NO

INDEX

CONTENTS
Introductiontothestudy
Needforthestudy
Objectivesofthestudy
Scopeofthestudy
Limitationsofthestudy
Researchmethodology
InventoryManagement
Theoreticalframeworkandarticle
Dataanalysisandinterpretation
Findingsandsuggestions
Conclusion

INTRODUCTION
FinancialManagementisconcernedwiththedutiesofthefinicalmanagerinthebusinessfirm.
Financialmanagersactivelymanagethefinancialaffairsofanytypeofbusiness,namelyfinancial
andnonfinancial,privateandpublic,largeandsmall,profitseekingandnonprofit.
They perform such varied task, as budgeting, financial forecasting, cash management, credit
administration,investmentanalysis,fundsmanagementandinventorymanagement.
A term inventory refers to the stock file of the products a firm is offering for sale and the
componentsthatmakeuptheproduct.Inotherwords,inventoryiscomposedofassetsthatwillbe
showedinfutureinthenormalcourseofthebusinessoperations.Theassetswhichfirmsstoreas
inventoryinanticipationofneedare:
Rawmaterials
Workinprocess(SemiFinishedgoods)Finishedgoods
The raw material inventory contains item that are purchased by the firm from other and are
converted into finished goods through the manufacturing (production) process. They are an
importantinputofthefinalproduct.Theworkingprocessinventoryconsistsofitemscurrentlybeing
usedintheproductionprocess.
Theyarenormallysemifinishedgoodsthatareatvariousstagesofproductioninamultistage
productionprocess.Afinishedgoodsrepresentedfinalorcompletedproductswhichareavailablefor
sale.Theinventoryofsuchgoodsconsistsofitemsthathavebeenproducedbutareyetbesold.
Inventory,asacurrentasset,differsfromothercurrentassetsbecauseonlyfinancialmanagersare
notinvolved.Ratherallthefunctionalareas,finance,marketing,production,andpurchasingare
involved.Theviewsconcerningtheappropriatelevelofinventorywoulddifferamongthedifferent
functionalareas.
Thejobofthefinancialmangeristoreconciletheconflictingviewpointsofthevariousfunctional
areas regarding the maximizing the owners wealth. Thus, inventory management, like the
managementofothercurrentassets,shouldberelatedtotheoverallobjectiveofthefirm.Itisinthis
contextthatthepresentchapterisdevotedtothemainelementsofinventorymanagementfromthe
viewpointoffinancialmanagement.
The objective of inventory management is explained in some detail sections. Section two is
concernedwithinventorymanagementtechniques.Attentionisgivenheretobasicconceptsrelevant

tothemanagementandcontrolofinventory.
Theaspectscoveredare:
Determinationofthetypeofcontrolrequired.ThebasiceconomicorderquantityThereorderpoint,
andSafetystocks.
Asamatteroffact,theinventorymanagementtechniquesareapartofproductionmanagement.But
a familiarity with them is of great help to the financial managers in planning and budgeting
inventory.

NEEDTOHOLDINVENTORIES

Martinandmilleridentifiedthreegeneralmotivesforholdinginventories

TRANSACTION

MOTIVE:

Thisreferstotheneedofmaintaininginventorytofacilitatesmoothproductionandsalesoperations.

PRECAUTIONARY

MOTIVE:

Precautionarymotiveforholdinginventoryistoprovideasafeguardwhenthenactuallevelof
activityisdifferthananticipated.Thisinventoryserveswhenthereisaunpredictablechangesinthe
demandandsupplyforces.

SPECULATIVE MOTIVE:
This motive influences the decision to increase or decrease the levels of inventory to take the
advantageofpricefluctuations.

OBJECTIVEOFTHESTUDY

Tostudyabouttheorderinglevelsfortheimportantcomponentsofinventory.
Tounderstandandmeasureeconomicorderquantityfortheselectedrawmaterialitems.
ToanalyzeitsinventorymanagementmethodswiththehelpofABCanalysis,VED
analysisetc.
Tooffersuitablesuggestionsfortheimprovementofinventorymanagementpractices.

SCOPEOFTHESTUDY
Inventorymanagementisasimpleconceptdonthavetoomuchstockanddonthavetoolittle.
Sincetherecanbeasubstantialcostsinvolvedinstayingaboveandbelowtheoptimalrange,careful
inventorymanagementcanmakeahugedifferenceintherightbalancecanbequiteacomplexand
timeconsumingtaskwithouttherighttechnology.
InventorymanagementisveryimportantItenablesthebusinesstomeetorexceedexpectationsof
thecustomersbymakingtheproductsreadilyavailable/
ThescopeofthestudyincludestheABCAnalysisofRawMaterials,workinprogressandfinished
goodsforfourfinancialyears.
Thisstudyprovidesinsighttothemanagementofhighvalueitemsandalsobringsattentionof
managementtowardsmovementofAclassitemsoverperiodof4years

LIMITATIONSOFTHESTUDY
Detailstudyaboutallthematerialwasnotpossiblebecauseoftimelimit.

Someoftheinformationwaskeptconfidentialbythestoriesdepartment.

Studywasconfinedonlytotheselectedcomponentsinthestoresdepartment.

RESEARCHMETHODOLOGY
Thedatahasbeengatheredthroughinteractionanddiscussionswiththeexecutivesworking
inthedivision.
Someimportantinformationhasbeengatheredthroughcoupleofunstructuredinterviewsof
executive.
Annualreportsandothermagazinespublishedbythecompanyareusedforcollectingthe
requiredinformation.

OBJECTIVES:

Maintainsmoothanduninterruptedsupplyofproductsbykeepingadequateinventoriesandstocks;
toensureproductavailabilityinallmarkets.
Optimize utilization of existing infrastructure and operate at installed capacities to maximize
productionandenhanceefficiency.
Shore up man power skills and technical expertise aimed at self reliance implementation of
expansionprogramsanddiversificationofplans.
Toconsolidatesandsustaingrowthbydevelopingsuitablestructure,inductingmonitoringsystem
forcosteffectivenessandexercisingcontrolsatlevelsforeffectivefunctioning.

INHERENTSTRENGTHS:

Survivedthroughturbulenttimesofindustry.BISStandardcompliancequalityproducts.
Strongcoretechnicalteamandlowemployeeturnover.Capacityforflexibledesignsand
smallbatchsizes.
Efficientuseofinfrastructure.

OPPORTUNITIES:

Marketvalueaddedproductsthroughinnovationanddevelopment.
Goodgrowthprospectsforgalvanizedtowersforpowertransmissionandtelecom.Astronggrowth
ininfrastructureindustry.
Growthinhousingsectorexpectedtocontinue.
Increasedexportdemandforgalvanizedproductsandreductionoftariffbarriers.
O

WaiverofantidumpingdutybyVSA.

Concessionaltariffsfor

SAARC

countries.

STRATEGIES:

Takingadvantagesofliberalizationpolicies,thegrouphasdevisedstrategiesto
IdentifythethrustareasandsteelsandbearingsDiversifyintoinfrastructureareas
Addandexpanditsexistingplantcapacities.Maintainitsglobalstandardsofexcellence.
Emergeasakeyplayerbothindomesticandinternationalmarkets.

