## Inventory Control Ratios

Ratio analysis provides a quantitative basis for monitoring inventory efficiency.

### (i) Input-Output Ratio

Compares actual material consumed with the standard material content required for actual output.

$$\text{Input-Output Ratio} = \frac{\text{Actual Material Input}}{\text{Standard Material for Actual Output}}$$

Ratio	Interpretation
< 1 (or < 100%)	Favourable — less material used than standard
> 1 (or > 100%)	Adverse — excess consumption / wastage

Purpose: Identifies whether material usage is efficient or whether there is avoidable waste or pilferage.

### (ii) Inventory Turnover Ratio

Measures how many times inventory is consumed and replenished in a period.

$$\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$$

Where: Average Inventory = (Opening Stock + Closing Stock) ÷ 2

Ratio	Implication
High	Fast-moving material; efficient management; low holding period
Low	Slow-moving material; over-investment; working capital locked up

Uses of Ratio Analysis in Inventory Control:

Worked example

### Example 1

Input-Output Ratio

Standard material to produce 100 units = 110 kg

Actual output = 500 units → Standard material = 550 kg

Actual material consumed = 580 kg

Input-Output Ratio = 580 / 550 = 1.055 (i.e., 105.5%)

Since ratio > 1, material usage is adverse by 30 kg. Investigate causes: excess wastage, pilferage, measurement errors.

### Example 2

Inventory Turnover Ratio

Cost of Goods Sold = ₹12,00,000

Opening Stock = ₹1,80,000; Closing Stock = ₹2,20,000

Average Inventory = (1,80,000 + 2,20,000) / 2 = ₹2,00,000

Inventory Turnover = 12,00,000 / 2,00,000 = 6 times

Holding Period = 365 / 6 ≈ 61 days

If a competitor turns inventory 12 times (30-day holding), our company is tying up twice as much working capital in stock.

⚠️ Common exam mistakes

Using sales revenue instead of Cost of Goods Sold in the turnover ratio formula — COGS must be used for consistency.
Using closing stock instead of average stock — this distorts the ratio when stock levels fluctuate seasonally.
Interpreting a very high turnover as always positive — it could mean dangerously low safety stock leading to stockouts.
Confusing Input-Output ratio with efficiency ratio — a ratio below 1 is favourable (less input used), not a problem.

Reference:

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Inventory Control Ratios (Input-Output Ratio and Inventory Turnover Ratio)

Worked example