The following points highlight the top two inventory control ratio’s. They are: 1. Input-Output Ratio 2. Stock Turnover Ratio.
1. Input-Output Ratio:
Input-output ratio is used in material control, which indicates the relation between the quantity of material used in the production and the quantity of final output.
The advantages of analysis of input-output ratios are given below:
(a) It helps in material planning by estimation of output and its raw material requirement.
(b) The standard input-output ratio act as guide in control of materials used in the process by minimization of waste, scrap, spoilage and defective.
(c) It acts as a performance indicator of particular production cost centres.
(d) It helps the management in investigation and analysis of any variations in material usage by establishing relation between input and output.
(e) The cost-benefit analysis of use of different substitutes of raw material is possible by comparing each of the input-output ratios.
For example, if 500 units of material are introduced into the process or operation and the yield of final product is 400 units, the input-output ratio is calculated as follows:
2. Stock Turnover Ratio:
The stock turnover ratio indicates the movement of average stock holding of each item of material in relation to its consumption during the accounting period.
The stock turnover ratio is calculated by applying the following formula:
The computation of stock turnover ratio will lead to the following benefits:
(a) It highlights slow-moving or obsolete stocks where action is needed to reduce the stock held.
(b) It indicates whether the stock holding is consistent with the material required for production.
(c) It helps in location of excessive stocks and by avoiding unnecessary pile up of stocks, the financial strain on the working capital of the organization can be reduced.