Techniques to Measure Inventory
Inventory refers to the products of any business that are intended to be sold to customers. It is the level of stock that is available in the business unit at a given time. There are different strategies and techniques that will help the business unit to measure its inventory levels more effectively. These strategies are given below:
Economic Order Quantity (EOQ): It determines the optimal order quantity of inventory to avoid overstocking or understocking. The aim is to reduce costs associated with ordering and carrying inventory. The calculations of the economic order quantity are done by the methods given below:
Formula method:
\[EOQ = \sqrt{\frac{2RO}{C}}\]
Where,
EOQ = Economic Order Quantity
R = Annual Requirement or consumption in units
O = Ordering Cost per order
C = Carrying Cost per unit per year
Traditional techniques: The traditional techniques or strategies used before the development of modern techniques can help the business unit in measuring their inventory levels in a different way:
Inventory control ratios: Measures inventory turnover by calculating the ratio of cost of products sold to average stock. Helps assess inventory control.
Stock Turnover: Cost of products sold / Average Stock
Two bin system: Manages inventory by storing items in separate bins. When one bin is empty, it signals the need to replenish stock while using the inventory from the second bin.
Perpetual inventory system: Continuously monitors and records inventory transactions to maintain accurate stock levels. Transactions are recorded regularly in the books of accounts.