A

PROJECT REPORT
ON
“INVENTORY MANAGEMENT”
AT
SUJANA METAL PRODUCTS LTD. , HYDERABAD

Submitted in partial fulfillment of the requirements for the award of the degree of

BACHELOR OF BUSINESS ADMINISTRATION

SESSION (2019-20)

UNDER THE SUPERVISION OF: SUBMITTED BY:

Mrs. Sakshi MANISHA
College Roll No. 1384720044
University Roll No.

GOVERNMENT COLLEGE FOR WOMEN,

ROHTAK

1
 DECLARATION

I MANISHA, a student of Sixth Semester, Bachelor of Business Administration Roll No

1384720044 of Government College for Women, under the Maharshi Dayanand University,
Rohtak declare that the Project Report entitled on inventory management at sujana metal products
limited, Hyderabad is being submitted by me is an original piece of work done by me under the
Supervision of Mrs. Sakshi. The matter presented has not been copied from any other existing
report. However, extracts of any literature which has been used for this report has been duly
acknowledged providing details of such literature in the references. Also, this Project Report has
not been submitted for the fulfillment of the requirements for the award of any other Degree or
Diploma to any other college/institution/university.

Signature…………

MANISHA

University Roll No: ___

University Registration No: 17R6340184

Dated:

Place:

Signature:

Mrs. Sakshi

Government College For Women, Rohtak

2
 INDEX

Sr. No. Contents Page No.

CHAPTER-1 5-8

1.1 Introduction To The Study 5-6

1.2 Need For The Study 7

1.3 Objectives Of The Study 7

1.4 Scope Of The Study 8

1.5 Limitations Of The Study 8

1.6 Research Methodology 8

CHAPTER-2 9-33

2.1 Theoretical Framework and Article 9-33

CHAPTER-3 34-60

3.1 Data Analysis and Interpretation 34-60

CHAPTER-4 61-62

4.1 Findings and Suggestions 61-62

4.2 Conclusion 63

BIBLIOGRAPHY 64-65

3
 CHAPTER-1

INTRODUCTION

4
 INTRODUCTION

Financial Management is concerned with the duties of the finical manager in the business firm.
Financial managers actively manage the financial affairs of any type of business, namely
financial and non-financial, private and public, large and small, profit seeking and non-profit.
They perform such varied task, as budgeting, financial forecasting, cash management, credit
administration, investment analysis, funds management and inventory management.

A term inventory refers to the stock file of the products a firm is offering for sale and the
components that make up the product. In other words, inventory is composed of assets that will
be showed in future in the normal course of the business operations. The assets which firms
store as inventory in anticipation of need are:
 Raw materials
 Work in process (Semi Finished goods)
 Finished goods
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
important input of the final product. The working process inventory consists of items currently
being used in the production process.

They are normally semi finished goods that are at various stages of production in a multi
stage production process. A finished goods represented final or completed products which
are available for sale .The inventory of such goods consists of items that have been produced
but are yet be sold.

Inventory, as a current asset, differs from other current assets because only financial
managers are not involved. Rather all the functional areas, finance, marketing, production, and
purchasing are involved. The views concerning the appropriate level of inventory would differ
among the different functional areas.

The job of the financial manger is to reconcile the conflicting view points of the various
functional areas regarding the maximizing the owners wealth. Thus, inventory management,

5
like the management of other current assets , should be related to the overall objective of the
firm. It is in this context that the present chapter is devoted to the main elements of inventory
management from the view point of financial management.

The objective of inventory management is explained in some detail sections. Section two is
concerned with inventory management techniques. Attention is given here to basic concepts
relevant to the management and control of inventory.
The aspects covered are:

 Determination of the type of control required.

 The basic economic order quantity
 The reorder point, and
 Safety stocks.

As a matter of fact, the inventory management techniques are a part of production

management. But a familiarity with them is of great help to the financial managers in planning
and budgeting inventory.

6
 NEED TO HOLD INVENTORIES

Martin and miller identified three general motives for holding inventories

TRANSACTION MOTIVE:

This refers to the need of maintaining inventory to facilitate smooth production and sales
operations.

PRECAUTIONARY MOTIVE:

Precautionary motive for holding inventory is to provide a safeguard when then actual level
of activity is differ than anticipated. This inventory serves when there is a unpredictable
changes in the demand and supply forces.

SPECULATIVE MOTIVE:

This motive influences the decision to increase or decrease the levels of inventory to take the
advantage of price fluctuations.

OBJECTIVE OF THE STUDY

 To study about the ordering levels for the important components of inventory.
 To understand and measure economic order quantity for the selected raw material items.
 To analyze its inventory management methods with the help of ABC analysis, VED
analysis etc.
 To evaluate the inventory management practices of SUJANA METAL PRODUCTS
LIMITED.
 To offer suitable suggestions for the improvement of inventory management practices.

7
 SCOPE OF THE STUDY

Inventory management is a simple concept-don‟t have too much stock and don‟t have too
little. Since there can be a substantial costs involved in staying above and below the optimal
range, careful inventory management can make a huge difference in the right balance can be
quite a complex and time consuming task without the right technology.

Inventory management is very important for “SUJANA METAL PRODUCTS LTD”. It

enables the business to meet or exceed expectations of the customers by making the products
readily available/

The scope of the study includes the ABC Analysis of Raw Materials, work in progress and
finished goods for four financial years.

This study provides insight to the management of high value items and also brings attention of
management towards movement of „A‟ class items over period of 4 years

LIMITATIONS OF THE STUDY

 Detail study about all the material was not possible because of time limit.
 Some of the information was kept confidential by the stories department.
 Study was confined only to the selected components in the stores department.

RESEARCH METHODOLOGY

The data has been gathered through interaction and discussions with the executives working
in the division.
Some important information has been gathered through couple of unstructured interviews of
executive.
Annual reports and other magazines published by the company are used for collecting the
required information.

