Inventory management.

1. Inventory management. • The purpose of inventory management is to keep the stocks in such a way that neither there is over – stocking nor under-stocking. The over-stocking will mean a reduction of liquidity and starving of other production process, under –stocking , on the other hand, will result in stoppage of work. The investments in inventory should be kept in reasonable limits. • A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. • An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c ) from where to purchase (d) where to store, etc.

2. Objectives of inventory management. • To ensure continuous supply of materials, and finished goods so that production should not suffer at any time and the customers demand should also be met. • To avoid both over-stocking and under-stocking of inventory. • To maintain investments in inventories at the optimum level as required by the operational and sales activities. • To keep material cost under control so that they contribute in reducing cost of production . • To eliminate duplication in ordering stocks. This is possible with the help of centralising purchases.

3. Cont- • To minimise losses through deterioration, pilferage, wastages and damages. • To design proper organisation for inventory management. A clear cut accountability should be fixed at various levels of the organisation . • To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. • To ensure rights quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price analysis, the cost analysis will ensure payment of proper prices. • To facilitate furnishing of data for short-term and long-term planning and control of inventory.

4. Tools and techniques of inventory management. • The following are the important tools and techniques of inventory management and control. • Determination of stock levels. • Determination of safety stocks. • Selecting a proper system of ordering for inventory. • Determination of economic order quantity(E.O.Q) • A .B. C. analysis. • V . E.D analysis. • Inventory turnover ratio. • Aging schedule of inventories.

5. Cont- • Classification and codification of inventories. • Preparation of inventory reports. • Lead time • Perpetual inventory system. • JIT control system.

6. Determination of stock levels. • (a) Minimum level • Minimum stock level = Re-ordering level-(Normal consumption *Normal Re-order period). • (b) Re- ordering level = Maximum consumption* Maximum Re-order period. • (c ) Maximum level = Re-ordering level + Re-ordering quantity –(Minimum consumption*Minimum Re-ordering period). • (d) Danger level = Average consumption* Maximum Re-order period for emergency purchases. • (e) Average stock level = Minimum stock level+ ½ of re-order quantity.

7. Economic order quantity(EOQ). • A decision about how much to order has great significance in inventory management. The quantity to be purchased should neither be small nor big because cost of buying and carrying materials are very high. • EOQ is the size of the lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs. • Generally, EOQ is the point at which inventory carrying costs are equal to order cost. • In determining EOQ it is assumed that cost of managing inventory is made up solely of two parts i.e ordering costs and carrying costs .

8. Ordering costs. • These are the costs which are associated with the purchasing or ordering of materials. These costs include: • (1) Costs of staff posted for ordering of goods. • (2) Expenses incurred on transportation of goods purchased. • (3) Inspection cost of incoming materials. • (4) Cost of stationery, typing, postage, telephone charges etc.

9. Carrying costs. • These are the costs for holding the inventories these cost will not be incurred if inventories are not carried. These costs include: • 1. the cost of capital invested in inventories. An interest will be paid on the amount of capital locked up in inventories. • 2. cost of storage which could have been used for other purposes. • 3. the loss of materials due to deterioration and obsolescence. • 4. insurance cost. • 5. cost of spoilage in handling of materials.

10. Assumptions of EOQ. • The supply of goods is satisfactory. The goods can be purchased whenever these are needed • The quantity to be purchased by the concern is certain. • The prices of goods are stable. It results to stabilise carrying costs. • EOQ=√2AS/I • Where, A= Annual consumption in rupees. • S = Cost of placing an order. • I = Inventory carrying costs of one unit.

11. Question. • From the following information, calculate minimum stock level, maximum stock level and re-ordering level: • (i) Maximum consumption 200 units per day • (ii) Minimum consumption 150 units per day • (iii) Normal consumption 160 units per day • (iv) Re-order period 10- 15 days • (v) Re- order quantity 1600 units • (vi) Normal re-order period 12 days.

12. Solution. • Re-ordering level = Max consumption *Max.re- order period = 200 units*15=3000 units. • Minimum stock level = Re-ordering level-(Normal consumption *Normal re-ordering period) = 3000-(160*12)= 3000-1920=1080 units. • Max. stock level = Re-ordering level+ re-ordering quantity –(Minimum consumption * Minimum re-order period) = 3000+1600- (150*10) • = 4600-1500= 3100 units.

13. Question. • From the following information, find out EOQ. • Annual usage, 10000 units. • Cost of placing and receiving one order Rs 50 • Cost of materials per unit Rs 25 • Annual carrying cost per unit : 10% of inventory value.

14. Question. • The annual demand for a product is 6400 units. The unit cost is Rs 6 and inventory carrying cost per unit per annum is 25% of the average inventory cost. If the cost of procurement is Rs 75, determine— • (a) EOQ. • (b) Number of orders per annum and • ( c) Time between two consecutive orders.

15. Cont- • A= annual consumption in units = 6400 units • S=cost of placing an order = Rs 75 • I = Inventory carrying cost of one unit = 6*25/100 = Rs 1.5 • EOQ = √2AS/I = √2*6400*75/1.5 = √ 640000 • = 800 units. • No of orders per annum = 6400/800 = 8 orders. • Time between two consecutive orders= 12months/8 orders = 1.5 months.

16. Valuation of Inventories. • The value of materials has a direct bearing on the income of a concern, so it is necessary that a method of pricing materials should be such that it gives a realistic value of stocks. • The traditional method of valuing materials ‘ cost price or market price whichever his less’ is no longer the only method . • Different methods of pricing materials give different values of closing materials and it scope for window dressing . • If management is interested to show more profit then it can choose such a method which will show more stock or vice- versa. • To safeguard public interest the Govt of India has instituted statutory controls to prevent frequent change of material valuation methods. • A concern will have to use a particular valuation method for at least three years and any changes therefrom must be approved by the Board.

17. Methods for Pricing Materials Issues. • FIFO method • LIFO method • Average price method • Base stock method • Standard price method • Market price method.

18. Question. • The following are the figures of receipts and issues of materials. • Jan1,2008opening stock 500 units @Rs 5/- • Jan 6 Purchase of RM 400 units @ Rs5.25/- • Jan 8 Issue of RM 600 units • Jan 10 Purchase of RM 550 units @ Rs 5.45/- • Jan 15 Purchase of RM 350 units @ Rs 5.60/- • Jan 16 Issue of RM 450 units • Jan 22 Purchase of RM 480 units @ Rs 5.75/- • Jan 28 Issue of RM 600 units • Jan 30 Issue of RM 300 units • Write up the store ledger account by pricing for issues at FIFO method and LIFO method.ssssss