Inventory ageing analysis is a useful analysis based on inventory ageing report. But what is an inventory ageing report? It is a list of inventory items grouped in relevant age brackets providing useful information about the age of inventory. The age of inventory refers to the time that an item is in inventory from the date of its production or acquisition.
Inventory ageing report is customized for each business and its inventory types. Age brackets can be based on number of days, number of weeks, number of months, or number of years etc. depending on the relevant lives of the inventory items.
Let’s see an example to get a better picture of how an inventory ageing report looks like and how inventory ageing analysis is done.
A tires manufacturing company produces following three types of tires. All tires have a shelf life of 5 years.
- Economy tires (ET)
- Good quality tires (GQT)
- Premium Quality tires (PQT)
On 31 December 20X0, the company has extracted the following aging report from the accounting software for analysis.
Economy tires and Good quality tires do not have slow movement; however, premium quality tires are slow moving. Tires over 5 years old will not be purchased by customers and can only be scrapped, so an allowance for obsolete inventory needs to be created to write down the inventory. Similarly, tires falling in the age bracket of 4-5 years are also relatively old and their market value should also be evaluated to check for any obsolescence.
It is evident from the above inventory ageing report that the demand of premium quality tires is less in market whether due to over pricing or other reasons. It should be evaluated whether the demand for these tires is expected to rise in future and if not, the company should discontinue the production of premium quality tires. Slow movement of tires is resulting in losses due to obsolescence. In addition, the company is suffering extra storage cost as well as the opportunity cost of resources used in manufacturing premium quality tires.
Uses of inventory ageing reports
The inventory ageing report provides useful information about inventory management. Some uses of the inventory ageing report are highlighted below:
- Identification of slow-moving inventory
- Identification of obsolete inventory for calculation of allowance for obsolete inventory
- Trends in inventory average age help to evaluate the market demand of products
- Works as a useful tool for monitoring of inventory levels and inventory management