8
 CHAPTER-2
THEORTICAL FRAMEWORK AND
ARTICLE

9
 MEANING OF INVENTORY

Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household and
for a list for testamentary purpose of the possessions of someone who has died. In accounting
inventory is considered an asset

TYPES OF INVENTORIES

Inventories play a major role in a business or depending on nature of the businesses.

The inventories may be classified as under.

(I) Raw Materials

Materials and components scheduled for use in making a product. These are the basic
inputs, which are converted into finished products through manufacturing process. Raw
material inventories are those units, which have been purchased and stored for future
production.

.(II) Work in process / Progress

Materials and components that have begun their transformation to finished goods. Materials
issued to the stop floor, which have not yet become finished products they are value added
materials to the extent of labor cost incurred.

(III) Finished Goods

A finished goods is a completed part that is ready for a customer order. These goods have
been inspected and have passed final inspection requirements so that they can be transferred
out of work-in-process and into finished goods inventory. From this point, finished goods can
be sold directly to their final user, sold to retailers, sold to wholesalers, sent to distribution
centers, or held in anticipation of a customer order.

10
 STORES & SPARES
The level of four kind of inventory depends upon the nature of the business. Supplies
include office and cleaning materials like soap, brooms, oil, light, blubs etc. these materials
do not directly enter production, but are necessary for production process.
.

NEED OR INVENTORY CONTROL

Transaction motive:

Every firm has to maintain some level of inventory to meet the day-to-day requirement of
sales, production process, customer demand etc. In the finished goods as well as raw material
are kept as inventories for smooth production process of the firm.

Precautionary motive:
A firm should keep some inventory for unforeseen circumstances also like loss due to natural
calamities in a particular area, strikes, lay outs etc so the firm must have some finished goods
as well as raw-materials to meet circumstances.

Speculative motive:
The firm may be made to keep some inventory in order to capitalize an opportunity to make
profit due to price fluctuations.

BASIC REASONS TO KEEPING AN INVENTORY:

There are three basic reasons for keeping an inventory:

1. TIME: The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amount of inventory to use in this “lead time”.

2. UNCERTAINTY: Inventories are maintained as buffers to meet uncertainties in

demand, supply and movement of goods.

11
 INVENTORY MANAGEMENT

Inventory management is primarily about specifying the size and placement of stocked goods.

Inventory management is required at differ locations within a facility or within multiple

locations of a supply network to protect the regular and planned course of production against
the random disturbance of running out of materials or goods. The scope of inventory
management also concerns the fine lines between replenishment lead time, carrying costs of
inventory, asset management, inventory forecasting, inventory valuation, inventory
visibility, feature inventory price forecasting, physical inventory, available physical space for
inventory, quality management, replenishment, returns and defective goods and demand
forecast.

Inventory management involves:

 Inventory management is the active control program which allows the management
of sales purchases and payment.
 System and processes that identify inventory requirements, set targets,
provide replenishment techniques and report actual and projected inventory
status.
 Inventory management helps providing a good understanding ground and the
capacity to control financial costs.
 The Inventory management will control operating costs and provide better understanding.

OPERATING CYCLE OF INVENTORY MANAGEMENT

Operating Cycle is the time duration to convert sales after the conversion of resources into
invention, into sales there is difference between current assets and fixed assets. A firm
required many years to recover initial invests in fixed assets such plant and machinery or
land buildings or furniture and fixtures etc. On the contrary, investment in current assets
such as inventory and books debts are realized during the firms operating cycle, which in
usually less than a year.
12
The operation cycle can be said to be the heart of the working capital. The need for working
capital or current assets cannot be over emphasized as already observed. The main motive of
many business firms is to achieve maximum profits, which can be earned depending upon
the magnitude of the sales among other things. However, sales do not convert in to cash
instantly. There is invariable time lag between sale of goods and receipts of cash. Therefore
the need of working capital in the form of current assets to deal with the problem arising
good sold. Therefore, sufficient working capital requires sustaining sales activity. Technically
this is refer to as the operating the cash cycle. The continuous flow form cash to supplies to
inventory to accounts receivable and back into cash what is called operating cycle.

Cash

Debtor‟s Raw material

Sales Work in Progress

Finished Goods

13
 The operating cycle of manufacturing company has three phases namely

1. Acquisition of resources
2. Manufacturing products
3. Sale of product

Acquisition of resources:-

In the phase first operating cycle, include phases of raw materials, fuel & power etc., which
are totally required or manufacturing product

Manufacturing products:-

In the phase 2 of the operating cycle includes conversion of raw material in to work-in-
progress and the work in progress is converted into finished goods.

Sale of product:-

In the phase 3 of the operating cycle may sale the product either for credit is made to
customers.

REASONS AND BENFITS OF INVENTORY:

The optimal level to maintaining inventory is subjective matter and depends upon the features
of a particular firm.

Trading firm

In case of a trading firm there may be several reasons for holding inventories because of sales
activities that should not be interrupted more over it not always possible to procure the good

14
whenever there is a sales opportunity there is always a time gap required between purchase
and sale of goods. Thus trading concern should have some stock of finished goods in order to
under- take sales activities independent of the procurement schedule.

Similarly, a firm may have several incentives being offered in terms of quantity discounts or
lower price etc by the supplier of goods. There is trading concern inventory helps in a de-
inking between sales activity and also to capitalize a profit of opportunity due to purchase
make at a discount will result in lowering the total cast resulting in higher profits for the firm

Manufacturing firm

A manufacturing firm should have inventory or not only the finished goods, but also of raw
materials and work -in-progress for following reasons.

Uninterrupted production schedule

Every manufacturing firm must have sufficient stock of raw materials in order to have the
regular and uninterrupted production schedule. If there is stock out of raw materials in order
to have the regular 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 dissatisfaction as the goods cannot be delivered in time more over the fixed
cost will continue to be incurred even if there is no production.

Further work-in-progress would let the production process run smooth. In most of
manufacturing concerns the work in progress is a natural outcome of the production schedule
and it also helps in fulfilling when some sales orders, even if the supply of raw-materials
have stopped.

15
 ESSENTIALS OF INVENTORY CONTROL

The important requirements of inventory control are:

 A firm needs inventory control system to effectively manage its inventory.

