Definition of Inventory Conversion Period
- The inventory conversion period is the timeframe that encompasses the process of obtaining the raw materials, manufacturing, to selling the product.
- It helps the firms estimate the timespan between the day raw materials are bought to the day the product is sold.
- The ideal inventory conversion ratio differs between industries.
What is the Formula for Inventory Conversion?
- To calculate the inventory conversion period, divide the average inventory by cost of goods sold per day.
Inventory conversion period = inventory/cost of goods sold per day
Inventory Conversion in Practice
- If the average inventory of Walter pharmacy is $800 and the annual cost of goods sold is $146,000. What is the inventory conversion period of Walter’s pharmacy?
- As the cost of goods sold is given in years, it has to be converted into days. So $146,000/ 365 days = $400 per day.
- Now the information can be plugged in the formula:
- $800/ $400 = 2 days
- In conclusion, Walter pharmacy can purchase raw material, manufacture, and sell the products, all within two days.