A REPORT ON INVENTORY MANAGEMENT OF JOCIL LIMITED.

PULIVARTHI ANUSHA (121429) PGDM 2012-2014 BATCH

Report Submitted In Partial Fulfillment for the Award of Post-Graduation Diploma in Management

VIGNANA JYOTHI INSTITUTE OF MANAGEMENT

(Approved By AICTE, Ministry Of HRD, Govt. Of India) BACHUPALLY, HYDERABAD.

DECLARATION I hereby declare that this Project Report titled A Study on INVENTORY MANAGEMENT OF JOCIL LTD. submitted by me is a bona fide work undertaken by me and it is not submitted to any other Institution or university for the award of any certificate or published any time before. degree/diploma

PULIVARTHI ANUSHA Name of the Student Signature of the Student

ACKNOWLEDGEMENT I take this opportunity to express my profound gratitude and deep regards to my guide CH.JYOTHI Madam for her exemplary guidance, monitoring and constant encouragement throughout the course of this internship. The blessing, help and guidance given by her time to time shall carry me a long way in the journey of life on which I am about to embark. I also take this opportunity to express a deep sense of gratitude to Mr. SESHA GIRI RAO, Deputy Finance Manager, JOCIL Ltd, for his cordial support, valuable information and guidance, which helped me in completing this task through various stages. I am obliged to staff members of JOCIL Ltd, for the valuable information provided by them in their respective fields. I am grateful for their cooperation during the period of my internship. Lastly, I thank almighty, my parents, brother and friends for their constant encouragement without which this internship would not be possible.

CONTENTS S.NO TOPIC NAME

TITLE PAGE ACKNOWLEDGEMENT DECLARATION EXECUTIVE SUMMARY

PAGE NO.

1.

INTRODUCTION TO FINANCIAL MANAGEMENT

10 10 11 13 13 13 14 15 16 18 18 19 21 21 22 24 25 31 32 32 34 35 37 38 39

A. Objectives Of Financial Management B. Meaning and nature of inventory C. Need of the study D. Methodology of study E. Limitations of the study F. Objectives of the study 2.
INDUSTRY & COMPANY PROFILE

A. Industry profile B. Company profile C. History of company E. Financial performance 3.

THEORETICAL FRAME WORK

A. Meaning and nature of inventory B. Benefits of holding inventory C. Objectives of inventory management D. Inventory valuation and cash flows 4.
TO STUDY ON INVENTORY AT JOCIL MANAGEMENT

A. Inventory ratios B. Inventory turnover ratio C. Inventory to current assets ratio D. Current ratio E. Quick ratio F. Asset turnover ratio G. Inventory to working capital ratio

IMPACT ON OTHER PROFITABILITY RATIOS

42 43 43 45 46 47 49 51 55 60 71 73 74

H. Profitability ratios I. Net profit ratio J. Gross profit ratio K. Return on investment L .Return on equity M. Impact on other profitability ratios 6 7 8 9 10
CASH CONVERSION CYCLE SND ITS IMPACT ON PROFITABILITY OF COMPANY TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

L. ABC Analysis FINDINGS&SUGGESTIONS CONCLUSION BIBILOGRAPHY

LIST OF TABLES S.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 NAME OF THE TABLES Table-1 Table-2 Table-3 Table-4 Table-5 Table-6 Table-7 Table-8 Table-9 Table-10 Table-11 Table-12 Table-13 Table-14 Table-15 Table-16 Table-17 Table-18 PAGE NO. 32 34 35 37 38 40 43 45 46 47 52 52 53 53 60 62 66 68

LIST OF DIAGRAMS
S.NO 1 2 3 4 NAME OF THE DIAGRAM Graph-1 Graph-2 Graph-3 Graph-4 PAGE NO. 33 34 36 37

5 6 7 8 9 10 11 12 13 14 15 16 17 18

Graph-5 Graph-6 Graph-7 Graph-8 Graph-9 Graph-10 Graph-11 Graph-12 Graph-13 Graph-14 Graph-15 Graph-16 Graph-17 Graph-18

39 41 44 45 47 48 53 61 63 63 66 67 69 69

EXECUTIVE SUMMARY
Every organization needs inventory for smooth running of its activities. It serves as a link between production and distribution processes. The investment in inventories constitutes the most significant part of current assets/working capital in most of the undertakings. Thus, it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories.

Raw materials, goods in process and finished goods all represent various forms of inventory. Each type represents money tied up until the inventory leaves the

company as purchased products. Because of the large size of the inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is therefore absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The reduction in excessive inventories carries a favorable impact on the companys profitability. The study starts with an introduction to inventory management, Companys profile, its Vision & Mission, Achievements and also the need for study, and objectives are set out for the study. Research methodology, Data analysis & Interpretation, Findings and Suggestions of the study follow.One of the main areas of the project is the analysis part, where the data are analyzed & interpreted, to find out how the inventories were managed.

CHAPTER-1
INTRODUCTION

INTRODUCTION
INTRODUCTION TO FINANCE: In our present day economy, finance defined as the provision of money at the time when it is required. Every enterprise, whether big, medium of small needs finance to carry on its operations and to achieve its target. In fact finance is so indispensable today that is

rightly finance, no enterprise can possibly accomplish, its objective. Money makes many things. It is the good old proved which explains the importance of money on the like on not only human beings but also organization resources in the organization, Money is necessary to acquire and utilize the resources in the organization, both human and material resources. A business enterprise that is not having proper financial planning and control losses its.resources and consequently of its existence. It is the "Master key". Which provider access to all
manufacturing transactions. the sources used in

Objectives of financial management

1. 2.

Profit maximization Wealth maximization

Profit maximization It is stated in terms, of return on investment or profit to sales ratio. Ace. To this objective, all actions like increase in income and cut down in cost. This helps in profitable utilization of society's economic resources. Wealth maximization Wealth maximizations is a widely recognized criteria with the performance of
business enterprise is evaluated. The word 'wealth means the met present worth of the firm. There fore, it is stated that the net present worth is difference between gross present worth and the amount of capital

investment required to achieve the benefits. Gross present worth represents the present value of expected cash inflows discounted at a rate. Every enterprise needs inventory of smooth running of its activities, it a Service as link between production and distribution process. There is generally, a time lag between the recognition of a need and its fulfillment, the greater the time lag, the higher the requirement for inventory it also provides a cushion for future price fluctuations. The investment in inventories constitutes the most significant part of current assets/working capital in most if the under taking. Thus, it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories.

