Inventory Accuracy Formula: The Ultimate Guide in 2023
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.
What is the Inventory Accuracy Formula?
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
Recorded Inventory is the amount of inventory recorded in the company’s records or systems.
Physical Inventory is the actual amount of inventory counted during a physical inventory audit.
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.
How to Apply the Inventory Accuracy Formula?
Here are our steps to apply the inventory accuracy formula:
Step 1. Gather Data:
Collect necessary data including the Recorded Inventory and Physical Inventory.
Recorded Inventory: Retrieve the number of units recorded in the inventory management system.
Physical Inventory: Count the actual number of units physically present in the warehouse or storage area.
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:
Step 1. Gather Data:
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).
Recorded Inventory: 800 pounds
Physical Inventory: 850 pounds
Step 2. Apply the Formula:
GreenGrocer would use the inventory accuracy formula as follows:
Inventory Accuracy = (Recorded Inventory / Physical Inventory) x 100
Step 3. Perform the Calculation:
Now, plugging the values,
Inventory Accuracy = (800 pounds / 850 pounds) x 100
Inventory Accuracy = 94.12%
Step 4. Analysis and Interpretation:
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.
Importance of the Inventory Accuracy Formula
Calculating inventory accuracy is important for a number of reasons, some of the most common reasons include:
1. Operational Efficiency:
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.
2. Financial Accuracy:
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.
3. Customer Satisfaction:
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.
4. Supply Chain Management:
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.