Top 2 Inventory Control Ratio’s | Cost Accounting

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.

Advantages:

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.

ADVERTISEMENTS:

(e) The cost-benefit analysis of use of different substitutes of raw material is possible by comparing each of the input-output ratios.

Illustration:

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.

ADVERTISEMENTS:

The stock turnover ratio is calculated by applying the following formula:

Advantages:

ADVERTISEMENTS:

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. 

, , ,

shopify traffic stats