Inventory accuracy formula

A business relies upon the accuracy of its inventory records in order to maintain its production and customer fulfillment systems. For these records to be truly accurate, they must contain accurate information in the following areas:

  • Quantity on hand
  • Location of inventory
  • Unit of measure
  • Part number

If any one of these items within an inventory record is wrong, then the entire set of information can be considered sufficiently incorrect to render the entire record useless. For example, the inventory quantity may be completely accurate, but if the location code is wrong, then the materials handling staff cannot find the item. Or, if the part number is wrong, a component cannot be used. Consequently, the inventory accuracy formula encompasses all four elements.

To calculate inventory accuracy, divide the number of completely accurate inventory test items sampled by the total number of all inventory items sampled. An accurate inventory test item is considered to be one for which the actual quantity, location, unit of measure, and part number matches the information stated in the inventory record. If even one of these items is found to be incorrect, then the entire item tested should be flagged as incorrect. The formula for inventory accuracy is:

Number of Completely Accurate Inventory Test Items  ÷ Total Number of Inventory Items Sampled

As an example of inventory accuracy testing, an internal auditor for ABC International conducts an inventory accuracy review in the company's storage area. He compiles the following incorrect information for a sample test of eight items:

Audited Unit of Measure
Alpha Unit No No    
Beta Unit No      
Charlie Unit   No    
Delta Unit No No    
Echo Unit   No    
Foxtrot Unit No     No
Golf Unit       No
Hotel Unit       No

The result of the test is inventory accuracy of 0%. The test score astounds the inventory manager, who has been focusing solely on quantity accuracy. Even though the quantity counts did indeed prove to be accurate, the inventory records were well below expectations for the other data items.