Turnover – SS2 Commerce Lesson Note (Third Term)

Turnover is the total net sales of a business during a period. It is variously referred to as stock-turn, sales turnover or stock-turnover. The rate of turnover is the number of times the average stock is sold in a period, usually a year. It is found by dividing the cost of goods sold by the average stock.

Behavioural objectives

By the end of the lesson, students should be able to:

• define turnover and rate of turnover;
• calculate the cost of goods sold;
• calculate the average stock;
• calculate the rate of turnover;
• list the factors that affect the rate of turnover of a business.

What is turnover?

Turnover refers to the total net sales during a period. It is variously referred to as the stock-turn, sales turnover or stock-turnover.

What is the rate of turnover?

The rate of turnover (or rate of stock-turn) is the number of times the average stock is sold during a given period, usually a year.

It is calculated by dividing the cost of goods sold by the average stock. To find the rate of turnover, first calculate the cost of goods sold, then the average stock, and then the rate itself.

Step 1: Calculate the cost of goods sold

Or:

Step 2: Calculate the average stock

Average stock = (Opening stock + Closing stock) / 2

= (5,000 + 8,000) / 2 = 13,000 / 2 = ₦6,500

Step 3: Calculate the rate of turnover

Rate of turnover = Cost of goods sold / Average stock

= 32,000 / 6,500 = about 4.9 times

What factors affect the rate of turnover of a business?

The number of times a trader buys goods and resells them determines the size of his gross profit. In other words, a trader’s gross profit can be increased by raising his rate of turnover. The measures that can increase the rate of turnover can be inferred from the following factors.

1. Nature of the product.
2. Advertisement and sales promotion.
3. Location of the business.
4. Goodwill or reputation of the seller.
5. Prices.
6. Wide variety of products offered for sale.
7. Reliability and frequency of supply.
8. Credit facilities.
9. Application of modern sales techniques, for example self-service that encourages impulse buying.
10. Number of sales outlets or branches of the business.

Evaluation

1. Define turnover.
2. State the formula for the rate of turnover.
3. State two ways of calculating the cost of goods sold.
4. List five factors that affect the rate of turnover of a business.

Assignment

1. Distinguish between turnover and rate of turnover.
2. If the cost of goods sold is ₦4,000 and the stock is turned over five times, yielding a profit of 10% on sales, calculate the:
   1. average stock;
   2. gross profit;
   3. turnover.