 Proper classification of materials with codes, material standardization and simplification.
 The operation of a system of internal check to ensure that all transactions involving
material and equipment are checked by properly authorized and independent
persons.
 The operation of a system of perpetual inventory so that it is possible to determine at any
time, the amount and value of each kind o material in stock.
 A suitable method of valuation of materials is essential because it affects the cost of
jobs and the value of closing stock of materials.

Objectives of Inventory Control

The main objectives of inventory control are:

1. To maintain a large size of inventory for efficient and smooth production and sales
operation.
2. To maintain a minimum investment in inventories to maximize profitability.To ensure a
continuous supply of raw materials to facilities uninterrupted production.
3. To maintain sufficient stocks of raw materials in periods of short supply and anticipate
price change.
4. Maintain sufficient finished goods inventory for smooth sales operation and efficient
customer services.
5. Minimize the carrying cost and time.
6. Control investment in inventories and keep it at an optimum level.

16
 Advantages of Inventory Control

The following are suggested advantages:

1. Eliminates wastages in use of material.

2. It reduces the risk of loss form fraud and theft.
3. It helps in keeping perpetual inventory and other records to facilitate the preparation
of accurate material reports management.
4. To reduce the capital tied up in inventories.
5. It reduces cost of storage.

Disadvantages of Inventory Control

Every firm has to maintain optimal level of inventories. It not the following will be the result
in form of losses.

 Opportunity cost : Every firm has to maintain inventory for that some investment is
needed it is known as opportunity cost and handle the investment in inventory are
more the funds are blocks up with inventory.
 Excessive inventories: It will lead to firm losses due to excessive carrying costs the
risk of liquidity. It is also referred as danger level.
 Inadequate Inventory: It is another danger which results is production hols-up and
failure to meet delivery commitments. In adequate raw materials and work - in -
process inventors will results in frequent production interruptions. It finished goods
are not sufficient customers may shifts to competitors.
 Danger due to physical decoration: It is one of the reason with the inventories due
to maintaining stocks at high levels they will be deteriorated due to passage of time,
sometimes due to mishandling or improper storage facilities.

17
 Costs involved in Inventory

Every firms maintains inventory depending upon requirement and other features of firm for
holding such inventory some cost will be incurred there are as follows .

Carrying Cost

This is the cost incurred in keeping or maintaining an inventory of one unit of raw materials,
work-in-process or finished goods. Here there are two basic cost involved.

Cost of Storage

It includes cost of storing one unit or raw materials by the firm. This cost may be for the
storage of materials. Like rent of spaces occupies by stock, stock for security, cost of
infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc.

Cost of Financing

This cost includes the cost of funds invested in the inventories. It includes the required rate of
return on the investments in inventory in addition to storage cost etc. The carrying cost
include therefore both real cost and opportunity cost associated with the funds invested in the
inventories.

The total carrying cost is entirely variable and rise in directly proportion to the level of
inventories carried.

Total carrying cost = (carrying cost per unit) X (Average inventory)

Cost of Ordering

The cost of ordering includes the cost of acquisition if inventories.

18
It is the cost of preparation and execution of an order including cost of paper work and
communicating with the supplier.

The total ordering cost is inversely proportion to annual inventory of firm. The ordering cost
may have a fixed component, which is not affected by the order size: and a variable
component, which changes with the order size.

Total Ordering Cost = (No of orders) X (cost per order).

Cost of Stock out

It is also called as hidden cost. The stock out is the situation when the firm is not having units
of an item is stores but there is a demand for that item either for the customers or the
production department. The stock out refers to zero level inventories. So there is a cost of
stock out in the sense that the firm faces a situation of lost sales or back orders. The stock
outs are quite often expensive.

Even the good will of firm also be effected due to customers dissatisfaction and may lose
business in case of finished goods, where as in raw materials or work in process can cause the
Production process to stop and it is expensive because employees will be paid for the time not
spine in producing goods.

The carrying cost and the ordering cost are opposite forces and collectively. They determine
the level of inventors in a firm.

Total Cost = (Cost of items purchased) + (Total Carrying and ordering cost)

19
 Valuation of Inventory

The methods of valuing inventory are combination of the actual cost and replacement cost
plans. The chief advantage of the cost or net realizable value rule is that it is conservative.
Hence the methods of valuation of inventory are quite independent of system of mincing.

In balance sheet closing stock is shown under current assets and it also credited to
manufacturing or trading accounts. The inventories are valued on the basis as follows:

Cost of raw materials in stock may include freight charges and carrying cost. But such cost
should not exceed market price.

I. Work - in - process is generally valued at cost, which includes cost of materials,

labor. And the proportionate factory overhead, as it is reasonable according to
degrees of completion.
II. Cost of finished goods wound normally to the total or full cost it includes prime
cost plus appropriate amount of the overhead. Selling and distribution cost is
deducted on the other hand work in progress may be valued at work in progress may
be valued at work cost, marginal cost, prime cost or , even at direct materials.

Purchase & stores procedure

In inventory management the purchase department store department plays a major role to be
the effective inventory there must be cooperation of various departments such as purchase
receiving and inspection stores production and stock control departments.

The main functions of each department are as follows:

Purchase Department

It is responsible for purchase of all necessary goods of proper quality to produces, without
interruption to supply the finished goods.

20
 1. It receives purchase requisitions.
2. Invites quotations or tenders from suppliers with desired quality.
3. Issue purchase orders to the selected supplier.
4. Certify the quality and quantity of order received in specified time
5. Approve purchase invoice for payment after checking invoice for paying after
checking prices and extensions if any needed.

Material Cost

Materials cost of a job or cost unit can be ascertained by multiplying the quantity consumed
for the job or cost unit by the price of the materials. For ascertaining the quantity consumed for
each job or cost unit we have devised material requisition which will indicate the quantity
required for the job and the job number against which the material cost will be change directly.

For indirect material issued the material requisition will not indicate the job number but the
cost center number will be indicated for charging to relevant cost center as indirect materials.

Thus in order to ascertain material cost.