Meaning and Nature of Inventory:

In accounting language, inventory may mean the stock of finished goods only. In a manufacturing concern, it may include raw materials, work-in- progress and stores etc. Inventory Includes The Following Things: A) Raw Material: Raw Material form a major input into the organization. They are required to carry out production activities uninterruptedly the quantity of 10

raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies, the factors like the availability of raw materials and government, regulations etc, too affect the stock of raw materials. B) Work in Progress : The work in progress is that stage of stocks, which

are in between raw materials and finished goods. The quantum of work in progress depends upon the time taken in the manufacturing process.
The greater the time taken in manufacturing the more will be the

amount of work in progress. C) Consumables: These are the materials, which . are needed to smoother the process of production. These materials do not directly enter production but they act as catalysts. Consumables may be classified according to their consumption and criticality. Generally consumable stores do not create any supply problem and the firm a small part of production cost. There can be instances where these materials may account for much value then the raw materials. The fuel oil may form a substantial part of cost. D) Finished goods: These are the goods, which are' ready for the consumers the stock of finished goods provides a buffer between production and market.
The purpose of maintaining inventory is to ensure proper supply of

goods to customers. E) Spares: The stocking policies of spares differ from industry to industry some industries like transport will require more spares then the other concerns. The costly spare parts like engine, maintenance spares etc are not discarded after use, rather they kept in ready position for further use.
All decisions about spares are based on the financial cost of

11

inventory on such spares and the costs mat arise due to their non- availability. Benefits of Holding Inventories:
Although holding inventories involves blocking of a firms funds and the cost of

storage and handling, every business enterprise has to be maintain certain level of inventories of facilitate un-interrupted production and smooth running of business.
In the absence of inventories a firm will have to make purchases as soon as it receives orders, it will mean loss of time and delays in execution of orders which

sometimes may causes loss of customers and business. A firm also needs to maintain inventories to reduce ordering cost and avail quantity discounts etc., There are their main purposes of holding inventories:
i) ii) iii) The Transaction Motive: Which necessitates the holding of inventories for The Precautionary Motive: Which necessitates the holding of inventories for the unpredictable changes in demand and supplies of materials. meeting the unpredictable changes in demand and supplies of materials. The Speculative Motive : Which includes keeping inventories for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts.

NEED OF THE STUDY:

Every industry on average spends 70% on raw materials (inventory). Therefore there is a need to know the raw material cost and also there is a great importance to understand the inventory management system of this industry. The study helps a log to various departments to take steps to control the inventory 12

process. The overall inventory management includes design and inventory control organization with proper accountability establishing procedure for inventory handling disposal of scrap simplification, standardization and codification of inventories, determining the size of inventory.

METHODOLOGY OF THE STUDY:

The study is based on both primary and secondary data. Primary data: Any information which is collected afresh and for the first time is called primary data. The primary data happen to be original in character. The information is gathered from concerned employees. The employees and manager of the financial department have provided the information needed for the study. Secondary data: The collected data is tabulated and suitable interpretation had been made by considering the data collecting through secondary data like annual reports purchase registers, storage records of the organization.

LIMITATIONS OF THE STUDY:

The study has the following limitations:

The study is limited only for a period 5 years i.e., from 2007-08 to 2011-12
The limitations of ratio analysis can be applicable of the study. There may be approximation in calculating ratios and taking the figure from the annual reports.

OBJECTIVE OF THE STUDY:

The main objectives of the study are: 1. To present the conceptual and theoretical framework relating to inventory management.

13

2. To study on the inventory management at JOCIL limited management. 3. To study the inventory levels for last five years and its impact on other profitability ratios. 4. To understand the various techniques of inventory management and inventory control mechanism at Jocil. 5. To present the observations and suggestions for optimum inventory levels thus profitability.

14

CHAPTER 2 INDUSTRY PROFILE & COMPANY PROFILE

IN D U S T R Y P R O F I L E :
Personal wash market in India is very high. Everyone is using toilet Soaps. It is one of the fast moving consumer products in personal care segment.

15

The consumption percentage of toilet soaps was increased year by year. The total consumption of toilet soaps in India is 5.3 lakh tones per year. The growth rate is 2-3 percent per annum. But the consumption rate of soap used per an Indian is low, when we compare with Thailand, Italy and Brazil people. Their consumption rate is 480 Gms, 700 gms and 160 gms per head in a month. There are a number of reputed companies in the toiIet soap market. Due to increased competition, along with those companies several small scale manufacturers are also entered in to the market. The crowded market place has also brought to the consumer as marketers of soap have tried to woo consumers through upgraded offerings and better quality soaps. The marketers of toilets' soaps have increased the TFM (Total Fatty Matter) content in their brands, to offer better quality soaps at a lower- price. Industry watchers .say that the 1FM content on some brands has moved up from the'5-0-60.per cent earlier to over 70 per cent of late. Fatty Acid Industry: These are compounds of carbon, oxygen and Hydrogen. In the fatty acid Molecule the carbon atoms are linked together in the form of a long chain commonly referred to as a hydrocarbon chain. According to scientific data and nomenclature, long straight chain organic acids with carbon atoms of more than 4 are called fatty acids, because they are obtained from natural vegetable/animal oils/fats. However most of the commonly used fatty acids are with carbon chain 624. These fatty acids are mainly grouped into two categories viz., saturated and unsaturated fatty acids. Fatty Acids are having diversified application in various fields of industries like rubber manufacturing industries, Tyres, Plastic, Cosmetics, Foods and Pharmaceuticals. Present Status of Industry: Present manufacture of Fatty Acids is dispersed all over the country with units in various states. Production of fatty acid in India was insignificant, prior to the period of second world war. Production on a small scale was initially started in the mid forties that too with obsolete equipment. The qualities of fatty acid coming .out from these units are far from desirable and recovery of glycerin was inefficient.

16

It is in 1953, the first high pressure Fat Splitting Plant in our country went into stream in Bombay. It started production as a batch- operating unit, which was soon converted to a semi-continuous one. The industry which started taking shape in the early fifties was established on a firm footing within a decade, acquiring considerable know-how in process technology.

In the year 1954, the installed capacity of Fatty Acid Plants was below 4500 tonnes per annum. The annual production from the four operating units at that time
was below 1000 tonnes per annum. Since then the Fatty Acid industry in India has made raid progress during the next two decades.

SOAP INDUSTRY:
HISTORY: Traditionally, soap has been manufactured from alkali (lye) and animal fats (tallow), although vegetable products such as palm oil and coconut oil can be substituted for tallow. The major uses for soap were in the household, for washing clothes and for toilet soap, and in textile manufacturing, particularly for filling, cleansing and scouring woolen stuffs. In 1920s three firms had come to dominate the industry: (1) Colgate Palmolive-Peet, (2) Lever Brothers, an English company that developed a full line of heavily advertised soaps in the nineteenth century and in 1897 and 1899 purchased factories in Boston and Philadelphia; .and (3) In 1933 Procter and Gamble introduced a pioneer detergent, Drift, which targeted the dishwashing market because it was too light for laundering clothes. In urban sales of premium toilet soaps in 1984, the Liril brand manufactured by Hindustan lever had sales of 3500 MT, representing 24.4% of the market share, Mysore sandal made by Karnataka soaps sold 1588 MT or 11% of the market share, and shikaki manufactured by swastika sold 1500MT representing 10.6% of the market share for the same year Hindustan lever produced the three top brands of popular Toilet soaps-Life boy with sales of 36000MT and 38.5 market share. Lux with sales 17600 MT for 18.6% market share: and Rexona, 11300MT for an 11.9% market share.

