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October 28

Inventory Days on Hand calculation

How do you calculate inventory days on hand without COGS? All guides I've been able to google always include COGS as part of the formulas, but is COGS always necessary?

Can I simply take the stock level at a point in time divide by the sales volume for a period of time then multiply with the number of days (in the period matched with the sales volume) to get an idea of DOH.

The data I have: ending stock figures at present time and monthly sales (past realized and future budgeted)

For example: Stock level end of Oct (now): 100

Sales by month (actual): July: 80, August: 100, September: 120

Sales by month (planned): Nov: 120, Dec: 180, Jan: 150

--> past DOH = 100/(80+100+120)*90 ~= 30 days

--> forward DOH = 100/(120+180+150)*90 ~= 19 days

What do you think about this method of calculation? Any problems/disadvantages compared with the traditional method? I'll be checking often for input. Thank you so much!

Abbreviations:

COGS = Cost of Goods Sold[1] = Beginning Inventory + Inventory Purchases – End Inventory

DOH = Days of Inventory on Hand[2] = 365 / Inventory turnover

AllBestFaith (talk) 12:30, 28 October 2016 (UTC)[reply]

If you're studying accounting at college, as it sounds like you might be, it would be good to run this past your teacher first. --Viennese Waltz 12:42, 28 October 2016 (UTC)[reply]

Thank you for your responses! I guess I wasn't clear that my above examples used only stock volumes (not stock values). I'd like to calculate DOH with data on volume only (no data on value), is that possible to calculate like I presented above? (COGS is not possible with volume-only data)

I'm by no means an expert, but I do run the calculations for weeks on hand / days on hand at my company. In a snapshot view, you can calculate your DOH simply by dividing the QOH (quantity on hand) by the ADM (average daily movement): I currently have 40 cases, I move 10 per day on average, so I have 4 DOH. Calculating forward and backwards is still doable performing the same calculations, it's just complicated by the fact you need to derive the quantity and movement numbers first (and that is not always easy if you're discussing multiple SKUs). What you've got above has the right idea, but shows no planned purchases (i.e. you would have no sales in December because you sold all your stock already). So, at the very least, you would want to factor purchases and to do it correctly, you'd want the sales and purchases planned out in detail (otherwise the exercise is a little pointless). Matt Deres (talk) 16:31, 28 October 2016 (UTC)[reply]

Thank you very much for your help! I do have figures for sales and purchases volume but did not mention that for the sake of making a simple question/calculation. My further question would be, what is the normal practice for calculating how much we move per month/day on average? How do we choose whether to calculate the average of 3 months backward or forward or is it better that I take the middle ground and calculate average monthly sales of three months with the current month in between? The 3 months that I use could be arbitrary itself right? (because we can take average of 2 months or 4 months?) or do we base the number of months (to take average) on the target DOH? Thank you for your input : )

It will depend greatly on the industry and what you're trying to examine. For example, in my area of expertise - broad-line food-service distribution - we usually work with weekly movements averaged out over four weeks. That's because many of the influencing factors are based on seasonality. In less volatile industries, you can work with much longer ranges of 12 or 16 weeks. In some industries it makes sense to speak of case-based WOH; in others, you might see cost or value-based calculations or even cube-based ones. Working backwards - figuring out how many WOH you had last month - is a surprisingly tricky thing to calculate because the numbers proliferate so quickly; you would not do it by hand for more than a few SKUs; even fairly advanced ERP software has troubles with it (though obviously that will depend on how complicated your business is). It is a far easier and more reliable thing to simply run the calculations regularly and track the results over time - a straightforward Excel document can handle that easily. Working forwards is a more normal thing to do, but if anything it's even more complicated because minor variations against expectation can cascade in unexpected ways. Seasonality, sales promotions, commodity pricing shifts and a whole host of other factors also need to be weighed. Sophisticated software packages, such as E3 get used for that - and even there, the emphasis is often more on fill rate than maintaining a standard level of WOH (though that is still a component). First and foremost, you'll need to fully define what it is you're trying to examine and then decide if calculating WOH (or DOH or whatever) is even applicable or useful. Matt Deres (talk) 13:43, 2 November 2016 (UTC)[reply]