If you're Ray-Ban sunglasses, the average age of your wayfarer brand that has been a hot seller since 1962 probably doesn't matter. If you, in fact, manufactured them in 1962, it is likely you would have paid a lot less than it costs you today to manufacture the same glasses, but little else will have changed. And, in reality, most companies go through all of their inventory within their current year.
So while this structure doesn't matter as applied to sunglasses, which last forever, think about average age of inventory as regards an egg farm. An hour after Henny Penny has pooped out an egg, it begins a process of going bad. And after a week or two, it is probably fertilizer. So tracking that average as it applies to volatile inventory matters a lot.
But average age refers to another, potentially more important metric, which reflects how quickly a company's inventory is turning over.
So think about two extreme cases. Black & Decker hammers have become the darling of drug dealers and other mob money collectors. Supplies have been flying off the shelves, and the CFO of B&D notes in the quarterly conference call that the average age of his hammers in inventory has gone from 47 days to just 32 days. This metric may be a problem, in that the company has to produce more inventory to keep on hand, but for most companies, it's a good problem.
At the other end of the inventory spectrum, with the failure of most male enhancement drugs, sales of tape measures have flagged dramatically. Stanley Toolworks notes that the average age of their 24-foot stallion model has ballooned from 23 days to 34 days, and they probably have a problem.
The gist is that the age of inventory reflects sales volume as well as the efficiency of capital management, i.e. capital invested in a company's inventory, which is a bit like Goldilocks' porridge. Company managers seek that inventory to be not too hotly turned over, not iced, but rather living somewhere in the middle.
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Finance: What is Work In Process Invento...2 Views
finance a la shmoop what is work-in-process inventory well you're a
car assembly company named Shmord for any given car you have to buy a ton or [Lots of cars in a parking lot]
two of steel and four tires couple of windshield wipers a bunch of [Wipers on in the rain]
hoses wires vats a glass carpet and yards of rich Corinthian leather [Pictures of the materials]
with none of this stuff yet assembled into the car you're gonna sell it to a
dealership for twenty eight thousand eight hundred twenty three dollars it's [All the materials in a list]
just the inventory that is work in the process of being built why is it
important well for a lot of companies their inventory is highly valuable and
it comprises a lot of the actual asset value of the company it's also something
that clever accounting can jerk around to make the books look better or worse [Guy reading an accounting book]
than they actually are like there's a mountain of tires sitting in a portable [Tires piling up]
warehouse 12 feet off of the perimeter the border of the factory just sitting [A warehouse covers the tires]
there has Shmord paid for them well they're kind of sort of delivered but
not really so do those tires get counted as inventory what if you dragged the
porter shed twelve to fourteen feet closer to the factory then are they [The warehouse comes up to the factory perimeter]
counted as delivered and then you have to pay for them so then maybe you do so
and you recognize them as an asset maybe okay you get it
lots of accounting tricks that can be played in the short run in this category [Guy juggling balls with dollar signs on]
eventually however work-in-process inventory is work in the process of
being built into a finished product but that's still sitting there in inventory [Someone welding a car]
not yet sellable to people and the big accounting trick of moving the P beneath [A pea is hidden under one of three walnut shells]
the walnut shells only fools investors for so long eventually they're gonna
focus on revenues and free cash flow profits to be sure if you're not [Someone swipes away the walnut shells to reveal the pea]
tricking them well the big idea in this term set is that inventory takes a few
different forms it can be raw like just plain old tires or even the rubber to [Picture of tires]
then go be made into tires like sitting in a shed somewhere inventory can be [Bricks of rubber are thrown into a shed]
half-baked like a semi assembled chassis or like a thousand of them just sitting
around waiting to be uploaded with an engine and body and hydraulics and a [Computer screen showing a progress bar with each component of the car appearing]
steering wheel and it goes along you know the assembly process until finally
at the end of all of that work in process inventory stuff is in fact [Guy talking in front of the Shmord factory]
magically then turned into actual inventory that is sellable to a client [New cars in storage]
got it or a buyer whatever you want to call them okay
we didn't say it had to be pretty inventory just inventory [Guy smiling walking up to a Shmord dealership and a tiny car appears]
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