COMPANY PROFILE:
History of Jocil Limited:

17

Jocil limited was incorporated on 20 th February, 1978 as per the Certificate of incorporation No.2260 granted by the Register of companies A.P. Hyderabad Under the name and style of ANDHRA PRADESH OIL AND CHEMICAL INDUSTRIES LIMITED (APOCIL). Promoters of the company: The unit was promoted as public Limited Company in joint venture by the Andhra Pradesh Industrial Development Corporation Limited, Hyderabad (APIDC) and Jayalakshmi Cotton and Oil Products Private Lirnited, (JCOP), Perecherla, Guntur Dist .Company belongs to Jayalakshmi Group. Organizational Structure Ownership and Management Board of Directors: P.Narendranadh chowdary J. Murali Mohan P. Narendranath Chowdary Mullapudi Thimmaraja Y. Narayanarao Chowdary Chairman Managing Director Director Director

Director Director
Director Director

V.S. Raju
K. Srinivasa Rao M. Gopalakrishna Subbarao V. Tipirneni SENIOR EXECUTIVES: P. Kesavulu Reddy BANKERS: Andhra bank State Bank of India

Director

President& Secretary

Guntur Guntur

AUDITORS: Brahmayya & Co., Guntur

FINANCIAL PERFORMANCE:

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Financial: Jocil limited uses both its own Capital and debt to perform its activities. The company aims at wealth maximization, rather earning more profits. The company declares dividend to its shareholders out of its profits and transfers the rest to general reserve. Retained earnings are used for Re-investment such as purchase of fixed assets, investments in fixed deposits and repayment of loans. Jocil Limited Accounting Policies:

1. General
The Accounts are prepared on historical cost convention and in accordance with normally accepted Accounting Standards.

2. Fixed Assets
Fixed Assets are stated at historical cost less accumulated depreciation.

3. Depreciation
Depreciation is provided on the written down value method at the rates and in the manner specified in Schedule XIV of the Companies Act, 1956. Investments Long term investments are stated at cost and income thereon are accounted for on accrual. Provision towards decline in the value of long term investments in made only when

such decline is other than temporary

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CHAPTER-3 THEORETICAL FRAME WORK

THEORETICAL FRAME WORK:

Meaning And Nature Of Inventory: The inventories constitute the most significant part of current assets/working capital in most of the undertaking. Thus, it is very essential to have proper control and management of inventories. The purpose inventory monument is to ensure availability is to ensure availability of material in sufficient quantity as and when required and also to minimize investment inventories, in accounting language, inventory may be the stock of insured goods only, in a manufacturing company concern it may include raw-materials, work-in-process and stores etc. 20

Inventory includes the following things. RAW MATERIAL: Raw material is a major input into the organization. They are required to carry out production activities uninterruptedly, the quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies, the stocks like the availability of raw material and Government regulations etc., too affect the stock of raw materials. WORK IN PROGRESS: The work in progress is that stage of stocks which are in between raw material and

finished goods, the quantum of work in progress depends upon the taken in the manufacturing process, the quantum of work in progress depends upon the time taken in the manufacturing process, the greater the time taken in manufacturing, the more will be the amount of work in progress.
CONSUMABLES: These are the materials which are needed to smoother the process of

production but they act as catalysts. Consumables may be classified according to their consumption add critically. Generally, Consumable stores dose not supply problem and fun a small part of production cost. There can be instances where these materials may account for much value than the raw material. The fuel oil is a substantial part of cost.
FINISHED GOODS: These are the goods, which are ready for the consumers. The stock of finished goods provides a buffer between production and market, the purpose of marinating inventory is to ensure proper supply of goods to customers. SPARES: The stock policies of spares fifer from the industry to industry. Some industries like transport will require more spares than the other concerns. The costly spares parts like engines, maintenance spares etc., are not discarded after use, rather they 21

are kept in ready position for father use. All decisions about spares are based on the financial cost of inventory on such spares and the cots that may arise due to their nonavailability. BENEFITS OF HOLDING INVENTORIES: All though holding inventories involves blocking of a firm's and the costs of

storage and handling, every business enterprise has to be maintaining certain level of inventories of facilities un-interrupted production and smooth running of business.
In him absence of inventories a firm will have to make purchase as soon as it receives orders. It will mean loss of time and delays in execution of orders which sometimes may cause loss of customers and business. A firm also needs to maintain inventories to reduce ordering cost and avail quantity discounts etc. There are three main purpose of holding inventories. The transaction motive: Which facilities continuous production and timely execution of sales order? The precautionary motive: Which necessitates the holding of inventories for meeting the unpredictable changes

in demand and supplies of materials.

The speculative motive: Which induces to keep inventories for taking advantage of price fluctuations saving in re-ordering costs and quantity discounts.

RISK AND COSTS OF HOLDING INVENTORIES:

The holding of inventories blocking of a firms funds and incurrence of capital and other costs. The various costs and risks involved in holding inventories are: Capital costs: Maintaining of inventories results in blocking of the firms financial resources. The firm has therefore to arrange for additional funds to meet the cost of inventories.

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The funds may be arranged from own resources or from outsiders. But in both the cased, the firm incurs a cost. In the fowler case, there is an opportunity cost of investment while in the later case; the firm has to pay interest to the outsiders. Storage and handling costs: Holding of inventories also involves costs on storage as well as handling of materials. The storage of costs includes the rental of the go down, insurance charges etc. Risk of price decline: there is always a risk of reduction in the prices of inventories by the supplies, competition or general depression in the market. Risk of obsolescence: the inventories may become absolute due to improved technology, changes in requirements, change in customer tastes etc. Risk determination in quality: the quality of materials may also deteriorate while the inventories are kept.

OBJECTIVES OF INVENTORY MANAGEMENT:

Definition of inventory management: Inventory management is concerned with the determination of optimum level of investment for each components of inventory and the operation of an effective control and review of mechanism. The main objectives of inventory management are operational and

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financial. The operational objective mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that inventory should not remain idle and minimum working capital should be locked in it. The following are the objectives of inventory management: To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met. To avoid both over-stocking and under-stocking of inventory.

To maintain investment in inventories at the optimum level as required by the

operational and sales activities.

To keep material cost under control so that they contribute in reducing the cost of
production and overall costs.

To eliminate duplication in ordering or replenishing stocks. This is possible with the

help of centralizing purchases.

To minimize loses through . deterioration, pilferages wastages and damages. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores.
To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price-analysis, the cost analysis and value-analysis will ensure payment of proper prices. To facilitate furnishing of data for short-term and long term planning and control of inventory.

