costing v/s F.M

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Punit Tibrewal (Querist)

11 October 2009 in cost accounts the formula for inventory turnover formula is - materials consumed/average inventory. but in F.M in ratio analysis topic most of the books say that inventory turnover ratio is - cost of goods sold/avg inventory.

the two formulas will yieid diff. results.!
so which 1 is correct?

plz answer

sivadas chettoor

sivadas chettoor (Expert)

12 October 2009 Cost accounting being more specific it requires the calculation of inventory turnover ration based on materials alone. But in FM the matter is little bit general and it requires u to calculate the ratio based on cost of goods sold of which material cost is only a part. Please note that the ratios are calculated with a specific purpose and according to your requirements you can decide what should be included or excluded from the numerator or denominator.
CA Sivadas Chettoor
siva208@yahoo.com

CA Devanshi Gandhi (Ajani)

CA Devanshi Gandhi (Ajani) (Expert)

12 October 2009 agree

Punit Tibrewal

Punit Tibrewal (Querist)

12 October 2009 but in cost of goods sold we include direct expenses which has no relation with inventory turnover.!!

so dont u think 2nd formula is a little illogical..?

Srinivas Rao

Srinivas Rao (Expert)

13 October 2009 Dear friend,
Inventories include Raw Materials, Work in Process and Finished Goods.
The formula given in costing is for Raw Materials and turnover ratio is:
Cost of Raw materials used/ Average stock of raw Materials
In FM the formula is for Finished Goods and the turnover ratio is:
Cost of goods sold/ Average stock of Finished Goods
For work in process the turnover ratio is:
Cost of goods manufactured(Factory cost)/ Average stock of work in process)

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