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Thread: Inventory Turn Over Indicator -

  1. #1
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    Question Inventory Turn Over Indicator -

    Hi,
    To calculate ITO we use COGS - which includes labor cost for example, and divide it by inventory value, which for raw material for example doesn't include labor.
    Isn't it a problem it is not the same (both numerator and denominator regard same material value?) If the labor cost percentage in COGS is large, it would divert the result.
    For example we sold 1200 units a year, for each unit the cogs is 10$, but the material cost is 5$. The inventory is only raw material, 100 units (which is for exactly one month of sales). So cogs is 12000, inventory value is 500, and ITO is 24, which implies the inventory turns 24 times, whereas it turns only 12 times.

    Please help me understand if I have a mistake in understanding the calculation or in the meaning..

  2. #2
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