Valuation Of Inventories Methods Of Valuations:

FIFO method LIFO method
24

 Base stock method Weighted average price method

Inventory Valuation And Cost Flows:

What is the cost of inventory?
One can readily visualize the determination of inventory quantities by

physical count or by use of perpetual inventory records. When this quantity is determined, it must be multiplied by a unity cost in order to determine the inventory value that is used on financial statement.
Trade and quantity discount are to be exclude from unit cost since these discount

exist for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the other hand, have been considered as a reward for early payment and as a penalty for late payment. The "reward" has often been interpreted as a loss rather than as a part of unit cost. Thus in would not be difficult to find difference of opinion as to whether invoice cost includes or excludes cash discount.
When the current replay chemical cost" of material on hand at the close of a year is less than the actual cost, the inventory value is reduced to replay chemical cost (current market price). Thus the acceptable basis inventory valuation is he "lower of cost or marker or more properly the "lower of actual cost or replay chemical cost".

The determination of inventory values is very important from the point of view of the balance sheet and the income statement .since costs not included in the inventory (the balance sheet) are considered to be expensive and are thus included in the income statement. Valuation of inventories method of determination:
Although the prime consideration in the valuation of inventories is cost, there are a number of generally accepted methods of determining the cost of inventories at the 25

close of an accounting period. The most commonly used methods are first in first out (FIFO) average, and last in first out (LIFO). The selection of the method for determining cost for inventories valuation is important for its has a direct bearing on the cost of goods sold and consequently on profit. When a method is selected, it must be used consequently and cannot be change from year to year in order to secure the most favorable profit for each year.

THE FIFO METHOD (first in first out method)

Under this method it is assumed that the materials or goods first received are the first to be issued or sold. Thus, according to this method, the inventory on a particular date is presumed to be composed of the items which were acquired most recently. The value inventory would remain the same even if the perpetual inventory system is followed.

Advantages: The FIFO method has the following advantages. It values stock nearer to current market prices since stock is presumed to be consisting of the most recent purchases. It is based on cost and, therefore, no unrealized profit enters in the financial accounts of the company. The method is realistic since it takes into account the normal procedure of utilizing or selling those materials or goods which have been longer in stock.

Disadvantages:
The method suffers from the following disadvantages. It involves complicated calculations and hence increases the possibility of clerical errors. Comparison between different jobs, using the same type of material becomes sometimes difficult. A job commenced a few minutes after another job may. Have to bear an entirely different change for materials because the first jobs completely exhausted the supply of materials of the particular lot.

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The FIFO method of valuation of inventories is particularly suitable in the following circumstance.

The materials of goods are of a perishable nature. The frequency of purchase is not large.
There are only moderate fluctuations in the prices of materials or goods purchased, Materials are easily identifiable as belonging to a particular purchase lot.

THE LIFO METHOD (last in first out method)

This method is based on the assumption that last item of material or goods purchased are the first to be issued or sold. Thus, according to this method, inventory consists of items purchased at the earliest cost.

Advantages:
This method has the following advantages.

It takes not account the current market conditions while valuing materials issued to different jobs or calculating the cost of goods sold. The method is based on cost and, therefore, no unrealized profit or loss is made on account of use of this method. The method is most suitable for materials which are of bulky and nonperishable type.

BASE STOCK METHOD:

This method is based on the contention that each enterprise maintains at all times a minimum quantity of materials or finished goods in its stock. This quantity is termed as base stock. The base stock is always valued at this price and is carried forward as a fixed asset. Any quantity over and above the base stock is valued in accordance with any other appropriate method. As this method aims at matching current costs to current sales, the LIFO method will be most suitable for valuing stock of material of finished goods other than the base stock. The base stock method has advantage of charging out material / goods at actual cost. Its other merits or demerits will depend on the method which is used for valuing materials other than the base stock.

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WEIGHTED AVERAGE PRICE METHOD:

This method is based on the press presumption that once the materials are put into a common bin, they lose their identity. Hence, the inventory consists of no specific batch of goods. The inventory is thus priced on the basis of average priced on the quantity purchased at each price. Weighted average .price method is very popular on account of its being based on the total quantity and value of materials purchased besides reducing number of calculations. As a matter of fact the new average price is to be calculated only when a fresh purchase of materials is made in place of calculating it every now then as is the case with FIFO, LIFO method. However, in case of this method different prices of materials are charged from production particularly when the frequency of purchase and issues/sales is quite large and the concern is following perpetual inventory system.

Valuation of Inventories Impact on the Flow of Costs:

As should be quite evident, the different methods of calculating inventory values will all have their impact on the flow of costs through the balance sheet into the income statement. The dollars that are paid to acquire inventory are always divided between the balance sheet (inventories) and the income statement (costs of goods sold), there is not other place to .put them. Thus if the different methods of calculating inventory produce differing inventory values, they will also produce differing cost of goods sold figures, and the differing cost of goods sold will naturally produce differing profit figures. In order show the impact of inventory valuation on cost flows, the preceding exhibits are summarized. Each method produces a different figure for the transfer of raw materials to work in process. The differences appear small, but the only reason for this is that the dollar amounts have been kept small to make the illustration workable. With the transfer of materials to work in process, the cost flow or transfer with have its impact on the work in process inventory and the transfer of completed merchandise to finished goods. Ultimately when goods are sold the varying methods of valuing inventories will have their impact on cost of goods sold and these profits. The effects of the cost flows on cost of goods sold and profits can be accentuated further it the differing methods of valuing inventories are applies to work in process and finished goods.

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Evaluation Of Methods What Causes The Differences?

The differences in inventory values and flows for each of the method illustrated result from only one factor, that it, changing purchases prices or unit costs. If purchase prices had remained stable or unchanged, each method would have produced the same inventory value and cost flow. Costs flows and inventory are exactly the same under stable prices. With a falling price level, the LIFO method produces the highest cost flow and the lowest inventory. With a falling price level, the LIFO method produces the lowest cost flow and highest inventory. The cost flow under LIFO follows the price level, LIFO produces larger cost flows when prices are rising and smaller cost flows when prices are falling. A final item to consider is that the average method produces results which fall between the

extremes of LIFO and FIFO. Evaluation Of Methods-Can We Justify The Differences?

The best method of inventory valuation might be "specific identification", that is, the units in inventory should be identified with the specific invoices and thus specific unit costs to which they apply.

Fortunately, the FIFO method constitutes a very useful approximation to the specific identification method if one can reasonably assume that the actual flow of materials is first-in first-out. This assumption is not unreasonable and thus we have stated the main argument for the FIFO inventory scheme.
That is, the physical flow of materials would ma tch the flow of costs under the

first-in first-out method.

