The obsolete inventory is a percentage that is important for the firms and companies that have invested significantly in their inventory. This percentage helps the business to identify the percentage of inventory that is no more useable or have become obsolete. This percentage is also used to compare the obsolete inventory of a business to the other similar inventory or other businesses to create a trend line and to find out whether the business is suffering from a high percentage of un-used products.
A business may take a number of different actions on the biases of obsolete inventory percentage. For example a business may change the reserves of the stored inventory or stock to avoid the accumulation of the obsolete inventory. The business can also change the method of disposition of the obsolete inventory in such a manner that may help business in a better way. A business can also make decision regarding the avoidance of the obsolete inventory such as buying or manufacturing smaller batches of the products, starting production on the order of the customer, and business reengineering for better management of the orders.
The formula of the Obsolete inventory percentage can be shown as follows:-
Obsolete Inventory Percentage = Book Value of Inventory Item with no usage at all/ Total Inventory Book Value
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