![]() Therefore, the right balance is integral. On the other hand, if availability is governed by seasonal fluctuations, having a higher average stock is often prudent and profitable. If the goods are easily procurable, there is little need to carry a high level of stock. However, having too high an average stock creates disadvantages.įor 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. 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. ![]() For example, a company dealing in food items may have separate departments for solid foods, drinks, and food additives.Ĭompanies may prepare separate trading accounts for each department hence, they need to calculate the average stock held in each department to control it. ![]() If a company is dealing with different types of products, it can calculate the average inventory of each one. The figure can be calculated for each class of stock, namely raw materials, work in progress, and finished goods. ![]() FormulaĪverage stock is arrived at using the following formula: Average Stock = (Opening Stock + Closing Stock) / 2. It represents the investment a business has made in its inventory. 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. ![]()
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