When the units in inventory are identical, interchangeable and do not follow

any specific pattern of physical flow, the average cost system would seen to appropriate.
The primary difference between the FIFO and average methods is centered on the phys ical flow s ince both methods could involve identical and interchangeable 29

units. The FIFO methods fit a first-in first-out physical flow. The average method fits a system which has no specific pattern of physical flow. Finding a situation where there is no specific pattern of physical flow should be quite difficult because of the fact that most inventory items are subject to deterioration by instituting a person would attempt to reduce such deterioration and any reasonable person would attempt 'to reduce such deterioration by instituting a physical flow approximating first-in first-out. The major reason for the use of the average method

is something other than the lack of specific physical flow. Ordinarily the LIFO method cannot be justified on the basis of the physical flow of material. Under conditions of changing prices, the advocate of LIFO says that the only method which matches costs and revenues is the LIFO method. The LIFO method assumes that the latest item is the first item out, and thus the current costs of materials are matched with the other hand, assumes that the first item in is the first item out ; and thus the non-current costs of matching currents costs with current revenues is the essence of the argument for the LIFO method.
As can be seen by the above comments, there is no one best method of

valuing inventories. The method chosen should fir the situation. A physical flow pattern comparable to FIFO would force one to consider the FIFO method. The lack of discernible physical flow pattern would force one to consider the average method. Concentration on cost flows, as distinct from physical flows, would force to consider the LIFO method especially where there appears to be a discernible trend towards rising prices for falling prices as has been the case in our economy during recent years.

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Chapter 4 Study on the inventory management at JOCIL

31

INVENTORY RATIOS:
1. Inventory turnover ratio. 2. Inventory to current assets ratio. 3. Working capital ratio 4. Assets turnover ratio 5. Quick ratio.
1.INVENTORY TURNOVER RATIO:

This ratio indicates the number of times the stock has been turned over during the period & evaluated the efficiency with which a firm is able to manage its inventory. This ration is calculated by applying the following formula.

Cost of goods sold Inventory Turnover Ration = ----------------------------Average Inventory

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Year

Cost of goods sold

946000240 1277135937 2141379194 3235031620 1220734436

Avg. Inventory
105291435 133945023 168968061 285942551 131405030

Ratio
8.98 9.50 12.67 11.31 9.28

2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Table 1: Inventory turnover ratio

Graph 1: Inventory turnover ratio

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Interpretation: More inventory ratio is desirable to any company and it indicates that the company using low value of inventory. The inventory decreased in 2012 when compared to 2011. Actually the firm has to maintain more inventories for the purpose production of more products. Here the inventory is decreased due to less orders from HUL ,ITC.

2. INVENTORY TO CURRENT ASSETS: In order to know the percentage of inventory over current assets the ratio of inventory to current assets is calculated and which is presented in the following table. Inventory Inventory turnover current assets ratio = ----------------Current assets

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Inventory
133945023 138918033 138968061 285942551 105291435

Current assets
644848761 624866578 855177611 1025271238 505115978

Ratio
0.21 0.22 0.19 0.27 0.21

Table 2:Inventory to current assets ratio

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Graph 2:Inventory to current assets ratio

Interpretation: The inventory to current assets ratio had been decreased to0.20 in the year 2009-10 this is due to fall in the inventories and current assets the significant drop in the level of inventory is due to falling trend in demand thus leading to fall in purchases and finally on sales leads to fall in debtors and in turn on the current assets. In the year 2010-11 inventory is increased to 0.27 due to improvement of inventory to current assets. The inventory to current assets ratio had fallen to 0.21 in the year 2011-12.

3. CURRENT RATIO: It indicates the ability of a company in meeting the current obligation. It is significant short term creditors and management. Current assets Current ratio = -----------------------

35

Current liabilities

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Current assets
644848761 624866578 855177611 1025271238 505115978

Current liabilities
202829598 1904795571 301756003 391631987 168862312

Ratio
3.18 3.28 2.83 2.61 3.00

Table 3:Current ratio

Graph 3:Current ratio Interpretation: In JOCIL the current ratio is 2.8 in 2012. It means that for one rupee of current liabilities, the current assets are 2.8 rupee is available to them. In other words the current assets are 2.8 times the current liabilities. Almost the past 4years current ratio is fluctuating but current ratio in 2012 it is bit higher than before, which makes company more sound. The consistency increase in the value of current assets will increase the ability of the company to meets its

36

obligations & therefore from the point of view of creditors the company is in good condition.

4.QUICK RATIO: The quick ratio is the relationship between quick to current liabilities quick assets is more rigorous test of liability position of a firm it is computed by applying the following formula. Quick ratio = quick assets / current liability Where quick assets = current assets inventories

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Quick assets
510903738 485948545 685232006 739328687 399824543

Current liabilities
202829598 190479571 301756003 391631987 168862312
Table 4:Quick ratio

Ratio
2.4 2.6 2.3 2.0 2.4

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Graph 4:Quick ratio Interpretation: Almost in past 4 years the liquid ratio is fluctuating. The quick ratio of the JOCIL Company has increased from 1.8 to 2.3 from 2011-2012. It indicates good sound of company .This indicates that the dependence on the short-term liabilities & creditors are less & the company is following a conservative working capital policy. Quick ratio of Company is not favorable because the quick assets of the company are more than the quick liabilities. The liquid ratio shows the companys inability to meet its immediate obligations is good. So, as per the current year ratio of the company is satisfactory.

5.ASSETS TURNOVER RATIO: Assets are used to generate sales. Therefore a firm should manage its assets efficiently to maximize sales. The relationship between sales and assets is called assets turnover ratio. assets turnover ratio = net sales / total assets

38

Year
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012

Net sales
946000240 1277135937 2141379194 3235031620 820734436

Total assets
644848761 624866578 105715105 126889590 505115978
Table 5:Assets turnover ratio

Ratio
1.47 2.04 2.02 2.54 2.54

Graph 5: Assets turnover ratio Interpretation: The ratio of total assets is 71% of the total assets shows that the company has been utilizing its assets to the fullest. It makes use of its full assets to make the best for the profits. Or else these assets in the company will be non-performing assets which could bring additional cost for the company.

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This ratio indicates the efficiency with which the firm is utilizing its investments in assets to generate revenue. However since JOCIL ltd has huge investment with respect to production of soaps and chemicals, it requires huge investment. 6. INVENTORY TO WORKING CAPITAL RATIO: The inventory to working capital ratio measures how well the company is able to aggregate cash using working capital at its current inventory level. As increasing inventory to working capital ratio is generally a negative sign, showing the company may be having the operational problems. If it has too much working capital invested in inventory, they may have difficulty having enough working capital to make payment on short-term liabilities and accounts payable. Inventory to working capital ratio=Inventory/working capital

(or) =Inventory/(current assets-current liabilities)

Year
2007-08 2008-2009 2009-2010 2010-2011 2011-2012

Inventory
133945023 138918033 138968061 285942551 210582870

Working Capital
442019163 434387007 552444064 633639251 672507332

Ratio
0.30 0.32 0.30 0.45 0.31

Table 6:Inventory to working capital ratio

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Graph 6: Inventory to working capital ratio Interpretation: Percentage measure of a firm's capability to finance its inventories from its available cash. Numbers lower than 100 are preferable as they indicate high liquidity. Numbers higher than 100 suggest that the inventories are too large in relation to the firm's financial strength. The inventory turnover ratio had been decreased to 0.31 in the year 2011-12 the reason for this decrease in turnover which is mainly prevailing condition in the industry.

