Material Turnover Ratio

What is Material Turnover?

Turnover of materials refers to the movement of material into and out of an organization. It is in the best interest of the organization to compare the turnover of different types of and grades of material as a measure of detecting stock which does not move regularly thereby minimizing capital investment in undesirable stock.

Material Turnover Ratio

Material Turnover can be calculated by comparing the balance of stores with total issues or withdrawals during a particular period of time.

Formula to calculate Material Turnover Ratio

Material Turnover Ratio can be calculated in this regard as follows:

Material Turnover Ratio = Value of materials consumed during the period / Value of average stock (or, inventory held during the period)

Average stock can be calculated by adding opening and closing stocks and then divided by two or it may be put like this:

Average Stock = (Opening stock + Closing stock) / 2

A material turnover ratio indicates that the material items is fast moving and exhaust easily and investment in that item can be kept minimum. On the other hand, the low material turnover ratio in relation to a particular item indicates its slow movement and alarms the organization to avoid over-stocking of that item in the stores and immediate disposal of such item is in the best interest of concern.

Classification of Material Turnover:

Materials turnover indicating slow-moving items have been classified in the following three categories:

(a) Slow moving Material

These indicate the items which exhaust at a very slow speed. An attempt should be made to minimize the stock of such items in the store.

(b) Dorment Items

Such material items do not have any demand in present and represent zero turnover ration. Such stock may regain its demand in future. Store-keeper and other officials of concern should site togather and decide whether to retain or to dispose of such items in order to save further storing or handling cost.

(c) Obsolete items

Such material items are no longer in demand and represent zero turnover ratio. Obsolete items should be immediately scrapped or discarded and profit or loss should be transferred or Costing Profit and Loss Account.

Example

The following figures are taken from the books of John (Pvt) Ltd. for the year ending 31 March 2019. The valuation of Inventory is $1 per kg. or Litre.

Items Opening Stock Purchases Closing Stock
Material X 700 kg. 11,500 kg. 200 kg.
Material Y 200 Litres 11,000 Litres 1,200 Litres
Material Z 1,000 kg. 1,800 kg. 1,200 kg.

Calculate the material turnover ratio of the above material items and express in number of days the average inventory is held.

Solution:

First of all, cost of materials consumed pertaining to each item is to be calculated:

Material consumed = opening stock + purchases – closing stock

Consumption of X material = 700 + 11,500 – 200 = 12,000 kg

Cosnumption of Y material = 200 + 11,000 – 1,200 = 10,000 Litres

Consumption of Z material = 1,000 + 1,800 – 1,2000 = 1,600 kg.

Let us now ascertain Average Inventory of each material item.

Average Inventory = (Opening Stock + Closing Stock) / 2

Average Inventory of X = (700 + 2000) / 2 = 450 kg

Average Inventory of Y = (200 + 1,200) / 2 = 700 Litres

Average Inventory of Z = (1,000 + 1,200) / 2 = 1,100 kg.

Inventory/Material Turnover Ratio = Value of Materials Consumed during the period / Value of Average Inventory held during the period

Inventory/Material Turnover Ratio of:

Material X = 12,000 / 450 = 26.67 Times

Material Y = 10,000 / 700 = 14.29 Times

Material Z = 1,600 / 1,100 = 1.45 Times

The Inventory/Material Turnover as expressed in days can be calculated by applying the following formula:

= (Value of average inventory x Total No. of days during the period) / Material consumed

or

Total No. of days during the period / Inventory/Material Turnover

Material X = 450 x 365 / 12,000 = 365 / 26.67 = 14 days (approx.)

Material Y = 700 x 365 / 10,000 = 365 / 14.29 = 26 days (approx.)

Material Z = 1,100 x 365 / 1,600 = 365 / 1.46 = 250 days.

In the above problem inventory/Material Turnover Ratio is highest in case of material X and lowest in case of Material Z. similarly consumption rate in case of material X is more as compared to Z which is the lowest as indicated by the No. of days calculated. It is suggested that purchase of Z material should be made in limited quantity as and when the need arises, whereas frequent purchases are suggested in case of Material X and moderate in purchases in case of material Y.

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