CPIM Practice Exam

What is the average inventory turnover calculated from?

1. Total inventory sold during the year

2. One-half the average lot size plus safety stock

3. The average cost of goods sold

4. The total number of inventory items

The correct answer is: One-half the average lot size plus safety stock

The average inventory turnover is primarily calculated using the cost of goods sold (COGS) along with the average inventory during a specific period. This calculation allows businesses to understand how efficiently they are managing their inventory in relation to sales. The correct choice, which involves average lot size and safety stock, does not accurately represent how inventory turnover is typically computed. Inventory turnover specifically measures the ratio of how many times inventory is sold and replaced over a given period. The formula involves dividing the COGS by the average inventory, which encompasses items that are currently in stock. The element of average lot size and safety stock may contribute to inventory management but does not directly determine turnover. On the other hand, the total inventory sold during the year and the average cost of goods sold are crucial components of this calculation. The total number of inventory items does not factor into the standard calculation for inventory turnover. Therefore, the average inventory turnover is calculated from the cost of goods sold divided by the average inventory during the period, giving organizations insight into their inventory efficiency and guiding purchasing and production strategies.