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CHAPTER 5 Impact On Other Profitability Ratios

42

ROFITABILITY RATIOS:
NET PROFIT RATIO: Net profit ratio is computed by dividing the net profit (after tax) by net sales. It is a very popular profitability ratio that shows the net operating earnings. This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Jointly considered, the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm. Net profit ratio= Net profit( after tax)/sales*100

S.No
2007-08 2008-09 2009-10 2010-11 2011-12

Net Profit
826.19 969.06 2136.70 2756.29 2962.20

Sales

Ratio
5.09% 5.20% 7.21% 7.97% 7.91%

16201.26 18602.19 29635.07 34562.20 37432.19 Table 7: Net profit ratio

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Graph 7: Net profit ratio Interpretation: Every company is able to maintain more percentage of net profit on sales due to low value of interest charge in every year. The table shows there is increase in net profit from year to year. So the ratio of this company found to be very satisfactory and the company has been successful in controlling the expenses. It is a clear index of cost control, managerial efficiency & sales promotion.

GROSS PROFIT RATIO:

This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. It measures the efficiency of production as well as pricing. This ratio helps to judge how efficient the concern is I managing its production, purchase, selling & inventory, how good its control is

44

over the direct cost, how productive the concern , how much amount is left to meet other expenses & earn net profit. Gross profit ratio= Gross profit/net sales*100

S.No
2007-08 2008-09 2009-10 2010-11 2011-12

Gross Profit
17.79 20.80 37.73 37.93 31.06

Net Sales

Ratio
5.68 10.71 12.51 9.92 7.93

312.89 194.13 301.44 382.20 391.35 Table 8: Gross profit ratio

Graph 8: Gross profit ratio

Interpretation:

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The table shows that gross profit is fluctuating in every year due to change in the sales and change in the gross profit. The ratio is high in 2011 and it again got decreased in 2012 due to change in the gross profit margin because of changes in market and heavy competition.

RETURN ON INVESTMENT:
This is also called as overall profitability ratio and percentage of returns on total capital employed in the business. ROI measure the profit, which a firm earns on investing a unit of capital. It is desirable to ascertain this periodically the profit being the result of the operation. It also explains all efficiencies of a business collectively thus. It is a dependable measure for judging the overall efficiency of the company. Return on investment ratio = (net profit after interest tax / total net assets) x 100 Year 2007-08 2008-09 2009-10 2010-11 2011-12 EAT 8.67 9.69 21.37 19.43 12.50 Net assets 85.81 94.74 116.14 168.28 157.55 Return on investment (%) 10.10 10.22 18.4 11.54 7.93

Table 9: Return on investment

Graph 9: Return on investment 46

Interpretation:
It gives the relation between net profit and total assets. The table shows an decreasing ratio from last 2 year to study period which results in less return on invested capital. ROI measure the profit, which a firm earns on investing a unit of capital. It is desirable to ascertain this periodically the profit being the result of the operation. It also explains all efficiencies of a business collectively thus. It is a dependable measure for judging the overall efficiency of the company.

RETURN ON SHAREHOLDERS EQUITY:

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Return on shareholders Equity = Net profit after interest and tax / Shareholder's Equity Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. Also known as "return on net worth" (RONW).

Year

NPAIT

Shareholders equity

Return on shareholders equity (%) 10.43 10.93 20.38 16.17 9.81

2007-08 2008-09 2009-10 2010-11 2011-12

8.67 9.69 21.37 19.43 12.50

83.10 88.64 104.83 120.13 127.47

Table 10: Return on equity 47

Graph 10: Return on Share Holders Equity

Interpretation:
Decreasing inventory turnover translates into less sales numbers, which can result in low total revenues. Assuming costs remain the same or increase, higher revenues ultimately decrease net income, which results in fall down of ROE. A lower ROE number is always less desirable.

IMPACT ON OTHER PROFITABILITY RATIOS:

The proper management of inventory is critical for any size business. The way a company values its inventory can be the difference between a profit and loss. In fact, inventory valuation affects a company's profit margin, working capital, assets and shareholder's equity. Toss in the fact that the tax law allows a company to use different valuations of inventory for tax reporting purposes and a company must be careful how it records inventory.

48

The inventory method a company uses affects its costs of goods sold, or COGS, which has an impact on its profitability ratios. The formula for COGS is beginning inventory plus purchases less ending inventory. A company using FIFO to value its inventory reports lower COGS, which increases its gross profit margin (sales less COGS) and its net income all else being equal. Higher net income means higher profit margin. A company using LIFO reports higher COGS, translating into lower gross profit, net income and profit margins. This means earnings per share (net income divided by equity shares outstanding) is higher using FIFO all else being equal. A good rule of thumb is that if inventory turnover ratio multiply by gross profit margin (in percentage) is 100 percent or higher, then the average inventory is not too high. According to this rule by multiplying turnover ratio and gross profit ratio of JOCIL Ltd in the year 2010-11 the percentage is 114.56% this shows that the company average inventory is not too high. But in the year 2011-12 the percentage is the percentage is 86.92% this shows that the company average inventory is somewhat high when compared to before year so JOCIL should maintain the inventory as per the requirement. Decreasing inventory turnover translates into less sales numbers, which can result in low total revenues. Assuming costs remain the same or increase, higher revenues ultimately decrease net income, which results in fall down of ROE. A lower ROE number is always less desirable. The ROI also results the same it got decreased from last 2 years which gives less return on investments for the company.

49

50

CHAPTER 6 Cash Conversation Cycle

ANALYSIS OF OPERATING CYCLE AT JOCIL LTD:

The cash conversion cycle (CCC or Operating Cycle) is the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. It is the time required for a business to turn purchases into cash receipts from customers. CCC represents the number of days a firm's cash remains tied up within the operations of the business. A cash flow analysis using CCC also reveals in, an overall manner, how efficiently the company is managing its working capital. Operating Cycle = Inventory Conversion Period + Debtors Conversion Period Creditors Payable Period Operating Cycle Year 2007-08 2008-09 2009-10 2010-11 2011-12

51

Inventory Conversion Average Collection Payables Deferral Operating Cycle

37.12073 761 38.99431 765 23.60730 976 52.50774 55

40.874265 2 40.089366 91 15.710775 1 65.252857 01

73.043459 07 38.708733 86 22.400084 78 89.352108 15

52.556056 42.433388 59 7.6520277 89 87.337416 8

57.774596 4 44.687197 35 10.085364 52 92.376429 23

Table 11: Operating cycle Year 200708 200809 200910 201011 201112 Receivables 228771563 355316081 438561908 500071735 555178532 Sales per day 5866792.312 8863100.329 11329792.12 11784864.5 12423659.68 Table 12: Debtors conversion period Debtors Conversion Period 38.99431765 40.08936691 38.70873386 42.43338859 44.68719735

