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Turnover Ratios

In order to prevent unnecessary investment in inventories, it will be proper to compare the turnover of different grades of material. Stock turnover may be measured on the basis of the following formula:

Stock turnover figures may reveal the following four types of stocks:

(i) Fast moving stock: These are materials which are in great demand. An attempt should be made to keep these materials in stock at all times.

(ii) Slow moving stock: These are materials which have a low turnover ratio. An attempt should be made to keep these stocks at the lowest level.

(iii) Dormant stock: Materials which have no demand are classified as dormant stocks. The chief, the store-keeper, the production controller and cost accountant should sit together to decide whether to retain these materials because of good chance of future demand or to cut losses by scrapping the materials while they may have some market value.

(iv) Obsolete stock: These are materials which are no longer in demand either because there is no demand for the relevant finished product, or because a better substitute has been found. These materials should either be scrapped or discarded.

Steps for minimizing losses on account of slow moving or obsolete stocks:

(i) Periodic reports should be prepared showing the position of different items of stores showing quantities and values of opening stocks, purchases, issues and closing stocks.

(ii) Periodic turnover ratios should be calculated by the stores department to locate slow moving and dormant stocks.

(iii) In order to locate obsolescence of items on account of changes in the method of production or substitution by cheaper materials, a well-designed information system should be introduced in the organisation.

(iv) Stock holding of various items may be calculated in terms of number of days or months of consumption. In order to ensure that obsolete items are immediately disposed of, there should be a well-defined system laying down the authorities entitled to dispose of such goods and the manner of disposal.