OBLIGATIONS:

TowardsShareholders:
Toensuregrowthprojectionarematchedbyperformancetobuildconfidenceandgoodwill.
Toensureareasonableannualdividendcommensuratewithcompanysperformanceprofitsand
futureplansforinvestments
TowardsCustomersandDealers:
Toprovideaqualityproductandspreadawarenessamongstthemforcompetitivesellinginbuyers
markedbackedbyworldclasscustomerservice.
TowardsEmployees:
Todevelopandupgradetheirskillsthroughinhouseandexternaltrainingprogramsenablingcareers
progressionsandadvancement.
The inputs for upgrading managerial and operational skills are provided to meet presentand future
challenges.
Towardsthecommunity:
Totheensureenvironmentalprotectioninandaroundplantoperationalareasandpromotedevelopment
ofcommunitybyparticipatinginseveralactivities.

25

MEANINGOFINVENTORY
Inventoryisalistforgoodsandmaterials,orthosegoodsandmaterialsthemselves,heldavailablein
stockbyabusiness.Itisalsousedforalistofthecontentsofahouseholdandforalistfortestamentary
purposeofthepossessionsofsomeonewhohasdied.Inaccountinginventoryisconsideredanasset
TYPESOFINVENTORIES
Inventoriesplayamajorroleinabusinessordependingonnatureofthebusinesses.Theinventoriesmay
beclassifiedasunder.

(I)RawMaterials
Materialsandcomponentsscheduledforuseinmakingaproduct.Thesearethebasicinputs,whichare
convertedintofinishedproductsthroughmanufacturingprocess.Rawmaterialinventoriesarethoseunits,
whichhavebeenpurchasedandstoredforfutureproduction.

.(II)Workinprocess/Progress
Materialsandcomponentsthathavebeguntheirtransformationtofinishedgoods.Materialsissuedtothe
stopfloor,whichhavenotyetbecomefinishedproductstheyarevalueaddedmaterialstotheextentof
laborcostincurred.

(III)FinishedGoods
Afinishedgoodsisacompletedpartthatisreadyforacustomerorder.Thesegoodshavebeeninspected
andhavepassedfinalinspectionrequirementssothattheycanbetransferredoutofworkinprocessand
intofinishedgoodsinventory.Fromthispoint,finishedgoodscanbesolddirectlytotheirfinaluser,sold
toretailers,soldtowholesalers,senttodistributioncenters,orheldinanticipationofacustomerorder.

STORES&SPARES
Theleveloffourkindofinventorydependsuponthenatureofthebusiness.Suppliesincludeofficeand
cleaningmaterialslikesoap,brooms,oil,light,blubsetc.thesematerialsdonotdirectlyenterproduction,
butarenecessaryforproductionprocess.

NEEDORINVENTORYCONTROL

Transactionmotive:
Everyfirmhastomaintainsomelevelofinventorytomeetthedaytodayrequirementofsales,
productionprocess,customerdemandetc.Inthefinishedgoodsaswellasrawmaterialarekeptas
inventoriesforsmoothproductionprocessofthefirm.
Precautionarymotive:
A firm should keep some inventory for unforeseen circumstances also like loss due to natural
calamitiesinaparticulararea,strikes,layoutsetcsothefirmmusthavesomefinishedgoodsaswell
asrawmaterialstomeetcircumstances.
Speculativemotive:
Thefirmmaybemadetokeepsomeinventoryinordertocapitalizeanopportunitytomakeprofit
duetopricefluctuations.

BASICREASONSTOKEEPINGANINVENTORY:
Therearethreebasicreasonsforkeepinganinventory:

1. TIME:Thetimelagspresentinthesupplychain,fromsuppliertouserateverystage,requiresthat
youmaintaincertainamountofinventorytouseinthisleadtime.
2. UNCERTAINTY:Inventoriesaremaintainedasbufferstomeetuncertaintiesindemand,supplyand
movementofgoods.
3. ECONOMIESOFSCALE:Idealconditionofoneunitatatimeataplacewhereuserneedsit,
whenheneedsitprincipletendstoincurlotsofcostsintermsoflogistics.Sobulkbuying,movement
andstoringbrings.

INVENTORYMANAGEMENT
Inventorymanagementisprimarilyaboutspecifyingthesizeandplacementofstockedgoods.
Inventorymanagementisrequiredatdifferlocationswithinafacilityorwithinmultiplelocationsof
asupplynetworktoprotecttheregularandplannedcourseofproductionagainsttherandom
disturbanceofrunningoutofmaterialsorgoods.Thescopeofinventorymanagementalsoconcerns
thefinelinesbetweenreplenishmentleadtime,carryingcostsofinventory,assetmanagement,
inventoryforecasting,inventoryvaluation,inventoryvisibility,featureinventorypriceforecasting,
physicalinventory,availablephysicalspaceforinventory,qualitymanagement,replenishment,
returnsanddefectivegoodsanddemandforecast.

Inventorymanagementinvolves:

Inventory management is the active control program which allows the management of sales
purchasesandpayment.
System and processes that identify inventory requirements, set targets, provide replenishment
techniquesandreportactualandprojectedinventorystatus.
Inventorymanagementhelpsprovidingagoodunderstandinggroundandthecapacitytocontrol
financialcosts.
TheInventorymanagementwillcontroloperatingcostsandprovidebetterunderstanding.

OPERATINGCYCLEOFINVENTORYMANAGEMENT
OperatingCycleisthetimedurationtoconvertsalesaftertheconversionofresourcesintoinvention,
intosalesthereisdifferencebetweencurrentassetsandfixedassets.Afirmrequiredmanyyearsto
recoverinitialinvestsinfixedassetssuchplantandmachineryorlandbuildingsorfurnitureand
fixturesetc.Onthecontrary,investmentincurrentassetssuchasinventoryandbooksdebtsare
realizedduringthefirmsoperatingcycle,whichinusuallylessthanayear.

Theoperationcyclecanbesaidtobetheheartoftheworkingcapital.Theneedforworkingcapital
orcurrentassetscannotbeoveremphasizedasalreadyobserved.Themainmotiveofmanybusiness
firmsistoachievemaximumprofits,whichcanbeearneddependinguponthemagnitudeofthe
salesamongotherthings.However,salesdonotconvertintocashinstantly.Thereisinvariabletime
lagbetweensaleofgoodsandreceiptsofcash.Thereforetheneedofworkingcapitalintheformof
current assets to deal with the problem arising good sold. Therefore, sufficient working capital
requiressustainingsalesactivity.Technicallythisisrefertoastheoperatingthecashcycle.The
continuousflowformcashtosuppliestoinventorytoaccountsreceivableandbackintocashwhatis
calledoperatingcycle.

Cash

Debtors

Sales

FinishedGoods

Rawmaterial

WorkinProgress

Theoperatingcycleofmanufacturingcompanyhasthreephasesnamely

1.
2.
3.

Acquisitionofresources
Manufacturingproducts
Saleofproduct

Acquisitionofresources:
Inthephasefirstoperatingcycle,includephasesofrawmaterials,fuel&poweretc.,whichare
totallyrequiredormanufacturingproduct

Manufacturingproducts:
Inthephase2oftheoperatingcycleincludesconversionofrawmaterialintoworkinprogressand
theworkinprogressisconvertedintofinishedgoods.

Saleofproduct:
Inthephase3oftheoperatingcyclemaysaletheproducteitherforcreditismadetocustomers.