1. Make valuation of purchase.

2. Make use of proper valuation of material issue and closing stock following different method
such as, FIFO, LIFO WEIGHTED AVG. Etc.

The purchase price of material is directly obtained from the suppliers receives and have to be
issued to production before the invoice of materials is received.

The rate per unit, total price of the item as shown in the purchase order plus sundry charges
such as delivery and forwarding charges sales tax, duty etc, may be borne by suppliers,
governments controlled prices by notifications, suppliers, catalogues and circulars may be
valuable guides for obtaining rates of materials.

21
Delivery charges may be estimated with reference to the kind of transport with charges
incurred. The price may also include sales tax, excise duty, fright etc, so the total cost and rate
per unit can be computed and entered in the stores received registered and posted to stores
ledger for the issue of material to production.

In some cases material needs adjustment for any discount allowed charges for transport
containers etc.

Discounts may be like trade discounts quantity discount, cash discounts etc. Transportation
and storage costs may not include the cost of air, sea on land transport and other stores costs,
where the purchaser has to bear the costs. Cost of containers with regarded may not make a
separate charge because of non refundable and also sales tax, excise duty, insurance etc., all
the items are added to purchase price.

Receiving and Inspection Department

a) Receiving all raw materials and other supplies from various suppliers.
b) Verify items by count, weight etc., and report any shortage
c) Inspect materials and supplied as to quality by analyzing them suitably.
d) Inform the purchasing department and accounts department all facts that may require
adjustment with vendor.
e) Analyze and give them the code depending up on the type of materials.

Stores keeping Department

a) Check and accept all materials form the received department.
b) Identity each material received with the stock list, check the code number and place in
the respective bins.
c) Issue materials and supplies for use upon presentation of authorized requirement.
d) Record quantities received and issued on bin lards or stock ledger cards consisting
the perpetual inventory records.

22
 Production Department

Make out materials requirement note i.e. requisition of requisite quantity and quality of
materials at the right moment so the all materials may be available without delay on
production.

1. Check and verify that the materials of requisite quantity and quality have been
received and charged to production.
2. Keep proper records or materials received and their progress through different
operations or progress.
3. Prepare materials return note for excess materials.
4. Prepare materials transfer note to cover any transfer of materials.
5. Prepare report on scrap for reporting to management.

Inventory Control Department

In may be a subdivision of the cost accounting department, although in many concerns, it is a

part of the stores keeping department.

A. It keeps perpetual inventory records.

B. Adjust the stock on receipt of the property authorized adjustment notes.
C. Prepare weekly or monthly, statement of receipts, issue, balance and average
consumption of materials both in terms of quantity and value.

RECEIPT AND ISSUE OF INVENTORIES:

a) Receipt Inventories in to store:

After incoming materials have been examined and approved they are passed on to the

23
appropriate stores together with the goods received note. Articles are inspected and passed and
on the stores in 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 appropriate bin or shelf and make necessary entries in the receipt
column of the Bin Card.

A location code for materials helps in proper store - keeping with greater efficiency, because
stores can be easily identified. It is a part and parcel of stock control procedure. Location
code helps in mechanized accounting and safeguard against omission in counting as
verification.

BIN CARD
DESCRIPTION: MAXIMUM LEVEL:
MATERIAL CODE: MINIMUM LEVE:
LOCATION CODE: ORDERING LEVE:
BIN NO: ORDERING QUANTITY:
STORES LEDGER NO: UNITS:

RECEIPTS ISSUE BALANCE AUDIT

S
Date Goods received Qty Date Requisition Qty Qty (units) Initial &
Note No. (units Note No. (units Date
) )

24
BIN CARD

For each kind of materials or article a Bin Card attached to the bin which each individual‟s
materials is stored. A bin card provides a running record of receipts, issues and stock in the
simplest form. An entry will be made at the time of each receipt or issue and new balance will
be extended.

These cards should agree with the quantities entered in the relevant accounts in the stores
ledge. The main advantage is to enable the stores keeper to ascertain at a glance the quantity
of materials in stock and remind him to place purchase requisition for further suppliers the
ordering level has been reached more over they provide on independent check on stores
ledger and anciently a second perpetual inventory. If the bin card is from three years then the
transactions are made in same card. If Bin Card does not exist new Bin Card to be opened.

Issue of Material from Stores

The storekeeper issue materials on receipt of proper authorized document usually called a
materials requisition or a specification of material. Material requisition is a document which
authorities and records the issue of materials for use.

The materials requisition details the items required for the showing the quantity, description,
and code or past number and the cost center of job to be charged. Requisition is normally
prepared in triplicate: the department receiving the goods retains one copy and the other two
copies are handed over to the two copies are handed over to the storekeeper. He keeps one
along with him and enters on the issue sides of the appropriate bin card day – today
transactions are noted in stores ledger. Stores ledger:

The stores ledger which is usually a loose leaf or card type , contains an account for each
class of materials their ledger is kept in the cost department and contains such information as
well facilitate the ascertainment of all details relating to the materials in the minimum of time.

25
 STORES LEDGER ACCOUNT

FORM NO: FOLIO:

MATERIALS: MAXIMUM LEVEL:
GRADE: MINIMUM LEVEL:
UNITS: ORDERING LEVEL:
CODE NO: ORDERING LEVEL;
LOCATION

Date CSRV/STDNO. MIR Production Order Receipts

NO. No./Section
&Issue
Quantit
y
In Out Balance

26
 Materials returned to Stores

Where materials are issued in excess of requirement the excess quantity is return to the stories
together with materials return note.

Since the materials return to store form a works order is a reduction in the amount recorded
as issued, the preferable entry is to enter the number of units and the value of materials
returned and received in a different work in the issue column of the stores ledger account.

These values are deducted from total issues, and amount returned by each department as
shown by materials return note is deducted where return of materials to stores return of material
to stores is a major problem it is customary to use a materials and supplies journal for keeping
records of items.

