we need to do is to divide the number of days in a year by the inventory turnover ratio.
Extending the above example, we get = (365 days / 10 times) = 36.5 days in inventory to transform the inventory into finished stocks.
Uses
We can derive the formula for Days in Inventory by including the number of days of the year with the inventory turnover ratio.
If you ever want to know about the efficiency of inventory management of a firm, you should look at both – inventory turnover ratio and inventory days.
By trying to find out the inventory days, you would be able to calculate both of the above ratios.
By using the formula for days in inventory, you will get to know how much time a firm takes to manage and transform its inventory.
Days in Inventory Calculator
You can use the following Days in Inventory Calculator
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Days in Inventory in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. First, you need to find out the average inventory of the year. And then, you will find out the inventory turnover ratio.
You can easily find the days in inventory calculation in the template provided.
First, we need to calculate the average inventory.
Here We will use the simple average to find out the average inventory of the year.
Now, we will find out the inventory turnover ratio.
Below is the formula to calculate Inventory Turnover Ratio
Now, we will find out the Days in Inventory for Niti by using the formula.
You can download these Days in Inventory Template here – Days in Inventory Excel Template.
Days in Inventory Formula Video
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