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In this image, I purchase $100 worth of inventory, sell all of it, purchase another $100 worth, and sell all of that (in some time period). This looks like it should equal 2 turns:

Graph of (ostensibly) two turns of inventory

However, using the formula:

Turns = COGS / Avg Inventory

I insert the following:

  • COGS = $200 = 2 x $100.
  • Avg Inventory = $50, which is (beginning inventory + ending inventory) / 2 = (100 + 0) / 2. But 200 / 50 is 4, not 2.

Does this actually reflect 2 turns, as it appears to on the surface? Or am I plugging in a wrong number? COGS can't be $100 because I've spent $200 on goods to sell over the time period. Average inventory can't be $100 because I only have $100 on the shelf for two instants during the time period; I have an average of $50 over the time period. If 2 is not the correct answer, why not? Thanks.

mhoran_psprep
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user3511585
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1 Answers1

4

Inventory turnover is a measure of "how many times did I sell my average inventory in a year". It's not "how many times did I deplete my inventory". In reality, inventory is generally more stable since you replace inventory as it is sold. So it can still be a "sawtooth" but it's a swatooth that's always > 0:

enter image description here

In your case, your average inventory over the period is 50 (though your formula is not correct in general - the formula would be the total inventory on each day divided by the number of days). Since you sold 200, you sold your "average" inventory amount 4 times in that period.

D Stanley
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    This is how statistics "lie" to us, why it's so important to understand statistics, and why "common sense intuition" is so often wrong. – RonJohn Aug 12 '21 at 16:31
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    "How many times did I sell my average" versus "How many times did I deplete" was the key! Thank you very much. (I apparently do not have enough points to upvote your ansewr, but would have if I could have.) – user3511585 Aug 12 '21 at 16:33
  • @user3511585 No worries - glad it helped! – D Stanley Aug 12 '21 at 16:36