MATERIAL RETURN NOTE

FROM: NO:

DEPARTMENT: DATE:
JOB NO:
ORDER NO:

Qty. Descriptio Code No. Office Use only Remarks

n
Rate Amount
Approve Returned Returned Bin NO. Cost Priced by
d
by By by Stores officer
ledger Ref. No.
Follow
No.

27
 MATERIAL TRANSFER NOTE

NO: DATE:
FROM: TO:
DEPARTMENT: DEPARTMENT:
JOB NO: JOB NO:
ORDER NO: ORDER NO:

Qut. Descriptio Code No. Office use only Remarks

n
Rate Amount

Approve Issued Received Cost Ref. Officer Priced by

d
by No.
by

Transfer of materials

Transfer of materials form one job to another is prohibited unless the detail is adequately
recorded on the materials Transfer note. Such transfer is permissible only where an urgent
order has to be made and work started on a less urgent order may be appropriates. Such a note
shows are incessancy date for ordering and debiting the cost accounts affected. These not
are passed direct to the cost office for the appropriate adjustment in the work - in -progress
ledger.

All these four notes including stores ledger and bin card are major for inventory management
which are valued and checked for every quarterly of half yearly or annual

28
 Valuation of Materials Issues

The fixation of the price at which the materials are issued are to be charged to production is an
important one from the point of view to inventory management. These are numerous factors
to be taken into amount in pricing the material they are.
a) The nature of the business and type of production. The frequency of purchase
price fluctuations and issues of materials.
b) Rang of price fluctuation and value of material issued and size of bath of
materials issued.

c) Requirement that purchasing efficiency should be revealed or not.

d) The accuracy with which issues can be computed.

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

deteriorates quickly.
f) The length of inventory turnover period and quantity of material to be handled with
the necessity for maintaining uniformity within an industry.

ISSUE PRICING METHODS

There are two categories

1. Cost prices :
a) FIFO (First in First out)
b) LIFO (Last in first out)
c) Specific price
d) Base stock price
e) HIFO (highest in first out)

2. Delivered from cost prices

a) Simple average price

29
 b) Weighted average price
c) Periodic simple average price
d) Periodic weighted average price
e) Moving simple average price
f) Moving weighted average price

3. Notional prices
a) Standard price
b) Inflated price
c) Re- use price
d) Replacement price

First in First out (FIFO)

This is the price paid for the material first taken into stock from which the material to be
priced could have been drawn.

Under this method stocks of materials may not be used up in chronological order but for
pricing purpose it is assumed that items longest in stocks are used up first. The method is most
suitable for use where in material is slow - moving and comparatively high unit cost.

Advantages
1. Price is based on actual cost and not on basis of approximations such as no profits
or losses arises by reasons of adopting this method
2. The resulting stock balance generally represents fair commercial valuation of stock.
3. It is based on traditional principles.

Disadvantages:

1. The number of calculations in the stores ledger involved tends

to be Complicated with increase in clerical error.
2. The cost of consecutive similar jobs will differ if the price
changes Suddenly.
3. In times of rising prices, the charge to production is unduly low.

30
Last in first out (LIFO)

This is the price paid for the material last taken into stock from which the materials to be
priced could have been drawn. This method also ensure material being issued at the actual
cost. Its use is based on the principle that costs should be as closely as possible related to
current price level. Under this method production cost is calculated on basis on replacement
cost.

Advantages

I. Production is charged at the most recent prices so that it is based on the principle
that cost should be related to current price levels.
II. It obviates the necessity for continuously ascertaining the replacement price.
III. Neither profit nor loss is usually made by using this method.
IV. In the times of rising prices there is no wind fall profit as would have been obtained
under FIFO.

Disadvantages
I. Needs more clerical work.
II. Compassion among similar jobs is very difficult.
III. Stock values relating to prices of the oldest cost on hand may be entirely out of the
current replacement prices.

Weighted average price

This is the price which is calculated by Z dividing the total cost of material in the stock from
which the material to be priced have been drawn, by the total quantity of material in the stock.
This method differs from all other methods because here issue prices are calculated on receipts
of materials and not on issue of materials. Thus as soon as new lot is received a new price is
calculated and issues are then taken.

31
Advantages

This method is advantageous where the price varies widely as its use even out the effect of
these wide variations.

I. The basis of price calculations is a simple one involving only the division of total
amount of material in stock by quantity in stock.
II. Calculation of new prices arises only when receipt of stocks are received.
III. Stock records under this method give a fair indication of the stock values, which can
be used in financial analysis.

Disadvantages

This method is completed than simple average because it takes into consideration the total
quantities and total costs in stock.
1. Profit or loss may be incurred as in simple average price.
2. As LIFO or FIFO this method calls for many calculations.
3. In order to calculate the accurate value of issues the average price must normally be
calculated to four to five decimal places.

STANDARD PRICE

It is the predetermination of fixed price on basis of a specification of all factors affecting

price like the quantity of materials in hand and to be normally purchased and rate of
discount compared with existing price including or excluding freight and ware housing
expense.

A standard price for each material is set and the actual price paid is compared with standard.
It is paid exceeds the standard a loss will be realized if not profit will be obtained.

32
Advantages

I. This method is easy to operate.

II. Comparing the actual prices with the standard price will determine the efficiency of purchase
department.
III. The effect of price variations is eliminated from job costs.
IV. It reduces classical costs be eliminating detailed cost records.
V. In times of inflation or price fluctuations is very difficult to fix a standard price.
VI. This method also incurs a profit or loss on issues and closing stock.

INFLATED PRICE

This is the price, which includes a charge designed to cover the cost of contingencies or
related costs.

This price include not only the cost involved in bringing the material to the purchase
premises but also the loss due to evaporation and breakage etc, as well as carrying
costs. Increased gradually every year from 2002 to 2005.

33
 CHAPTER-3
DATA ANALYSIS AND
INTERPRETATION

34
 DATA ANALYSIS

Technique of Inventory Management:

Main problems in inventory management are to answer:

 What are Indus problems in managing inventories?

 Which inventory policy optimum for Indus? Why? Show calculations.
 What should be the over level?