REASONSANDBENFITSOFINVENTORY:
Theoptimalleveltomaintaininginventoryissubjectivematteranddependsuponthefeaturesofa
particularfirm.
Tradingfirm

Incaseofatradingfirmtheremaybeseveralreasonsforholdinginventoriesbecauseofsales
activities that should not be interrupted more over it not always possible to procure the good
wheneverthereisasalesopportunitythereisalwaysatimegaprequiredbetweenpurchaseandsale
ofgoods.Thustradingconcernshouldhavesomestockoffinishedgoodsinordertoundertake
salesactivitiesindependentoftheprocurementschedule.
Similarly,afirmmayhaveseveralincentivesbeingofferedintermsofquantitydiscountsorlower
priceetcbythesupplierofgoods.Thereistradingconcerninventoryhelpsinadeinkingbetween
salesactivityandalsotocapitalizeaprofitofopportunityduetopurchasemakeatadiscountwill
resultinloweringthetotalcastresultinginhigherprofitsforthefirm
Manufacturingfirm

A manufacturing firm should have inventory or not only the finished goods, but also of raw

materialsandworkinprogressforfollowingreasons.
Uninterruptedproductionschedule

Everymanufacturingfirmmusthavesufficient stockofrawmaterialsinordertohavetheregularand
uninterruptedproductionschedule.Ifthereisstockoutofrawmaterialsinordertohavetheregular
and uninterrupted production schedule. If there is stock out of raw material at any stage of
production process then the whole production may come to a half. This may result in custom
dissatisfactionasthegoodscannotbedeliveredintimemoreoverthefixedcostwillcontinuetobe
incurredevenifthereisnoproduction.

Furtherworkinprogresswouldlettheproductionprocessrunsmooth.Inmostofmanufacturing
concernstheworkinprogressisanaturaloutcomeoftheproductionscheduleanditalsohelpsin
fulfillingwhensomesalesorders,evenifthesupplyofrawmaterialshavestopped.

ESSENTIALSOFINVENTORYCONTROL

Theimportantrequirementsofinventorycontrolare:

Afirmneedsinventorycontrolsystemtoeffectivelymanageitsinventory.
Properclassificationofmaterialswithcodes,materialstandardizationandsimplification.

Theoperationofasystemofinternalchecktoensurethatalltransactionsinvolvingmaterialand
equipmentarecheckedbyproperlyauthorizedandindependentpersons.
Theoperationofasystemofperpetualinventorysothatitispossibletodetermineatanytime,
theamountandvalueofeachkindomaterialinstock.
Asuitablemethodofvaluationofmaterialsisessentialbecauseitaffectsthecostofjobsandthe
valueofclosingstockofmaterials.

ObjectivesofInventoryControl
Themainobjectivesofinventorycontrolare:
1.
To maintain a large size of inventory for efficient and smooth production and sales
operation.
2.
3.

Tomaintainaminimuminvestmentininventoriestomaximizeprofitability.
Toensureacontinuoussupplyofrawmaterialstofacilitiesuninterruptedproduction.

4.
Tomaintainsufficientstocksofrawmaterialsinperiodsofshortsupplyandanticipateprice
change.
5.
Maintain sufficient finished goods inventory for smooth sales operation and efficient
customerservices.
6.

Minimizethecarryingcostandtime.

7.

Controlinvestmentininventoriesandkeepitatanoptimumlevel.

AdvantagesofInventoryControl
Thefollowingaresuggestedadvantages:
1.

Eliminateswastagesinuseofmaterial.

2.

Itreducestheriskoflossformfraudandtheft.

3.
Ithelpsinkeepingperpetualinventoryandotherrecordstofacilitatethepreparationof
accuratematerialreportsmanagement.
4.

Toreducethecapitaltiedupininventories.

5.

Itreducescostofstorage.

DisadvantagesofInventoryControl
Everyfirmhastomaintainoptimallevelofinventories.Itnotthefollowingwillbetheresultinform
oflosses.
1. Opportunitycost:Everyfirmhastomaintaininventoryforthatsomeinvestmentisneededit
isknownasopportunitycostandhandletheinvestmentininventoryaremorethefundsareblocks
upwithinventory.
2. Excessiveinventories:Itwillleadtofirmlossesduetoexcessivecarryingcoststheriskof
liquidity.Itisalsoreferredasdangerlevel.
3. InadequateInventory:Itisanotherdangerwhichresultsisproductionholsupandfailureto
meetdeliverycommitments.Inadequaterawmaterialsandworkinprocessinventorswillresults
infrequentproductioninterruptions.Itfinishedgoodsarenotsufficientcustomersmayshiftsto
competitors.
4. Dangerduetophysicaldecoration:Itisoneofthereasonwiththeinventoriesdueto
maintainingstocksathighlevelstheywillbedeterioratedduetopassageoftime,sometimesdueto
mishandlingorimproperstoragefacilities.

CostsinvolvedinInventory
Everyfirmsmaintainsinventorydependinguponrequirementandotherfeaturesoffirmforholding
suchinventorysomecostwillbeincurredthereareasfollows.
CarryingCost

Thisisthecostincurredinkeepingormaintaininganinventoryofoneunitofrawmaterials,work
inprocessorfinishedgoods.Heretherearetwobasiccostinvolved.
CostofStorage

Itincludescostofstoringoneunitorrawmaterialsbythefirm.Thiscostmaybeforthestorageof
materials.Likerentofspacesoccupiesbystock,stockforsecurity,costofinfrastructure,costof
insurance,andcostofpilferage,warehousingcosts,handlingcostetc.
CostofFinancing

Thiscostincludesthecostoffundsinvestedintheinventories.Itincludestherequiredrateofreturn
ontheinvestmentsininventoryinadditiontostoragecostetc.Thecarryingcostincludetherefore
bothrealcostandopportunitycostassociatedwiththefundsinvestedintheinventories.
Thetotalcarryingcostisentirelyvariableandriseindirectlyproportiontothelevelofinventories
carried.
Totalcarryingcost=(carryingcostperunit)X(Averageinventory)
CostofOrdering

Thecostoforderingincludesthecostofacquisitionifinventories.
It is the cost of preparation and execution of an order including cost of paper work and
communicatingwiththesupplier.
Thetotalorderingcostisinverselyproportiontoannualinventoryoffirm.Theorderingcostmay
haveafixedcomponent,whichisnotaffectedbytheordersize:andavariablecomponent,which
changeswiththeordersize.
TotalOrderingCost=(Nooforders)X(costperorder).
CostofStockout

Itisalsocalledashiddencost.Thestockoutisthesituationwhenthefirmisnothavingunitsofan
item is stores but there is a demand for that item either for the customers or the production
department.Thestockoutreferstozerolevelinventories.Sothereisacostofstockoutinthesense
thatthefirmfacesasituationoflostsalesorbackorders.Thestockoutsarequiteoftenexpensive.
Eventhegoodwilloffirmalsobeeffectedduetocustomersdissatisfactionandmaylosebusinessin
caseoffinishedgoods,whereasinrawmaterialsorworkinprocesscancausethe
Productionprocesstostopanditisexpensivebecauseemployeeswillbepaidforthetimenotspine
inproducinggoods.
Thecarryingcostandtheorderingcostareoppositeforcesandcollectively.Theydeterminethe
levelofinventorsinafirm.
TotalCost=(Costofitemspurchased)+(TotalCarryingandorderingcost)

ValuationofInventory
Themethodsofvaluinginventoryarecombinationoftheactualcostandreplacementcostplans.The
chiefadvantageofthecostornetrealizablevalueruleisthatitisconservative.Hencethemethods
ofvaluationofinventoryarequiteindependentofsystemofmincing.
Inbalancesheetclosingstockisshownundercurrentassetsanditalsocreditedtomanufacturingor
tradingaccounts.Theinventoriesarevaluedonthebasisasfollows:
I)Costofrawmaterialsinstockmayincludefreightchargesandcarryingcost.Butsuchcostshould
notexceedmarketprice.
II)Workinprocessisgenerallyvaluedatcost,whichincludescostofmaterials,labor.Andthe
proportionatefactoryoverhead,asitisreasonableaccordingtodegreesofcompletion.
III)Costoffinishedgoodswoundnormallytothetotalorfullcostitincludesprimecostplus
appropriateamountoftheoverhead.Sellinganddistributioncostisdeductedontheotherhandwork
inprogressmaybevaluedatworkinprogressmaybevaluedatworkcost,marginalcost,primecost
or,evenatdirectmaterials.