Year 2007-08 2008-09 2009-10 2010-11 2011-12

Inventory 168968061 285942551 675506154 506456758 572000689

Cost of goods sold 1661425560 2553416692 3375521222 3517324752 3613703329

Inventory Conversion period 37.12073761 40.8742652 73.04345907 52.556056 57.7745964

Table 13: Inventory conversion period Year 2007-08 2008-09 Payables 107456953 109907275 Cost of goods sold 1661425560 2553416692 52 Creditors Payable period 23.60730976 15.7107751

2009-10 2010-11 2011-12

207156059 73738813 99850727

3375521222 3517324752 3613703329

22.40008478 7.652027789 10.08536452

Table 14: Creditors payable period

Graph 11: Cash conversion cycle

IMPACT OF CASH CONVERSION CYCLE ON PROFITABILITY OF A ACOMPANY

Cash conversion cycle of manufacturing firms is negatively related to the profitability of the firms. Whereas longer cash conversion cycle, inventory conversion period and receivables period of the firms will lead towards decreased profitability of the manufacturing firms. Moreover earlier payments to creditors will lead towards decreased profitability of the manufacturing firms. The manufacturing companies are required to well estimate and evaluate the cash flows of the business, to well identify the long run and short run cash inflows and outflows to timely sort out the cash shortages. As the cash conversion cycle increased in the study period

53

the profitability of the company decreased. So the company should evaluate the cash inflows and outflows before shortage of the cash raises.

54

CHAPTER 7 Tools and techniques of inventory management

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

A proper inventory control not only helps in solving the acute problem of liquidity but also increases profit and causes substantial reduction in the working capital of concern. The following are the important tools and techniques of inventory management and control. Determination of stock levels: Carrying o. f too much and too little of inventory is detrimental to the firm. If the inventory level is too little, the firm will face frequent stock outs involving heavy ordering 55

cost and if the inventory level is too high it will be unnecessary tie up of capital. An efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock out which may result in loss or sale or storage of production. Minimum stock level: It represents the quantity below its stock of any item should not be allowed to fall. Lead time: a purchasing firm requires sometime to process the order and time is also required by the supplying firm to execute the order. The time in processing the order and then executing it is know as lead time. Rate of consumption: It is the average consumption of materials in the factory. The rate of consumption will be decided on the basis of past experience and production plans. Nature of materials: the mature of materials also affects the minimum level. If a material is required only against the special orders of the customer then minimum stock will not be required for such material. Minimum stock level can be calculated with the help of following formula. Minimum stock level= Re-ordering level-(Normal consumption x Normal re-order period)

Re-ordering Level: When the quantity of materials reaches at a certain figure the fresh order is sent to get materials again: the order is sent before the materials reach minimum stock level. Reordering level is fixed between minimum level maximum levels. Maximum level: It is the quantity of materials beyond which a firm should not exceeds its stocks. If the quantity exceeds maximum level limit then it will be over-stocking. Overstocking will mean blocking of more working capital, more space for storing the materials, more wastage of materials and more chances of losses from obsolescence. Maximum stock level =reordering level + reorder quantity (Maximum consumption x Minimum reorder period)

56

Danger stock level: It is fixed below minimum stock level. The danger stock level indicates emergences of stock position and urgency of obtaining fresh supply at any cost. Danger stock level = average rate of consumption x emergency delivery time Average stock level: This stock level indicates the average stock held by the concern. Average stock level = Minimum stock level = x order, quantity Determination of safety stocks: Safety stock is a buffer to meet some unanticipated increase in usage. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can be face a problem of stock out. In order to protect against the static out arising out of usage fluctuations, firms usually maintain some margin of safety stocks. Two costs are involved in the determination of this stock that is opportunity cost of stock outs and the carrying costs. If a firm maintains low level of safety frequent stock outs will occur resulting into the larger quantity of safety stocks involves carrying costs.

ECONOMICS ORDER QUANTITY (EOQ):

The quantity of materials to be ordered at one time is known as economic ordering quantity. This quantity is fixed in such a manner as to minimize the cost of ordering and carrying costs. Total cost material = Acquisition cost +cost + carrying costs. + ordering cost Carrying cost: It is the cost of holding the materials in the store.

57

Ordering cost: It is the cost of placing orders for the purchase of materials. EOQ can be calculated with the help of the following formula. EOQ 2 CO/I Where C= consumption of the material in units during the year O= ordering cost I= carrying cost or interest payment on the capital.

ABC ANALYSIS: (ALWAYS BETTER CONTROL ANALYSIS):

Under ABC analysis the materials are divided into 3 categories viz.., A, B and C. Almost 10% of the items contribute to 70% of value of consumption and this category is called 'A' category. About 20% of the items contribute about 20% of value of category 'C' covers about 70% of items of materials which contribute only 10% of value of consumption.

VED ANALYSIS: (VITALLY ESSENTIAL DESIRE)

The VED analysis is used generally for spare parts. Spare parts classified as Vital (V), Essential (E), and Desire (D). The vital spares are a must for running the concern smoothly and these must be stored adequately. The 'E' types of spares are also necessary but their stocks may be kept at low figures. The stocking of `D' type spares may be avoided at times. If the lead time of these spares is less, then stocking of these spares can be avoided.

INVENTORY TURNOVER RATIO:

Inventory turnover ratios are calculated to indicate whether inventories have been used efficiently or not. The inventory turnover ration also known as stock velocity is normally calculated as sales / average inventory of cost of goods sold / average inventory. Inventory conversion period may also be calculated to find the average time taken for clearing the stocks. Symbolically.

Cost of goods sold Inventory turnover ratio = ----------------------------Average inventory at cost

58

(OR) Net Sales = --------------------------Average Inventory Days in a year And, Inventory conversion period = -------------------------------------Inventory turnover ratio

ABC ANALYSIS TECHNIQUE IS USED TO ANALYSE THE INVENTORY IN JOCIL LTD:

ABC Analysis Technique of Inventory Management At JOCIL LTD For The Year 2008-09:

59

s.no

name of units

in %if total

cumulative

unit

total cost % of cumulativ total 3309149 4 cost 59.7 0 3.74 e% of

category

the item quantity 1 Fatty acids 2 Glycerin 63 987

% of total cost 3352 7 42.92

units units 40.3 40.35 5

total cost 59.70 A

2.57 3 Soap Product 582 23.7 9 66.71

3291 5 3360 9

2073661 1956101 4

3.74 35.2 9 B 98.74

Pitch

14 0.57

67.28 2773 9 388354 0.71

99.45

Industria l oxygen

800

32.7 1

100

7.07

5657

0.01

99.45 C

others Total

2446 100

304961 5542514 1

0.55 100

100

Table 15: ABC Analysis for the year 2008-09

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Graph 12: %Quantity of inventory Interpretation: There are two items which comes under category A which comprises of fatty acids ,glycerin.These items cover 60% of total cost and 40% of total volume.These items are to be controlled strictly and are to be forcasted accurately. The B category inventory comprises of two items i.e.soap products,pitch which occupy about 34.96% of total cost and 28.70% volume.These items require only a moderate control. There is one item i.e. industrial oxygen,others consume under C category.This items occupied 4.83% of total cost and 18.6% of total volumes.Lose control is acceptable for these items.