To answer these following techniques are used:

 ABC analysis
 Economic Order Quantity
 VED Analysis
 Re-Order Level
 Safety stock
 Inventory Turnover Ratio

ABC Analysis

 It is based on proposition that

 Managerial items and efforts are scare and limited.
 Some items of inventory are some important than others.

ABC Analysis

ABC analysis classifies various inventory into three sets or groups of priority the allocates
managerial efforts in proportion of The priority the most important item are classified into
class - A,
Those of intermediate importance are classified as “class - B‟‟ and remaining items are
classified into class - C‟.
The financial manager has to monitor the items belonging to monitor the items belonging to
35
different groups in that order of priority and depending upon the consumptions.
The items with the highest values is given priority and soon and are more controlled then low
value item. The re - rational limits are as follows.

Category % of items % of total cost of materials

A 5-10 70-85

B 10-20 10-20

C 70-85 5-10

Procedure

1. Items with the highest value is given top priority and soon.
2. There after cumulative totals of annual value consumption are
Expressed as percentage of total value of consumption.
3. Then these percentage values are divided into three categories.
4. ABC analysis helps in allocating managerial efforts in proportion to importance of various items
of inventory.

ABC Analysis

Raw material (at closing stock)

YEAR AMOUNT OF RAW MATERIALS

2006 274.94
2007 582.11
2008 1858.17
2009 2031.85
2011 1768.52

36
 2500

2000

1500

1000

500

Interpretation:

The above graph shows the amount of raw materials at cost. In 2006 the cost of material is
274.94 rs increased in this year and in 2007-2008.It is more increased to 1858.17rs and in
2009 it is increased to rs2031.85 and in 2011 it is decreased to 1768.52.

Stock in process (at closing stock):-

YEAR AMOUNT OF STOCK in PROCESS

2006 2006.20
2007 82.67
2008 122.82
2009 110.96
2011 NILL

37
 20000

Interpretation:

The above graph shows that work in progress at cost. In 2006 the cost of material is 2006.20 rs
increased in this year and in 2007 it is decreased to rs 82.67 in the year 2008 it is increased to
122.82and it is also maintained in the year 2009 and in 2011 it is nill.

Finished goods (at closing stock):-

YEAR AMOUNT OFFINISHED GOODS

2006 2704.08
2007 6717.44
2008 15019.79
2009 16880.69
2011 7443.66

38
Interpretation:

The above graph shows the amount of finished goods at cost. In 2006 the cost of material is
2704.08 rs.It is increased to rs6717.44 in the year 2007..It is increased in the year 2008-09 the
cost of goods is rs 1,6880.69 and in the year 2011 it is decreased to 7443.66.

Stores, spares & consumables (closing stock):-

YEAR AMOUNT OF COST OF STORES AND SPARES

2006 673.25
2007 1628.44
2008 3617.38
2009 3539.05
2011 973.02

39
 200000

150000 Amount of Raw

material consumed in
Lakhs

2006 2007 2008 2009 2011

Interpretation:

The above graph shows the amount of stores and spares at cost. In 2006 the consumable is rs
673.25 and it is highly increased to rs 1628.44 in the year 2007.The form maintains goods in
proper way rs 3617.38 in the year 2008 and it is decreased to rs 3539.05 in the year 2009 and
in the year 2011 it is decreased to 973.02.

Raw material consumed:-

YEAR AMOUNT
2006 65875.45
2007 68699.73
2008 172305.70
2009 16,9697.36
2011 38607.65

40
 200000

150000 Amount of Raw

material consumed in
Lakhs

2006 2007 2008 2009 2011

INTERPRETATIONS

The above graph shows consumption of raw materials .The consumption of raw material in the
year 2006 is rs 65875.45 the consumption of raw material increased in the year 2007-08 in the
rs 172305.70. And it is decreased to Rs 16,969,736,368 in the year 2009 and it decreased to Rs
38607.65 in the year 2011.ss

Economic order quantity:

During 2006-2007:

The firm requires below given units of material for manufacturing of steel. The following are
the details of their operation during 2006-2007.

PARTICULARS

Billets/Blooms 28,889 Qty (mt)

Ordering cost per Rs. 2000
Order
Carrying cost 10%
Purchase price per 400
Unit

41
 1. Calculation of EOQ:-

Total units required (A) =28889

The ordering cost per order (O) =

Rs.2000 Carrying cost per unit (C) =
10%
(i.e.) 10% of Rs.400 =Rs.40

EOQ =⌐√2AO/C

=2*28889* 2000/40

=Rs.1699.67

2. Number of orders for the year = A/EOQ

=2889/1699.67

=16.99~17orders

1. Total annual cost = carrying cost + ordering cost

= 1445000+ 34000

= Rs.1479000

42
► Carrying cost = order size * average inventory

 order size = A/no of orders

=28889/17

= 1699.67

 Average inventory = order size/2

=1700/2
= Rs.850

 Carrying cost = 1700*S850

= Rs.1445000

 Ordering cost = cost per order * no of orders

= 2000*17

=Rs.34000

43
EOQ DURING 2007-2008

The firm requires below given units of material for manufacturing of steel. The following are
the details of their operation during 2007-2008.

PARTICULARS
Billets/Blooms 123596Qty (Mt)
Ordering cost per order 2200
Carrying cost 10%
Purchase price per unit Rs 420

1. Calculation of EOQ:-

Total units required (A) =123596mt

The ordering cost per order (O) =

Rs.2200 Carrying cost per unit (C) =
10%
(i.e.) 10% of Rs.2000 =Rs.42

EOQ = √2AO/C

= 2*123596*2200/42
= Rs.3598.354

2. Number of orders for the year = A/EOQ

= 123596/3598.35
= 4
34.79~35orders

44
 3. Total annual cost = carrying cost + ordering cost

= 6245669+ 77000
= Rs.6322669

► Carrying cost = order size average inventory

order size = A/no of orders

= 123596/35

= 3531.31

Average inventory = order size/2

= 3531.1/2
= Rs.1768.655

Carrying cost = 3531.31*1768.655

= Rs.6245669

Ordering cost = cost per order no of orders

= 2200 *35

= Rs.77000

45
EOQ DURING 2008-2009

The firm requires below given units of material for manufacturing of steel. The following are
the details of their operation during 2008-2009.

