Average inventory is the total inventory that is held by a business for a longer period of time other than the comparison of the inventory from the last month. In most of the businesses the inventory is calculated at the last day of the business month so it may be different in calculation as compared to the inventory that is held for a longer time. The best use of average inventory calculation is to compare the revenues and profits. The formula of calculating average inventory can be calculated as under:-
Average Inventory = Beginning Inventory + Ending Inventory / 2
This formula is used when there is no sudden spike or fall in the value of inventory. Another way of calculating inventory is on the biases of year to date sales where we add the balance of the ending balance of inventory of all the past months to get a figure of average inventory. The total accumulative figure is then divided with the number of months for which average inventory is being calculated. The example of this method of calculating average inventory can be shown as under:-
Ending Balance of inventory of the month January = $115,000
Ending Balance of inventory of month February = $ 200,000
Ending Balance of the inventory of month March= $ 142,000
Total Ending Balance of three months = $457,000
Total Average Inventory = 457,000/3 = $152,333
So the total average inventory calculation for three months is $152,333