In this article, we will explore what the inventory accuracy formula is and its importance. We also cover how to apply the formula using an example. Read on to learn more.
The inventory accuracy formula calculates the percentage of match between the recorded inventory in a company’s records and the actual physical inventory on hand. It is determined by dividing the recorded inventory by the physical inventory and multiplying by 100 to get a percentage.
The formula to calculate inventory accuracy is:
Inventory Accuracy = ( Recorded Inventory / Physical Inventory ) x 100
Where:
This formula will give you the inventory accuracy as a percentage. A higher percentage indicates a higher level of accuracy between the recorded and actual physical inventory.
Here are our steps to apply the inventory accuracy formula:
Collect necessary data including the Recorded Inventory and Physical Inventory.
The formula for inventory accuracy is given as:
Inventory Accuracy = (Recorded Inventory / Physical Inventory ) x 100
For instance,
Plug these values into the formula:
Inventory Accuracy = (180/200) x 100
Inventory Accuracy = 90%
With an inventory accuracy of 90%, analyze the potential causes of the 10% discrepancy and how it might impact business operations and decision-making. Evaluate the processes and systems in place for recording and counting inventory, and consider improvements to increase accuracy.
GreenGrocer is a retailer that wants to compute the inventory accuracy of one of their popular items - organic apples. Here’s how they calculated the inventory accuracy of organic apples:
At GreenGrocer, the inventory management system reports that there are 800 pounds of organic apples in stock (Recorded Inventory). However, a physical count of the stock reveals that there are actually 850 pounds of organic apples on hand (Physical Inventory).
GreenGrocer would use the inventory accuracy formula as follows:
Inventory Accuracy = (Recorded Inventory / Physical Inventory) x 100
Now, plugging the values,
Inventory Accuracy = (800 pounds / 850 pounds) x 100
Inventory Accuracy = 94.12%
With an inventory accuracy of 94.12%, GreenGrocer recognizes a discrepancy of 5.88%. This insight prompts the management to delve deeper to understand the underlying issues, perhaps related to recording errors, theft, or spoilage. The management can then evaluate and refine their inventory management processes to minimize such discrepancies in the future.
Calculating inventory accuracy is important for a number of reasons, some of the most common reasons include:
The inventory accuracy formula ensures businesses have precise data for decision-making and resource allocation. This reduces costs associated with excess inventory and wastage which leads to streamlined operations.
Accurate inventory data is crucial for reliable financial reporting and cash flow management. It prevents capital from being unnecessarily tied up in overstocking which enhances a company's financial health.
The formula aids in timely order fulfillment which enhances the customer experience and loyalty. Accurate inventory records build a brand’s reputation for reliability and efficiency.
Accurate inventory data strengthens relationships with vendors and optimizes the supply chain. It ensures efficient production, procurement processes, and precise demand forecasting, reducing operational costs.
We hope that you now have a better understanding of what the inventory accuracy formula is and how to calculate it.
If you enjoyed this article, you might also like our article on the inventory holding cost formula or our article on the inventory on hand formula.