Purchase&storesprocedure
Ininventorymanagementthepurchasedepartmentstoredepartmentplaysamajorroletobethe
effectiveinventorytheremustbecooperationofvariousdepartmentssuchaspurchasereceivingand
inspectionstoresproductionandstockcontroldepartments.

Themainfunctionsofeachdepartmentareasfollows:

PurchaseDepartment
Itisresponsibleforpurchaseofallnecessarygoodsofproperqualitytoproduces,without
interruptiontosupplythefinishedgoods.
1)

Itreceivespurchaserequisitions.

2)
Invitesquotationsortendersfromsupplierswithdesiredquality.
3)
Issuepurchaseorderstotheselectedsupplier.
4)
Certifythequalityandquantityoforderreceivedinspecifiedtime
5)
Approvepurchaseinvoiceforpaymentaftercheckinginvoiceforpayingafterchecking
pricesandextensionsifanyneeded.

MaterialCost
Materialscostofajoborcostunitcanbeascertainedbymultiplyingthequantityconsumedforthe
joborcostunitbythepriceofthematerials.Forascertainingthequantityconsumedforeachjobor
costunitwehavedevisedmaterialrequisitionwhichwillindicatethequantityrequiredforthejob
andthejobnumberagainstwhichthematerialcostwillbechangedirectly.
Forindirectmaterialissuedthematerialrequisitionwillnotindicatethejobnumberbutthecost
centernumberwillbeindicatedforchargingtorelevantcostcenterasindirectmaterials.
Thusinordertoascertainmaterialcost.
1.

Makevaluationofpurchase.

2.
Make use of proper valuation of material issue and closing stock following different
methodsuchas,FIFO,LIFOWEIGHTEDAVG.Etc.
Thepurchasepriceofmaterialisdirectlyobtainedfromthesuppliersreceivesandhavetobeissued
toproductionbeforetheinvoiceofmaterialsisreceived.
Therateperunit,totalpriceoftheitemasshowninthepurchaseorderplussundrychargessuchas
delivery and forwarding charges sales tax, duty etc, may be borne by suppliers, governments
controlledpricesbynotifications,suppliers,cataloguesandcircularsmaybevaluableguidesfor
obtainingratesofmaterials.
Deliverychargesmaybeestimatedwithreferencetothekindoftransportwithchargesincurred.The
pricemayalsoincludesalestax,exciseduty,frightetc,sothetotalcostandrateperunitcanbe
computedandenteredinthestoresreceivedregisteredandpostedtostoresledgerfortheissueof
materialtoproduction.
Insomecasesmaterialneedsadjustmentforanydiscountallowedchargesfortransportcontainers
etc.
Discounts maybeliketradediscounts quantitydiscount,cashdiscountsetc.Transportationand
storagecostsmaynotincludethecostofair,seaonlandtransportandotherstorescosts,wherethe
purchaserhastobearthecosts.Costofcontainerswithregardedmaynotmakeaseparatecharge
becauseofnonrefundableandalsosalestax,exciseduty,insuranceetc.,alltheitemsareaddedto
Purchase price.

ReceivingandInspectionDepartment
a) Receivingallrawmaterialsandothersuppliesfromvarioussuppliers.
b) Verifyitemsbycount,weightetc.,andreportanyshortage
c) Inspectmaterialsandsuppliedastoqualitybyanalyzingthemsuitably.
d) Informthepurchasingdepartmentandaccountsdepartmentallfactsthatmayrequireadjustment
withvendor.
e)Analyzeandgivethemthecodedependinguponthetypeofmaterials.

StoreskeepingDepartment
a)

Checkandacceptallmaterialsformthereceiveddepartment.

b)
Identityeachmaterialreceivedwiththestocklist,checkthecodenumberandplaceinthe
respectivebins.
c)Issuematerialsandsuppliesforuseuponpresentationofauthorizedrequirement.
d)Recordquantitiesreceivedandissuedonbinlardsorstockledgercardsconsistingtheperpetual
inventoryrecords.
ProductionDepartment

Makeoutmaterialsrequirementnotei.e.requisitionofrequisitequantityandqualityofmaterialsat
therightmomentsotheallmaterialsmaybeavailablewithoutdelayonproduction.
1)
Checkandverifythatthematerialsofrequisitequantityandqualityhavebeenreceived
andchargedtoproduction.
2)
Keepproperrecordsormaterialsreceivedandtheirprogressthroughdifferentoperations
orprogress.
3)

Preparematerialsreturnnoteforexcessmaterials.

4)

Preparematerialstransfernotetocoveranytransferofmaterials.

5)

Preparereportonscrapforreportingtomanagement.

InventoryControlDepartment
Inmaybeasubdivisionofthecostaccountingdepartment,althoughinmanyconcerns,itisapartof
thestoreskeepingdepartment.
A)

Itkeepsperpetualinventoryrecords.

B)

Adjustthestockonreceiptofthepropertyauthorizedadjustmentnotes.

C)
Prepareweeklyormonthly,statementofreceipts,issue,balanceandaverageconsumptionof
materialsbothintermsofquantityandvalue.

RECEIPTANDISSUEOFINVENTORIES:

(a)ReceiptInventoriesintostore:
Afterincomingmaterialshavebeenexaminedandapprovedtheyarepassedontotheappropriate
storestogetherwiththegoodsreceivednote.Articlesareinspectedandpassedandonthestoresin
the usual way. In order to keep the accounting procedure uniform, it is desirable that a goods
received note be prepared for these articles also, the store keeper than places the inventory in
appropriatebinorshelfandmakenecessaryentriesinthereceiptcolumnoftheBinCard.
Alocationcodeformaterialshelpsinproperstorekeepingwithgreaterefficiency,becausestores
canbeeasilyidentified.Itisapartandparcelofstockcontrolprocedure.Locationcodehelpsin
mechanizedaccountingandsafeguardagainstomissionincountingasverification.

BINCARD

DESCRIPTION:

MAXIMUMLEVEL:

MATERIALCODE:

MINIMUMLEVE:

LOCATIONCODE:

ORDERINGLEVE:

BINNO:

ORDERINGQUANTITY:

STORESLEDGERNO:

UNITS:

RECEIPTS
Date

ISSUES

Goodsreceived

Qty

NoteNo.

(units)

Date

Requisition

Qty

NoteNo.

(units)

BALANCE

AUDIT

Qty(units)

Initial&
Date

BINCARD

ForeachkindofmaterialsorarticleaBinCardattachedtothebinwhicheachindividualsmaterials
isstored.Abincardprovidesarunningrecordofreceipts,issuesandstockinthesimplestform.An
entrywillbemadeatthetimeofeachreceiptorissueandnewbalancewillbeextended.
Thesecardsshouldagreewiththequantitiesenteredintherelevantaccountsinthestoresledge.The
mainadvantageistoenablethestoreskeepertoascertainataglancethequantityofmaterialsin
stockandremindhimtoplacepurchaserequisitionforfurthersupplierstheorderinglevelhasbeen
reached more over they provide onindependent check on stores ledger andanciently asecond
perpetualinventory.Ifthebincardisfromthreeyearsthenthetransactionsaremadeinsamecard.If
BinCarddoesnotexistnewBinCardtobeopened.