61

ABC Analysis Technique Of Inventory Management At Jocil Ltd For The Year 2009-10: S.no Name of Units the item in %If total Cumulativ e %of total units Unit cost Total cost % of Cum cat ulati eg or y

quantit units y

tota ve% l of

cost total 1 Fatty acids 2 3 4 glycerin Soap product Industrial oxygen C 5 Others Total 3831411 69786134 5.49 100 100 146.09 35.46 701.156 19.32 1641 45.20 35.48 54.8 100 26961.87 3938860 327470.7 22960808 6.88 11302 5.64 61.58 32.9 94.51 B 0.03 94.51 1142.40 31.46 31.46 34176.95 39043755 cost 55.9 55.94 A

3630.64 100
Table 16 : ABC Analysis for the year 2009-10

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Graph 13 : % Value of inventory for the year 2009-10

Graph 14: %Quantity of inventory

Interpretations: 63

There are two items which comes under category A which comprises of fatty acids, glycerin. These items cover 61% of total cost and 33.48% of total volume.These items are to be controlled strictly and are to be forecasted accurately.

The B category inventory comprises of two items i.e. Soap products pitch which occupy about 32.90% of total cost and 19.32%volume.These items require only a moderate control.

There is one item i.e. industrial oxygen ,others which comes under C category.This item occupied 5.52% of total cost and 45.20% of total volume.Lose control is acceptable for these items.

ABC Analysis Technique Of Inventory Management At JOCIL Ltd For The Year 2010-11:

64

S.n o

Name item

of Units in %if Cumula quantity tota tive l %

Unit cost

Total cost % total cost

Cumulat

Catego

ive % of ry total

of total

unit units 1 Fatty acids 1274.72 5 glycerin 2 3 Soap product 77.395 671.163 52.66 3.04 26.1 78.78 2 B 4 5 Toilet soap Industrial oxygen 66.494 479 2.58 81.36 18.6 100 4 C 6 Others Total 3686.64 6
Table 17: ABC Analysis for the year 2010-11 65

s 49.6 49.62 2

41838.77

53332934

57.94

57.94

26759.24 39420

2071032 26457246

2.24 28.74

60.18 88.92

86231.79 6.84

5733897 3278

6.22 0.03

95.14 95.17

100

4449684 55425141

4.83 100

100

Graph 15: %Value of inventory

Graph 16: %Quantity of inventory

Interpretation: 66

There are two items which comes under category A which comprises of fatty acids, glycerin these items cover 60.18% of total cost and 42% of total volume. These items are to be controlled strictly and are to be forecasted accurately.

The B category inventory comprises of two items i.e. soap products, pitch which occupy about 34.96% of total cost and 28.70% volume. These items require only a moderate control.

There is one item i.e. industrial oxygen, others which comes under C category. This item occupied 4.83% of total cost and 18.64% of total volumes. Lose control is acceptable for these items.

ABC Analysis Technique Of Inventory Management At Jocil Ltd For The Year 2011-12. s.no Name of Units in %if item 1 Fatty acids 2 Glycerin 30 quantity total 776 Cumulative Unit %of total cost 31528 2446610 5 60.15 43295 1298884 70.08 31852 3 4226351 3.88 12.6 6 89.64

total cost % of Cumulative category total cost 73.1 0 76.98 A %of cost 73.10 total

units units 57.91 57.9 1 2.24

Soap product

133

70.0 8

67

Pitch

395 99.5

8004

316149 6

9.45 99.0 56 9 0.01 99.10

Industrial 6 oxygen

6 0.44

100

9.3

Other Total

1340

302121 3346497 2
Table 18: ABC Analysis for the year 2011-12

0.90 100

100

Graph 17: %Value of inventory

68

Graph 18: %Quantity of inventory

Interpretation: There are two items which come under category a which comprises of fatty acids,glycerin.These items cover 70% of total cost and27% of total volume.These are to be controlled strictly and are to be forecasted accurately. The B category inventory comprises of two items i.e. soap products,pitch which occupy about 13% of total volume .The items require only a moderate control. There is one item i.e. industrial oxygen ,others which comes under C category this item occupy 7% of total cost and 40% of total volume.lose control is acceptable for these items.

69

CHAPTER - 8 Findings, Suggestions

70

FINDINGS
In the year turnover ratio is good when compared in year 2006-07 and 201011.From this it has been observed that the investment on raw materials has been decreased from 2010-11 to 2011-12. From the study it has been observed that the inventory to working capital ratio was fluctuating from year to year. But as overall this ratio is satisfactory. From the study it has been observed that the inventory to current ratio of JOCIL Limited fluctuating for the period of 2007-12 the company is maintaining satisfactory current ratio. Which is more than idle ratio 2:1 due to current assets are more than the current liabilities. From this study it has been observed that the quick ratio of the company maintained medium level liquidity, which might slowly decrease its profitability. Since the return on assets is not so bad. From the study it has been observed that the assets turnover ratio of the company is increasing due to the net sales are more than the net assets.

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SUGGESTIONS
The investment on raw material has decreased from 2007-12 and there is need to improve investment on raw material for the production. The inventory turnover ratio is increasing level so it is suggested that JOCIL limited is to take the steps so as to maintain the optimum inventory turnover ratio. It is suggested that the JOCIL ltd is required to take necessary steps so as to maintain the same inventory to working capital ratio satisfactory. It has been suggested that the company needs to maintain the better level than the previous level of inventory turnover ratio, which is increasing sales. It has been suggested that the company needs to maintain the same level current ratio, which is useful to meet current obligations. It has been suggested that the company should examine the quick ratio to the beneficial of JOCIL Ltd. It has been recommended that the company needs to maintain high level of assets turnover ratio, which increases the profit.

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CONCLUSION
Total economic life of a company depends up on some financial aspects like profits, expenses, turnover etc.. A careful analysis of these areas is very much essential for the success and survival of the company. For this purpose inventory management with help of techniques like ABC analysis is to be carried out. A study of this type is very much useful to any company to keep in the different financial aspects and to take measures to improve.

In my view the inventory management of the company is supplying vital information about the inventory of the company in all aspects as per the ABC analysis. The company is maintaining optimum level of inventory as per the requirement and reached their goals. Overall inventory management in JOCIL provides to be in good trend.

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BIBILOGRAPHY
For the preparing the report we uses the following:1 . Annual Report of the company of 2007-08. 2. Websites:www.jocil ltd.com www.google.com www.kotaksecurities.com www.moneycontrol.com 3. Book:Financial Accounting, 3rd Edition, PHI Learning Pvt. Ltd., Author- R. Narayanswamy, Part III, Chapter11, Financial Statement Analysis.

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