ACCA Financial Management (F9) Certification Practice Exam

What is the formula for calculating Inventory Days for Raw Material?

1. (Raw Material / Raw Material Purchases) x 365

2. (Raw Material Purchases / Raw Material) x 365

3. (Raw Material / Cost of Sales) x 365

4. (Cost of Raw Material / Raw Material Purchases) x 365

The correct answer is: (Raw Material / Raw Material Purchases) x 365

The formula for calculating Inventory Days for Raw Material is correctly represented as (Raw Material / Raw Material Purchases) x 365. This calculation helps to understand how many days, on average, a company holds its raw material inventory before it is either utilized in production or sold. In this formula, "Raw Material" refers to the amount of raw materials held in inventory at a specific point in time, while "Raw Material Purchases" indicates the total amount of raw materials purchased over a defined period, typically a year. By dividing the inventory on hand by the purchases, you can assess the relationship between what the company has in stock versus what it has acquired. Multiplying by 365 converts this ratio into a number of days, providing a clearer picture of inventory management efficiency. This measure is crucial in financial management as it gives insights into how efficiently a company controls its raw materials, helping identify whether it is overstocked or adequately supplied to meet production demands. A lower number of days could indicate efficient inventory management, while a higher number might suggest overstocking or slower moving inventory. Other options do not accurately reflect the relationship between raw material inventory and purchases, using either incorrect components or incorrect ratios that do not yield a meaningful figure for inventory days.