IssueofMaterialfromStores
Thestorekeeperissuematerialsonreceiptofproperauthorizeddocumentusuallycalledamaterials
requisitionoraspecificationofmaterial.Materialrequisitionisadocumentwhichauthoritiesand
recordstheissueofmaterialsforuse.
Thematerialsrequisitiondetailstheitemsrequiredfortheshowingthequantity,description,and
codeorpastnumberandthecostcenterofjobtobecharged.Requisitionisnormallypreparedin
triplicate:thedepartmentreceivingthegoodsretainsonecopyandtheothertwocopiesarehanded
overtothetwocopiesarehandedovertothestorekeeper.Hekeepsonealongwithhimandenters
ontheissuesidesoftheappropriatebincarddaytodaytransactionsarenotedinstoresledger.
Storesledger:
Thestoresledgerwhichisusuallyalooseleaforcardtype,containsanaccountforeachclassof
materialstheirledgeriskeptinthecostdepartmentandcontainssuchinformationaswellfacilitate
theascertainmentofalldetailsrelatingtothematerialsintheminimumoftime.

STORESLEDGERACCOUNT

FORMNO:
MATERIALS:
GRADE:
UNITS:
CODENO:

FOLIO:
MAXIMUMLEVEL:
MINIMUMLEVEL:
ORDERINGLEVEL:
ORDERINGLEVEL;

LOCATION

Date CSRV/STDNO.MIRNO.ProductionOrderNo./SectionReceipts
&Issue
Quantity
In

MaterialsreturnedtoStores
Wherematerialsareissuedinexcessofrequirementtheexcess quantityis returntothestories
togetherwithmaterialsreturnnote.
Sincethematerialsreturntostoreformaworksorderisareductionintheamountrecordedas
issued,thepreferableentryistoenterthenumberofunitsandthevalueofmaterialsreturnedand
receivedinadifferentworkintheissuecolumnofthestoresledgeraccount.
Thesevaluesaredeductedfromtotalissues,andamountreturnedbyeachdepartmentasshownby
materialsreturnnoteisdeductedwherereturnofmaterialstostoresreturnofmaterialtostoresisa
majorproblemitiscustomarytouseamaterialsandsuppliesjournalforkeepingrecordsofitems.

MATERIALRETURNNOTE
FROM:

NO:

DEPARTMENT:

DATE:

JOBNO:
ORDERNO:

Qty.

Description

CodeNo.

OfficeUseonly

Remarks

Rate

Amount

Approved

Returned

Returned

BinNO.

Cost

by

by

by

Stores

officer

ledger

Ref.No.

Pricedby

Follow
No.

MATERIALTRANSFERNOTE
NO:
FROM:
DEPARTMENT:
JOBNO:
ORDERNO:
Qut.

DATE:
TO:
DEPARTMENT:
JOBNO:
ORDERNO:
Description CodeNo.

Officeuseonly
Rate

Approved

Issued

by

Remarks

Amount

Received

CostRef. Officer

by

No.

Pricedby

Transferofmaterials
Transferofmaterialsformonejobtoanotherisprohibitedunlessthedetailisadequatelyrecordedonthe
materialsTransfernote.Suchtransferispermissibleonlywhereanurgentorderhastobemadeandwork
startedonalessurgentordermaybeappropriates.Suchanoteshowsareincessancydatefororderingand
debiting the cost accounts affected. These not are passed direct to the cost office for the appropriate
adjustmentintheworkinprogressledger.

Allthesefournotesincludingstoresledgerandbincardaremajorforinventorymanagementwhichare

valuedandcheckedforeveryquarterlyofhalfyearlyorannual

ValuationofMaterialsIssues
Thefixationofthepriceatwhich thematerialsareissuedaretobechargedtoproductionisan
importantonefromthepointofviewtoinventorymanagement.Thesearenumerousfactorstobe
takenintoamountinpricingthematerialtheyare.

a)
Thenatureofthebusinessandtypeofproduction.Thefrequencyofpurchaseprice
fluctuationsandissuesofmaterials.
b)
issued.

Rangofpricefluctuationandvalueofmaterialissuedandsizeofbathofmaterials

c)

Requirementthatpurchasingefficiencyshouldberevealedornot.

d)

Theaccuracywithwhichissuescanbecomputed.

e)
quickly.

The durability of stock i.e. whether it evaporates absorbs moisture or deteriorates

f)
Thelengthofinventoryturnoverperiodandquantityofmaterialtobehandledwiththe
necessityformaintaininguniformitywithinanindustry.

ISSUEPRICINGMETHODS
Therearetwocategories

(I)Costprices:
(a)FIFO(FirstinFirstout)(b)LIFO(Lastinfirstout)(c)Specificprice
(d)Basestockprice
(e)HIFO(highestinfirstout)

(II)
(a)

Deliveredfromcostprices
Simpleaverageprice

(b)
(c)
(d)
(e)
(f)
(III)
(a)
(b)
(c)
(d)

Weightedaverageprice
Periodicsimpleaverageprice
Periodicweightedaverageprice
Movingsimpleaverageprice
Movingweightedaverageprice

Notionalprices
Standardprice
Inflatedprice
Reuseprice
Replacementprice

FirstinFirstout(FIFO)
Thisisthepricepaidforthematerialfirsttakenintostockfromwhichthematerialtobepricedcould
havebeendrawn.
Underthismethodstocksofmaterialsmaynotbeusedupinchronologicalorderbutforpricingpurpose
itisassumedthatitemslongestinstocksareusedupfirst.Themethodismostsuitableforusewherein
materialisslowmovingandcomparativelyhighunitcost.

Advantages:
(I)Priceisbasedonactualcostandnotonbasisofapproximationssuchasnoprofitsorlossesarisesby
reasonsofadoptingthismethod.

(II)
(III)

Theresultingstockbalancegenerallyrepresentsfaircommercialvaluationofstock.
Itisbasedontraditionalprinciples.

Disadvantages:
(I) ThenumberofcalculationsinthestoresledgerinvolvedtendstobeComplicatedwithincreasein
clericalerror.
(II) ThecostofconsecutivesimilarjobswilldifferifthepricechangesSuddenly.
(III)Intimesofrisingprices,thechargetoproductionisundulylowastheCostofreplacingthematerial
willbehigher.

Lastinfirstout(LIFO)
Thisisthepricepaidforthemateriallasttakenintostockfromwhichthematerialstobepricedcouldhave
beendrawn.Thismethodalsoensurematerialbeingissuedattheactualcost.Itsuseisbasedontheprinciple
thatcostsshouldbeascloselyaspossiblerelatedtocurrentpricelevel.Underthismethodproductioncostis
calculatedonbasisonreplacementcost.

Advantages
(I)Productionischargedatthemostrecentpricessothatitisbasedontheprinciplethatcostshouldbe
relatedtocurrentpricelevels.
(II)Itobviatesthenecessityforcontinuouslyascertainingthereplacementprice.
(III)Neitherprofitnorlossisusuallymadebyusingthismethod.
(IV)InthetimesofrisingpricesthereisnowindfallprofitaswouldhavebeenobtainedunderFIFO.

Disadvantages
(I)Needsmoreclericalwork.
(II)Compassionamongsimilarjobsisverydifficult.
(III)Stockvaluesrelatingtopricesoftheoldestcostonhandmaybeentirelyoutofthecurrent
replacementprices.

Weightedaverageprice
ThisisthepricewhichiscalculatedbyZdividingthetotalcostofmaterialinthestockfromwhichthe
materialtobepricedhavebeendrawn,bythetotalquantityofmaterialinthestock.Thismethoddiffers
fromallothermethodsbecausehereissuepricesarecalculatedonreceiptsofmaterialsandnotonissue
ofmaterials.Thusassoonasnewlotisreceivedanewpriceiscalculatedandissuesarethentaken.

