CPIM Practice Exam

What is the formula for calculating average inventory?

1. (Sales at period end - Sales at period start) / 2

2. (Cost of goods sold + Total inventory) / 2

3. (Inventory at period start + Inventory at period end) / 2

4. (Average lot size + Safety stock) / 2

The correct answer is: (Inventory at period start + Inventory at period end) / 2

The formula for calculating average inventory is derived from the need to determine a middle point of inventory levels over a specified time period. This method provides a reasonable approximation of inventory on hand by considering both the beginning and ending inventory levels. Using the values at the start and end of a period allows the calculation to smooth out fluctuations that may occur in the daily inventory levels, giving a more stable insight into average stock levels for planning and analysis. This is particularly useful for businesses when they are trying to understand trends or assess the effectiveness of inventory management strategies. In contrast, the other methods presented do not adequately represent the standard approach for calculating average inventory. They either focus on different metrics that do not reflect the average level of inventory over time or mix unrelated components that do not yield the average inventory number.