PARTICULARS
Billets/Blooms 106,066,Qty (Mt)
Ordering cost per order Rs 2400
Carrying cost 10%
Purchase price per unit Rs 440

Calculation of EOQ:-

Total units required (A) =106066mt

The ordering cost per order (O) =

Rs.2400 Carrying cost per unit (C) =
10%
(i.e.) 10% of Rs.2000
=Rs.44 EOQ =√2AO/C
=2 *106066* 2400/44
=Rs.3401.59

Number of orders for the year = A/EOQ

=106066/3401.59

=31.18~32orders

46
Total annual cost = carrying cost + ordering cost

= 5.493154+ 76800

= Rs.5569954

Carrying cost = order size * average inventory

Order size = A/no of orders

= 106066/33/2

= 3314.56

Average inventory = order size/2

= 3314.56/2

= Rs.1657.28

Carrying cost = 3314.56*1657.28

= Rs.5493154

Ordering cost = cost per order * no of orders

= 2400*32

= Rs.76800

47
EOQ DURING 2009-2010

The firm requires below given units of material for manufacturing of steel. The following are
the details of their operation during 2009-2010.

PARTICULARS
Billets/Blooms 184,661
Ordering cost per order 3000
Carrying cost 12%
Purchase price per unit Rs 500

Calculation of EOQ:-

Total units required (A) =184,661mt

The ordering cost per order (O) =

Rs.3000 Carrying cost per unit (C) =
12%
(i.e.) 12% of Rs.500 =Rs.50

EOQ =√2AO/C

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

Number of orders for the year = A/EOQ

= 184661/4707.37
= 39.23~39 orders

Total annual cost = carrying cost + ordering cost

= 11209639+ 117000
= Rs.11326639.
48
 Carrying cost = order size* average inventory

Order size = A/no of orders

= 184661/39
= 4734.90

Average inventory = order size/2

= 4734.90/2

= Rs.2367.45

Carrying cost = 4734.90 *2367.45

= Rs.11209639

Ordering cost = cost per order* no of orders

= 3000* 39
= Rs.117000

VED ANALYSIS

Vital Essential and Desirable analysis is done mainly for control of spare parts keeping in view
of the criticality to production.
Vital spares are spare the stock – out of which even for a short time will stop production for
quite some time. Essential spares are spares the absence of which cannot be tolerated for more
than a few hours a day. Desirable spare are those, which are needed, but their absence for even
a week or so will lead to stoppage of production.

49
 MATERIAL CLASS VALUE PRIORITY MATERIAL
10% “A” 70% V 10% 70%
E 20% 10%
D 70% 10%
20% “B” 20% V 10% 70%
E 20% 20%
D 70% 10%
70% “C” 10% V 10% 70%
E 20% 20%
D 70% 10%

THE RE-ORDER LEVEL

The re-order level is the level of inventory at which the fresh order for that item must be
placed to procure fresh supply. The re-order level depends upon.

1. Length of time between the placement of an order and receiving the supply.
2. The usage rate of the item. The inventory is constantly being used up. The rate at
which the inventory is being used up. The rate at which the inventory is being used up
is called the usage rate.

The reorder level can be determined as follows:

R= M+TU

R=Reorder level
M=Minimum level of
inventory T=time
gap/delivery time U=Usage
Rate
The reorder level and inventory patterns have be shown as follows:

50
The figure shows that if the usage rate is constant, the order are made at even intervals for the
same amounts each time and the inventory goes to zero just before an order is received.

Safety stock:

The safety stock protects firm from tradeoffs due to unanticipated demand for the items level
of inventory investments is however increased by the amount of safety stock. Safety level is
ascertained in inventory as a part because there is always an uncertainly involved in time lag
usage rate or other factors.
Usually smaller the safety level greater the risk of stock – outs. If stock levels are predictable
then there is a chance of stock out occurring. However stock inflows and outflows are
unpredictable or lesser predictable it becomes to carry additional safety to prevent
unexpected stock outs so usage rate is estimated if cost is low then no safety stock is needed.

Just – In – Inventory:

The Basic concept is that every firm should keep a minimum level of inventory on hand,
relying suppliers to furnish just in time as and when required. JIT helps in emphasizing
sufficient level of stock to ensure that production will not be interrupted. Although the large
inventories may be had idea due to heavy carrying JIT is a modern approach to inventory
management and the goal is essentially to minimize such inventories and there by
maximizing turnover.

JIT system significantly reduces inventory carrying cost be requiring that the raw material be
procured just in time to be placed into production. Additionally the work in process inventory
is minimized by eliminating inventory buffers between different production departments.

If JIT is to be implemented successfully there must be a high degree of coordination and co

operation between the supplier and manufacturer and among different production centers.
JIT does not appear to have any relation with EOQ however it is in fact alters some of the
assumptions of EOQ model. The average inventory level under the EOQ model is defined as

51
Average inventory =1/2EOQ+safety level JIT attacks this equation in two ways.
 By reducing the order cost.
 By reducing the safety stock.

The basic philosophy in JIT is that benefits, associated with reducing inventory and delivery
time to a bare minimum through adjustment iEOQ model, will more than offset the costs
associated with the increased possibility of stock – outs.

Inventory Turnover Ratio

What it is

This ratio is often a firm‟s inventory turns over during the course of the year. Because
inventories are the least liquid form of assets, a high inventory turnover ratio is generally
positive. On the other hand, and usually high ratio compared to the average for the industry
could mean a business is losing sales because of inadequate stock on hand.

When to use it

If a firm‟s business has significant assets tied up in inventory, tracking its turnover is critical
to successful planning. If inventory is turning too slowly, it could indicate that is may be
hampering the firm‟s cash flow.
Because this ratio judge‟s annual inventory turns, it is usually conducted once a year.