Advantages
(I)thismethodisadvantageouswherethepricevarieswidelyasitsuseevenouttheeffectofthesewide
variations.
(II)Thebasisofpricecalculationsisasimpleoneinvolvingonlythedivisionoftotalamountofmaterial

instockbyquantityinstock.
(III)Calculationofnewpricesarisesonlywhenreceiptofstocksarereceived.
(IV)Stockrecordsunderthismethodgiveafairindicationofthestockvalues,whichcanbeusedin
financialanalysis.
Disadvantages
Thismethodiscompletedthansimpleaveragebecauseittakesintoconsiderationthetotalquantitiesand
totalcostsinstock.
(I)
Profitorlossmaybeincurredasinsimpleaverageprice.
(II)
AsLIFOorFIFOthismethodcallsformanycalculations.

(III)
In order to calculate the accurate value of issues the average price must normally be
calculatedtofourtofivedecimalplaces.

Standardprice
Itisthepredeterminationoffixedpriceonbasisofaspecificationofallfactorsaffectingpricelikethe
quantityofmaterialsinhandandtobenormallypurchasedandrateofdiscountcomparedwithexistingprice
includingorexcludingfreightandwarehousingexpense.

Astandardpriceforeachmaterialissetandtheactualpricepaidiscomparedwithstandard.Itispaid
exceedsthestandardalosswillberealizedifnotprofitwillbeobtained.

Advantages
(I)

Thismethodiseasytooperate.

(II)
Comparingtheactualpriceswiththestandardpricewilldeterminetheefficiencyof
purchasedepartment.
(III)
Theeffectofpricevariationsiseliminatedfromjobcosts.
(IV)
Itreducesclassicalcostsbeeliminatingdetailedcostrecords.
(V)
Intimesofinflationorpricefluctuationsisverydifficulttofixastandardprice.
(VI)
Thismethodalsoincursaprofitorlossonissuesandclosingstock.

Inflatedprice
Thisistheprice,whichincludesachargedesignedtocoverthecostofcontingenciesorrelatedcosts.

Thispriceincludenotonlythecostinvolvedinbringingthematerialtothepurchasepremisesbutalso
thelossduetoevaporationandbreakageetc,aswellascarryingcosts.Increasedgraduallyeveryyear
from2002to2005. DATAANALYSIS

TechniqueofInventoryManagement:
Mainproblemsininventorymanagementaretoanswer:
WhatareIndusproblemsinmanaginginventories?
WhichinventorypolicyoptimumforIndus?Why?Showcalculations.Whatshouldbetheoverlevel?

Toanswerthesefollowingtechniquesareused:
*

ABCanalysis

EconomicOrderQuantity

*
*
*
*

VEDAnalysis
ReOrderLevel
Safetystock
InventoryTurnoverRatio

ABCAnalysis
*
*
*

Itisbasedonpropositionthat
Managerialitemsandeffortsarescareandlimited.
Someitemsofinventoryaresomeimportantthanothers.

ABCAnalysis
ABCanalysisclassifiesvariousinventoryintothreesetsorgroupsofprioritytheallocatesmanagerial
effortsinproportionof
TheprioritythemostimportantitemareclassifiedintoclassA,
ThoseofintermediateimportanceareclassifiedasclassBandremainingitemsareclassifiedinto
classC.
Thefinancialmanagerhastomonitortheitemsbelongingtomonitortheitemsbelongingtodifferent

groupsinthatorderofpriorityanddependingupontheconsumptions.
Theitemswiththehighestvaluesisgivenpriorityandsoonandaremorecontrolledthenlowvalueitem.
Thererationallimitsareasfollows.

Procedure
(I)Itemswiththehighestvalueisgiventoppriorityandsoon.
(II)ThereaftercumulativetotalsofannualvalueconsumptionareExpressedaspercentageoftotalvalue
ofconsumption.
(III)Thenthesepercentagevaluesaredividedintothreecategories.
ABCanalysishelpsinallocatingmanagerialeffortsinproportiontoimportanceofvariousitemsof
inventory.

ABCAnalysis
Rawmaterial(atclosingstock)
YEAR
2006
2007
2008
2009
2011

AMOUNTOFRAWMATERIALS
274.94
582.11
1858.17
2031.85
1768.52

2500
2000
Amount of
raw
materials in
Lakhs

1500
1000
500
0
2006 20072008 20092011

Interpretation:
Theabovegraphshowstheamountofrawmaterialsatcost.In2006thecostofmaterialis274.94rs
increasedinthisyearandin20072008.Itismoreincreasedto1858.17rsandin2009itisincreasedto

rs2031.85andin2011itisdecreasedto1768.52.

Stockinprocess(atclosingstock):
YEAR
2006
2007
2008
2009
2011

AMOUNTOFSTOCKinPROCESS
2006.20
82.67
122.82
110.96
NILL

Interpretation:
Theabovegraphshowsthatworkinprogressatcost.In2006thecostofmaterialis2006.20rsincreased
inthisyearandin2007itisdecreasedtors82.67intheyear2008itisincreasedto122.82anditisalso
maintainedintheyear2009andin2011itisnill.

Finishedgoods(atclosingstock):
YEAR
2006
2007
2008
2009
2011

AMOUNTOFFINISHEDGOODS
2704.08
6717.44
15019.79
16880.69
7443.66

Interpretation:
Theabovegraphshowstheamountoffinishedgoodsatcost.In2006thecostofmaterialis2704.08rs.It
isincreasedtors6717.44intheyear2007..Itisincreasedintheyear200809thecostofgoodsisrs
1,6880.69andintheyear2011itisdecreasedto7443.66.

Stores,spares&consumables(closingstock):

YEAR
2006
2007
2008
2009
2011

AMOUNTOFCOSTOFSTORESANDSPARES
673.25
1628.44
3617.38
3539.05
973.02

Interpretation:
Theabovegraphshowstheamountofstoresandsparesatcost.In2006theconsumableisrs673.25and
itishighlyincreasedtors1628.44intheyear2007.Theformmaintainsgoodsinproperwayrs3617.38
intheyear2008anditisdecreasedtors3539.05intheyear2009andintheyear2011itisdecreasedto
973.02.

Rawmaterialconsumed:

YEAR
2006
2007
2008
2009
2011

AMOUNT
65875.45
68699.73
172305.70
16,9697.36
38607.65

Interpretation:
Theabovegraphshowsconsumptionofrawmaterials.Theconsumptionofrawmaterialintheyear2006
isrs65875.45theconsumptionofrawmaterialincreasedintheyear200708inthers172305.70.Andit
isdecreasedtoRs16,969,736,368intheyear2009anditdecreasedtoRs3,8607.65intheyear2011.ss

Economicorderquantity:
During20062007:
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.Thefollowingarethedetails
oftheiroperationduring20062007.

PARTICULARS
Billets/Blooms

28,889Qty(mt)

Orderingcostper
order
Carryingcost

Rs.2000

Purchasepriceper
unit

1.CalculationofEOQ:
Totalunitsrequired(A)=28889
Theorderingcostperorder(O)=Rs.2000
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.400=Rs.40

EOQ =2AO/C=2*28889*2000/40=Rs.1699.67

2.Numberofordersfortheyear=A/EOQ
=2889/1699.67
=16.99~17orders

10%
400

3. Totalannualcost=carryingcost+orderingcost
=

1445000+34000

Rs.1479000

Carryingcost=ordersize*averageinventory

ordersize=A/nooforders

=28889/17

1699.67

=1700/2
=

Averageinventory=ordersize/2

Carryingcost=1700*S850

Rs.850

Rs.1445000

Orderingcost=costperorder*nooforders

2000*17

=Rs.34000

EOQDURING20072008

Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.Thefollowingarethedetails
oftheiroperationduring20072008.

