Explain the stock turnover ratio, Managerial Accounting

Assignment Help:

Stock turnover ratio

 Meaning: this ratio establishes a relation ship between costs of goods sold and average inventory.

Objective: the objective of component of this ratio is to determine the efficiency with which the inventory is utilized.

Components: there are two components of this ratio which are as under:

Cost of goods sold

Average inventory

Computation: this ratio is computed by dividing the cost of goods sold and average inventory. This ratio is usually expressed as x number of times. In the form of a formula this ratio may be expressed as under:

Stock turnover ratio = cost of goods sold/ average inventory

Cost of goods sold = sales - gross profit

Note:

If opening stock is not known closing stock can be taken.

If there is any complexity in calculating cost of goods sold then.

 Interpretation: It shows the speed with which the inventory is converted into sales. In general a high ratio indicates efficient performance since an improvement in the ratio shows that either the same volume of sales has been maintained with a lower investment in stock or the volume of sales has increased without any increase in the amount of stocks. However too high ratio and too low ratio call for further investigation. A too high ratio may be the result of a very low inventory levels which, ay result in frequent stock outs and thus the firm may incur high stock out costs. On the other hand a too low ratio may be the result of excessive inventory level slow moving or obsolete inventory and thus the firm incurs high carrying costs. Therefore a firm should have neither a very high not a very low stock turnover ratio it should have a adequate level.

 


Related Discussions:- Explain the stock turnover ratio

Cash collection and disbursements, Once the cash budget has been arranged a...

Once the cash budget has been arranged and suitable net cash flows established the finance manager must ensure that there does not exists an important deviation in between actual a

Standard error of estimate , Standard error of estimate (Se) The coeffi...

Standard error of estimate (Se) The coefficient of determination r 2 gives us an indication of the reliability of the estimate of total cost based on the regression equation b

Explain support activities and production process activity, Explain Support...

Explain Support activitiesand production process activity Support activities are for example schedule production set up machine purchase materials inspect item customer orde

Budget costing, Archie Ltd manufactures a product called Gizmo. It uses th...

Archie Ltd manufactures a product called Gizmo. It uses the following direct inputs: Price Quantity Cost per unit of output Direct materials $4 per gram 10 grams per unit $40 per

Research, Activity Based costing and Functional Based Costing compare them ...

Activity Based costing and Functional Based Costing compare them together in terms of efficiency, advantages, disadvantages and accuracy.

Treasury management, Treasury management is explained as "the corporate han...

Treasury management is explained as "the corporate handling of all financial matters, the production of external and internal funds for business, the management of cash flows and c

What is the main purpose of cost centre, Explain the main purpose of cost c...

Explain the main purpose of cost centre The main purpose of cost centre is two fields. 1. Recovery of cost: costs are collected, classified into two field in respect of

Distinguish between advertising and public relation, Question 1: a. Dis...

Question 1: a. Distinguish between Advertising and Public Relation? b. Discuss the methods adopted by a Public Relation company in promoting the image of a destination in th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd