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Control Ratio

In cost accounting, the Control ratio is equation which shows the relationship of inventory’s input and output.

Inventory Turnover Ratio = Cost of stock of raw material consumed / Average stock held

Average stock held = opening stock + closing stock / 2

Average number of days which average material is held = 365/ inventory turnover ratio

It indicates whether the stock has been efficiently used or not. This ratio can also be used for controlling the material consumed with cost of average material held; we can find the material turnover ratio.

For Example: Assume cost of raw material consumed is $20,000, beginning inventory is $10,000, and ending inventory is $8,000. The inventory turnover equals 2.22 times ($20,000/$9000).

Application of Control Ratio in Material Control

We can use control ratio in material control with following ways:

1. If inventory turnover ratio is higher, it means our material is being consumed fastly for production. So, there is no block of money in inventory.

2. If inventory turnover ratio is, it means this material’s movement is slow and money is blocking in inventory because we have to suffer inventory holding cost, if it is not used for production. So, it is very necessary to consume it or sell it fastly otherwise, it may be useless and working capital will be lost in this.

3. We can find average number of days from material turnover ratio which is very useful to know how many days did material will be in stock before sending it for production.

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Accounting Education: Control Ratio
Control Ratio
Accounting Education
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