PARTICULARS

Billets/Blooms
Orderingcostperorder
Carryingcost

123596Qty(Mt)

Purchasepriceperunit

Rs420

2200
10%

1.CalculationofEOQ:
Totalunitsrequired(A)=123596mt
Theorderingcostperorder(O)=Rs.2200
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.2000=Rs.42
EOQ=2AO/C
=

2*123596*2200/42

Rs.3598.354

2.Numberofordersfortheyear

=A/EOQ
=123596/3598.354
=34.79~35orders

3.Totalannualcost=carryingcost+orderingcost
=6245669+77000
=Rs.6322669

Carryingcost=ordersize
ordersize

averageinventory
=

A/nooforders

123596/35

3531.31

Averageinventory

ordersize/2

3531.1/2

Rs.1768.655

Carryingcost=
=

3531.31*1768.655
Rs.6245669

Orderingcost=

costperordernooforders

2200*35

Rs.77000

EOQDURING20082009

Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.Thefollowingarethedetails
oftheiroperationduring20082009.

PARTICULARS
Billets/Blooms
Orderingcostperorder
Carryingcost
Purchasepriceperunit

106,066,Qty(Mt)
Rs2400
10%
Rs440

CalculationofEOQ:
Totalunitsrequired(A)=106066mt
Theorderingcostperorder(O)=Rs.2400
Carryingcostperunit(C)=10%
(i.e.)10%ofRs.2000=Rs.44
EOQ

=2AO/C

=2*106066*2400/44=Rs.3401.59

Numberofordersfortheyear=A/EOQ
=106066/3401.59
=31.18~32orders

Totalannualcost=carryingcost+orderingcost
=

5.493154+76800

Rs.5569954

Carryingcost=ordersize*averageinventory
Ordersize

=A/nooforders
=106066/33/2
=3314.56

Averageinventory

=
=
=

ordersize/2
3314.56/2
Rs.1657.28

Carryingcost

=
=

3314.56*1657.28
Rs.5493154

Orderingcost

=
=
=

costperorder*nooforders
2400*32
Rs.76800

EOQDURING20092011
Thefirmrequiresbelowgivenunitsofmaterialformanufacturingofsteel.Thefollowingarethedetails
oftheiroperationduring20092011.

PARTICULARS
Billets/Blooms

184,661

Orderingcostperorder
Carryingcost
Purchasepriceperunit

3000
12%
Rs500

CalculationofEOQ:
Totalunitsrequired(A)=184,661mt
Theorderingcostperorder(O)=Rs.3000
Carryingcostperunit(C)=12%
(i.e.)12%ofRs.500=Rs.50
EOQ

=2AO/C

=
=

2*184,661*3000/50
Rs.4,707.37

Numberofordersfortheyear

A/EOQ

184661/4707.37

39.23~39orders

Totalannualcost

carryingcost+orderingcost

11209639+117000

Rs.11326639.

Carryingcost=ordersize*averageinventory
Ordersize

A/nooforders

184661/39

4734.90

Averageinventory=

ordersize/2

4734.90/2

Rs.2367.45

Carryingcost=
=

4734.90*2367.45
Rs.11209639

Orderingcost=costperorder*nooforders

3000*39

Rs.117000

VEDANALYSIS
VitalEssentialandDesirableanalysisisdonemainlyforcontrolofsparepartskeepinginviewofthe
criticalitytoproduction.
Vitalsparesaresparethestockoutofwhichevenforashorttimewillstopproductionforquitesome
time.Essentialsparesaresparestheabsenceofwhichcannotbetoleratedformorethanafewhoursa
day.Desirablesparearethose,whichareneeded,buttheirabsenceforevenaweekorsowillleadto
stoppageofproduction.

MATERIALCLASS
10%A

VALUE
70%

PRIORITY
MATERIAL
V
10%70%
E
20%10%
D
70%10%

20%B

20%

70%C

10%

V
E
D
V
E
D

10%70%
20%20%
70%10%
10%70%
20%20%
70%10%

THEREORDERLEVEL
Thereorderlevelisthelevelofinventoryatwhichthefreshorderforthatitemmustbeplacedto
procurefreshsupply.Thereorderleveldependsupon.

1. Lengthoftimebetweentheplacementofanorderandreceivingthesupply.
2. Theusagerateoftheitem.Theinventoryisconstantlybeingusedup.Therateatwhichtheinventory
isbeingusedup.Therateatwhichtheinventoryisbeingusedupiscalledtheusagerate .

Thereorderlevelcanbedeterminedasfollows:
R=M+TU
R=Reorderlevel
M=Minimumlevelofinventory
T=timegap/deliverytime
U=UsageRate
Thereorderlevelandinventorypatternshavebeshownasfollows:
Thefigureshowsthatiftheusagerateisconstant,theorderaremadeatevenintervalsforthesame
amountseachtimeandtheinventorygoestozerojustbeforeanorderisreceived.

Safetystock:
The safety stock protects firm from tradeoffs due to unanticipated demand for the items level of
inventoryinvestmentsishoweverincreasedbytheamountofsafetystock.Safetylevelisascertainedin
inventoryasapartbecausethereisalwaysanuncertainlyinvolvedintimelagusagerateorotherfactors.
Usuallysmallerthesafetylevelgreatertheriskofstockouts.Ifstocklevelsarepredictablethenthere
isachanceofstockoutoccurring.Howeverstockinflowsandoutflowsareunpredictableorlesser
predictable it becomes to carry additional safety to prevent unexpected stock outs so usage rate is
estimatedifcostislowthennosafetystockisneeded.

JustInInventory:
TheBasicconceptisthateveryfirmshouldkeepaminimumlevelofinventoryonhand,relyingsuppliersto
furnishjustintimeasandwhenrequired.JIThelpsinemphasizingsufficientlevelofstocktoensurethat
productionwillnotbeinterrupted.AlthoughthelargeinventoriesmaybehadideaduetoheavycarryingJIT
isamodernapproachtoinventorymanagementandthegoalisessentiallytominimizesuchinventoriesand
therebymaximizingturnover.

JITsystemsignificantlyreducesinventorycarryingcostberequiringthattherawmaterialbeprocured

justintimetobeplacedintoproduction.Additionallytheworkinprocessinventoryisminimizedby
eliminatinginventorybuffersbetweendifferentproductiondepartments.
IfJITistobeimplementedsuccessfullytheremustbeahighdegreeofcoordinationandcooperation
betweenthesupplierandmanufacturerandamongdifferentproductioncenters.JITdoesnotappearto
haveanyrelationwithEOQhoweveritisinfactalterssomeoftheassumptionsofEOQmodel.The
averageinventorylevelundertheEOQmodelisdefinedas
Averageinventory=1/2EOQ+safetylevelJITattacksthisequationintwoways.

Byreducingtheordercost.
Byreducingthesafetystock

ThebasicphilosophyinJITisthatbenefits,associatedwithreducinginventoryanddeliverytimetoa
bareminimumthroughadjustmentiEOQmodel,willmorethanoffsetthecostsassociatedwiththe
increasedpossibilityofstockouts.

