Certified Supply Chain Professional (CSCP) Practice Exam

Which formula do manufacturers typically use for calculating inventory turnover?

1. Total revenue divided by the number of sales transactions

2. Cost of goods sold divided by average inventory at cost

3. Net profit divided by total assets

4. Sales revenue divided by operational expenses

The correct answer is: Cost of goods sold divided by average inventory at cost

Manufacturers typically use the formula involving cost of goods sold divided by average inventory at cost to calculate inventory turnover because it provides a clear indication of how efficiently a company is managing its inventory. This metric is crucial for understanding how effectively a business is converting its inventory into sales. By focusing on cost of goods sold, the formula reflects the actual cost of the inventory that is sold during a specific period, giving a more accurate picture of operational performance. When the cost of goods sold is compared to average inventory at cost, manufacturers can assess how many times their inventory has been sold and replaced over a given period. A higher turnover rate indicates that goods are sold quickly, which may signal strong demand and efficient inventory management, whereas a lower turnover rate could suggest overstocking or weaker sales. This formula is vital within supply chain management as it helps manufacturers make informed decisions about purchasing, production, and inventory levels, ultimately affecting cash flow and profitability.