HELP: Inventory vs. COGS for monthly projections
So I know for annual projections inventory can be calculated as (inventory days/365)*COGS. COGS/Inventory is how many times inventory is turned over so it makes sense that annually the COGS will be a lot higher than inventory.
However, I'm a little confused when doing monthly. Say for January 2010 COGS is projected to be 10,000. If we're trying to project inventory based on COGS, and inventory days is 30, should inventory be calculated as (30/360)10,000? Or should it be over # of days in a month: (30/30)10,000? In this case since it takes 30 days to turn over and the # of days in a month is 30, would inventory just equal COGS?
Thanks!
Ok, well think about it this way. Inventory Turnover Days = Days in Period / Inventory Turnover . Therefore, Inventory Turnover = Days in Period / Inventory Turnover Days. In your case of January, IT = 31 / 30 .
Also we know, IT = COGS/Avg Inventory. Solving for Inventory:
Inventory = COGS / IT ==> Inventory = 10,000 / (31/30) or approximately 10,000
From another angle you could think about it this way... if the company were to do the exact same thing every month, IT, Days Inventory and Inventory should all approximately stay the same, so lets test our method.
For FY 2010 then, Inventory = 10,000 & COGS = 10,000*12 = 120,000 IT = 120,000 / 10,000 = 12 Days inventory = 365 / 12 which is approximately 30 (a little off since we assumed about 30 days in a month, but nonetheless logically correct). Therefore, we can conclude our inventory calculation was accurate.
Hope this helps.
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