Average stock retention period ratio provides another way of looking at average stock and rate of stock turn. This is calculated to show the period, in weeks or months, for which stock remains with a business before it is sold off. Obviously, if the rate of stock turn is high, average stock retention period must be low, and vice versa.
Average stock retention period is calculated as follows if the answer is sought in weeks:
In case of manufacturing business, average stock retention period is calculated for each class of stocks.
Average stock retention period for raw material is calculated as follows:
Average stock retention period for work in progress is calculated as follows:
Average stock retention period for finished goods is calculated as follows:
The following information relates to ABC trading company:
- Opening stock: $570,000
- Closing stock: $630,000
- Cost of goods sold: $3,600,000
Calculate and interpret average stock retention period of ABC trading company.
Average stock retention period = (Average stock/Cost of goods sold)×12
= 2 months
An average stock period of 2 months is quite high for a trading concern. However, we have to consider the particular type of business or goods that the ABC company trades in, and to know the industry norm before passing a judgement on efficiency or otherwise of this ratio.