Which expression yields the average inventory?

Which expression yields the average inventory?

• A. (Opening inventory + Closing inventory) / 2
• B. Cost of food sold / average inventory
• C. Food cost / days in period
• D. Number of days in period / cost of food sold

Answer: (A)

Average inventory is the stock level you typically have on hand over a period. To estimate it, add the inventory at the start of the period to the inventory at the end, then divide by two. This simple average smooths out fluctuations, giving a representative figure that you can use in useful metrics like inventory turnover. For example, if opening inventory is 5,000 and closing inventory is 6,000, the average inventory is (5,000 + 6,000) / 2 = 5,500. Inventory turnover is then cost of goods sold divided by this average inventory, showing how many times you turn stock over in the period. The other expressions don’t give the average inventory itself: cost of food sold divided by average inventory yields turnover, not the stock level; food cost divided by days in the period gives daily cost, not inventory; and days in period divided by cost of food sold isn’t a standard measure of inventory.

Average inventory is the stock level you typically have on hand over a period. To estimate it, add the inventory at the start of the period to the inventory at the end, then divide by two. This simple average smooths out fluctuations, giving a representative figure that you can use in useful metrics like inventory turnover. For example, if opening inventory is 5,000 and closing inventory is 6,000, the average inventory is (5,000 + 6,000) / 2 = 5,500. Inventory turnover is then cost of goods sold divided by this average inventory, showing how many times you turn stock over in the period. The other expressions don’t give the average inventory itself: cost of food sold divided by average inventory yields turnover, not the stock level; food cost divided by days in the period gives daily cost, not inventory; and days in period divided by cost of food sold isn’t a standard measure of inventory.