InventoryTurnoverRatio

Whatitis
Thisratioisoftenafirmsinventoryturnsoverduringthecourseoftheyear.Becauseinventoriesarethe
leastliquidformofassets,ahighinventoryturnoverratioisgenerallypositive.Ontheotherhand,and
usuallyhighratiocomparedtotheaveragefortheindustrycouldmeanabusinessislosingsalesbecause
ofinadequatestockonhand.

Whentouseit
If a firms business has significant assets tied up in inventory, tracking its turnover is critical to
successfulplanning.Ifinventoryisturningtooslowly,itcouldindicatethatismaybehamperingthe
firmscashflow.
Becausethisratiojudgesannualinventoryturns,itisusuallyconductedonceayear.

Theformula:

costofgoodssold

Averagevalueofinventory

YEARCOST
SOLD
2006

OFGOODSAVGVALUE
INVENTORY
OF
TURNOVER
INVENTORY
RATIO
70340.33
4076.86
17.25

2007

75687.45

4800.64

15.76

2008

184082.21

12583.99

14.63

2009

190053.62

16067.13

11.83

2011

419760.92

10185.20

41.21

RAWMATERIALCONSUMED:

60
40
20
0
2006 2007 2008 2009 2011

Interpretation:
Theabovegraphshowsinventoryturnoverratiooftheform.Theratiocanbecontinuouslydecreased
fromtheyear200609.Theturnoverratiooftheformis17.25intheyear2006.Thedecreasedturnover
showsgoodconsumptionofrawmaterial.Theratiowillbedecreasedto11.83intheyear2009butitis
increasedintheyear2011is41.21.

STOCKLEVELS
During20062007
Thecompanyrequires28889unitsofbillets/bloomstomanufactureofsteelfortheyear200607.EOQis
1700units.Thecompanymakessafetystockequalto30dayrequirementandthenormalleadtimeis10
20days.Thecompanyworksfor300daysinayear.
a.Reorderlevel=

leadtime*Averageusage+safetystock

=
=
Safetystock

(10*96.29)+2888.9

3851.9
usage*periodofsafetystock/totalworkingdaysinayear

28889*30/300

=
Averageusage

2888.9
usage/totalworkingdaysinayear

28889/300

96.29

b.Minimumstocklevel=

reorderlevel(Averageusage*Averageleadtime)

3851.9(96.29*10+20/2)

2408

c. Maximumstocklevel=reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)
=

3851.9+1700(96.29*10)

5551.9962.9

4589

d.Dangerlevel

Averageusage*Maximumreorderperiodforemergencypurchases

96.29*20

1925.8

e.Averagestocklevel

(Minimumstocklevel+Maximumstocklevel)

2408+4589/2

3496

During20072008
Thecompanyrequires123596unitsofbillets/bloomstomanufactureofsteelfortheyear200708.EOQ
is3335units.Thecompanymakessafetystockequalto30dayrequirementandthenormalleadtimeis
1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel

leadtime*Averageusage+safetystock

(10*412)+12360

=
Safetystock

16480
usage*periodofsafetystock/totalworkingdaysinayear

123596*30/300

12360
Averageusage

usage/totalworkingdaysinayear

123596/300

412

b.Minimumstocklevel

c.Maximumstocklevel

reorderlevel(Averageusage*Averageleadtime)

16480(412*10+20/2)

10300

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

=16480+3335(412*10)
=198154120
=15695

d.Dangerlevel

=Averageusage*Maximumreorderperiodforemergencypurchases

412*20

8240

e.Averagestocklevel

(Minimumstocklevel+Maximumstocklevel)

10300+15695/2

13000

During20082009
Thecompanyrequires106066unitsofbillets/bloomstomanufactureofsteelfortheyear200809.EOQ
is3257units.Thecompanymakessafetystockequalto30dayrequirementandthenormalleadtimeis
1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel

=
=

leadtime*Averageusage+safetystock

(10*354)+10606.6
141476
Safetystock
=

usage*periodofsafetystock/totalworkingdaysinayear

106066*30/300

10606.6
Averageusage

usage/totalworkingdaysinayear

=106066/300
=354
b.Minimumstocklevel

=reorderlevel(Averageusage*Averageleadtime)
=
=8837

14147(354*10+20/2)

c.Maximumstocklevel

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

=14147+3257(354*10)
d.Dangerlevel

=
13864
=Averageusage*Maximumreorderperiodforemergencypurchases

354*20

708

e.Averagestocklevel

(Minimumstocklevel+Maximumstocklevel)

8837+13864/2

11350

72

During20092011
Thecompanyrequires184661unitsofbillets/bloomstomanufactureofsteelfortheyear200911.EOQ
is6155units.Thecompanymakessafetystockequalto30dayrequirementandthenormalleadtimeis
1020days.Thecompanyworksfor300daysinayear.
a.Reorderlevel

=leadtime*Averageusage+safetystock
=(10*615.53)+18466.1
=24621.4

Safetystock

=usage*periodofsafetystock/totalworkingdaysinayear
=184661*30/300
=18466.1

Averageusage

=usage/totalworkingdaysinayear
=

184661/300

615.53

b.Minimumstocklevel =

reorderlevel(Averageusage*Averageleadtime)

24621.4(615.53*10+20/2)

15389

c.Maximumstocklevel =

d.Dangerlevel

reorderlevel+reorderingquantity
(Minimumusage*minimumleadtime)

24621.4+6155(615.53*10)

24521.1

=Averageusage*Maximumreorderperiodforemergencypurchases
=615.53*20
=12310.6

e.Averagestocklevel

(Minimumstocklevel+Maximumstocklevel)

15389+24521.1/2

27649.55

FINDINGS&SUGGESTIONS
Thecompanyishavinggoodsalesfortheirproductsduringalltheyears ofthestudy.

Theinventoryturnoverratioisonadecliningtrendyearafteryearintheperiodofthestudy.It
indicatesinefficiencyofmanagementinturningoftheirinventoryintosales.

Thecompanyshouldadoptsophisticatedtechniquestomanageitsinventoryinabettermanner.

TheEOQcalculatedissuggestingthatthecompanyshouldobtainitsinventoryrequirementsby
placingordersfrequentlytoitssuppliersratherthanonetimereplenishment.

Companyshouldtakemeasures formaintenanceofproperstoresandspares soas toavoidthe

Thereisaneedtodevelopgoodcommunicationsystembetweenvariousdepartmentslikemarketing,
planning,procurement,andproductionanddistributionsfunctions.

ThecompanyshouldfollowsJustinTimetechnique,theirbyitcandoawaywithwaitingtimefora
receiptofmaterials.

CONCLUSION
Inventory management has to do with keeping accurate records offinished goods thatare readyfor

shipment.Thisoftenmeanspostingtheproductionofnewlycompletedgoodstotheinventorytotals
aswellassubtractingthemostrecentshipmentsoffinishedgoodstobuyers.Whenthecompanyhas
areturnpolicyinplace,thereisusuallyasubcategorycontainedinthefinishedgoodsinventoryto
accountforanyreturnedgoodsthatarereclassifiedorsecondgradequality.Accuratelymaintaining
figuresonthefinishedgoodsinventorymakesitpossibletoquicklyconveyinformationtosales
personnelastowhatisavailableandreadyforshipmentatanygiventime.

Inventorymanagementisimportantforkeepingcostsdown,whilemeetingregulation.Supplyand
demand is a delicate balance, and inventory management hopes to ensure that the balance is
undisturbed. Highly trained Inventory management and highquality software will help make
Inventorymanagementasuccess.TheROIofInventorymanagementwillbeseenintheformsof
increasedrevenueandprofits,positiveemployeeatmosphere,andonoverallincreaseofcustomer
satisfaction.