52
The formula: cost of goods sold
Average value of inventory

YEAR COST OF GOODS AVG VALUE INVENTORY

SOLD OF TURN OVER
INVENTORY RATIO
2006 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

RAW MATERIAL CONSUMED:

60

40

20

2006 2007 2008 2009 2011

Interpretation:

The above graph shows inventory turnover ratio of the form. The ratio can be continuously
decreased from the year 2006-09.The turnover ratio of the form is 17.25 in the year 2006. The
decreased turnover shows good consumption of raw material. The ratio will be decreased to
11.83 in the year 2009 but it is increased in the year 2011 is 41.21.

53
 STOCK LEVELS

During 2006-2007
The company requires 28889 units of billets/blooms to manufacture of steel for the year
2006-07.EOQ is 1700 units. The company makes safety stock equal to 30 day requirement and
the normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*96.29) + 2888.9

= 3851.9
Safety stock = usage * period of safety stock/ total working days in a year

= 28889*30/300

= 2888.9
Average usage = usage/total working days in a year

= 28889/300

= 96.29

b. Minimum stock level = re-order level –(Average usage * Average lead time)

= 3851.9 – (96.29* 10+20/2)

= 2408

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 3851.9+1700-(96.29*10)

= 5551.9-962.9

54
 = 4589

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 96.29*20

= 1925.8

e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 2408+4589/2
= 3496

During 2007-2008

The company requires 123596 units of billets/blooms to manufacture of steel for the year
2007-08.EOQ is 3335 units. The company makes safety stock equal to 30 day requirement and
the normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*412) + 12360

= 16480
 Safety stock = usage * period of safety stock/ total working days in a
year

= 123596*30/300

= 12360
 Average usage
= usage/total working days in a year

= 123596/300

= 412

55
 b. Minimum stock level = re-order level – (Average usage * Average lead time)

= 16480 – (412* 10+20/2)

= 10300

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 16480+3335-(412*10)

= 19815-4120

= 15695

d. Danger level = Average usage * Maximum re-order period for emergency

purchases
=
412*20
=
8240

e. Average stock= ½(Minimum stock level + Maximum stock level)

level

= 10300+15695/2

= 13000

56
During 2008-2009

The company requires 106066 units of billets/blooms to manufacture of steel for the
year 2008-09.EOQ is 3257 units. The company makes safety stock equal to 30 day
requirement and the normal lead time is 10-20 days. The company works for 300days in
a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*354) + 10606.6

= 141476
Safety stock = usage * period of safety stock/ total working days in a year

= 106066*30/300

= 10606.6

Average usage = usage/total working days in a year

= 106066/300

= 354

b. Minimum stock level = re-order level –(Average usage * Average lead

time)

= 14147 – (354* 10+20/2)

= 8837

57
 c. Maximum stock level = re-order level + re-ordering
quantity- (Minimum usage *
minimum lead time)

= 14147+3257-(354*10)

= 13864

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 354*2

= 708

e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 8837+13864/2

= 11350
During 2009-2011

The company requires 184661 units of billets/blooms to manufacture of steel for the year
2009-11.EOQ is 6155 units. The company makes safety stock equal to 30 day requirement and
the normal lead time is 10-20 days. The company works for 300days in a year.

58
 a. Reorder = lead time*Average usage+ safety stock
level

= (10*615.53) + 18466.1

= 24621.4

 Safety stock = usage * period of safety stock/ total working days in a

year

= 184661*30/300

= 18466.1

 Average usage = usage/total working days in a year

= 184661/300

= 615.53

b. Minimum stock= re-order level –(Average usage * Average lead

level time)

= 24621.4 – (615.53* 10+20/2)

= 15389

c. Maximum stock= re-order level + re-ordering quantity-

level
(Minimum usage * minimum lead time)

= 24621.4+6155-(615.53*10)

= 24521.1

d. Danger level = Average usage * Maximum re-order period for emergency

purchase
= 615.53*20

59
 = 12310.6

e. Average stock = ½(Minimum stock level + Maximum stock level)

level

= 15389+24521.1/2

= 27649.55

60
 CHAPTER-4
FINDINGS AND SUGGESTION

61
 FINDINGS & SUGGESTIONS

► The company is having good sales for their products during all the years of the study.
► The inventory turnover ratio is on a declining trend year after year in the period of the
study. It indicates inefficiency of management in turning of their inventory into sales.
► The company should adopt sophisticated techniques to manage its inventory in a
better manner.
► The EOQ calculated is suggesting that the company should obtain its inventory
requirements by placing orders frequently to its suppliers rather than one time
replenishment.
► Company should take measures for maintenance of proper stores and spares so as to
avoid the frequent breakdown of the machinery.
► There is a need to develop good communication system between various
departments like marketing, planning, procurement, and production and
distributions functions.
► The company should follows Just-in-Time technique, their by it can do away with
waiting time for a receipt of materials

62
 CONCLUSION

Inventory management has to do with keeping accurate records of finished goods that are
ready for shipment. This often means posting the production of newly completed goods to
the inventory totals as well as subtracting the most recent shipments of finished goods to
buyers. When the company has a return policy in place, there is usually a sub-category
contained in the finished goods inventory to account for any returned goods that are
reclassified or second grade quality.

Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey
information to sales personnel as to what is available and ready for shipment at any given time.

Inventory management is important for keeping costs down, while meeting regulation. Supply
and demand is a delicate balance, and inventory management hopes to ensure that the
balance is undisturbed. Highly trained Inventory management and high-quality software will
help make Inventory management a success. The ROI of Inventory management will be seen
in the forms of increased revenue and profits, positive employee atmosphere, and on overall
increase of customer satisfaction.

63
 BIBLIOGRAPHY

Referred following standard text and websites:

Financial
Management ………. I.M. Pandey
Financial
Management ………. Prasanna Chandra
Financial
Management ………. Van Horn

64
 Management Accounting and
Control
………. S.N.Maheswari
Financial
Management
……….Khan and Jain

Website:
WWW.SUJANNA.COM
WWW.FINANCIAL MANAGEMENT.COM
WWW.PRICIPALS OF ACCOUNTING.COM

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