Under the ratios topic of Average Days in Inventory, which formula correctly computes days' sales in raw materials inventory?

• A. Average raw materials inventory ÷ Annual cost of goods sold
• B. (Annual raw materials used ÷ 365) ÷ Average raw materials inventory
• C. Average raw materials inventory ÷ (Annual raw materials used ÷ 365)
• D. Annual raw materials used ÷ Average raw materials inventory

Answer: (C)

Verified step by step guidance

1. Understand that the Average Days in Inventory measures how many days, on average, inventory is held before it is used or sold. For raw materials, it tells us how long raw materials stay in inventory before being used in production.
2. Identify the key components needed: Average raw materials inventory (the average amount of raw materials held during the period) and Annual raw materials used (the total raw materials consumed during the year).
3. Recall the general formula for Average Days in Inventory: \(\text{Average Days in Inventory} = \frac{\text{Average Inventory}}{\text{Average Daily Usage}}\).
4. Calculate the Average Daily Usage of raw materials by dividing the Annual raw materials used by 365 days: \(\frac{\text{Annual raw materials used}}{365}\).
5. Combine these elements into the formula for days' sales in raw materials inventory: \(\text{Average Days in Raw Materials Inventory} = \frac{\text{Average raw materials inventory}}{\frac{\text{Annual raw materials used}}{365}}\).