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INVENTORY MANAGEMENT
IN
Submitted in partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION
Under the Guidance of
B. JAHAN
By
G.SRUTHI
(Reg.No.412109672043)
CERTIFICATE
This is to certify that the Project Report entitled A
STUDY ON INVENTORY MANAGEMENT IN ZUARI CEMENT LIMITD, AT HYDERABAD, submitted to OSMANIA UNIVERSITY
HYDERABAD, by G.SRUTHI (Reg.No.412109672043) in a partial fulfillment of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION from SUPRABATH
P.G COLLEGE, BB NAGAR is a piece of bonafide work carried
DECLARATION
[[
been carried out by me during the period of my study and submitted to OSMANIA UNIVERSITY under the guidance of
Mrs.B.JAHAN, E.JALJA Principal .
SUPRABATH
P.G
not been submitted to any other university for the award of any degree or diploma.
(G.SRUTHI)
ACKNOWLEDGEMENT
I sincerely thank to Mr. Ch. RAVI (Chief Accounts Officer), Project Guide for granting me permission to do my project in ZUARI CEMENT LIMITED, HYDERABAD. There is no word to express my gratitude to my guide
Mrs. JAHAN,
Management Studies, SUPRABATH P.G COLLEGE, for their expert guidance and suggestions went a long way in enabling me to complete this project. I convey my respectable thanks to JALJA, Principal, other faculty members and non-teaching staff of SUPRABATH P.G COLLEGE for giving their moral support during the project work. Last but not least, I would like to express my gratitude to my parents and all of my friends for helping me with lot encouragement without which it would not have been possible for me to complete this project successfully.
[G.SRUTHI]
CONTENTS
CHAPTER CHAPTER TITLE PAGE .NO 1-4 5-12 13-27 28 29 30 31 32 33 34-61 62 63 64 65-66 67
1. 2
RESEARCH METHODOLOGY Need for the Study Scope of the Study Objectives of the Study Methodology of the study Limitations of the Study
4 5
1. INTRODUCTION
Inventory Management "Inventory" too many small business owners is one of the more visible and tangible aspects of doing business. Raw materials, goods in process and finished goods all represent various forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Likewise, merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient and costly. Meaning of Inventory Management Inventories are essential to provide flexibility in operating a system. The inventory can be classified into Raw materials Inventory It remove dependency between suppliers and plants. Work-in-process It remove dependency between machines of a product line. Finished Goods Inventory It remove dependency between plant and its customers /market.
Definition of Inventory Inventory is defined as a usable resource which is physical and tangible such as materials. In this sense, our stock is our inventory, but even then the term inventory is more comprehensive. Though inventory is a usable resource, it is also an idle resource, unless it is managed efficiently and effectively.
The Main Functions of Inventory Are Summarized Below Smoothing out irregularities in supply. Minimizing the production cost. Allowing organizations to cope with perishable materials.
Place between the various materials resulting in the formatting of cement compounds like, C3-tri calcium silicate (about 45%) C2-di calcium silicate (about 20%) C3-tri calcium aluminates (about 7 to 10%) C4LFE-tetra calcium alumna ferrite (about 10 to 12%) It is these compound that the impart the strength characteristics to cement at these high temperatures of 1500c; the linker is then ground in a cement mill or ball mill consisting of several compartments charged with progressively. Smaller hardened balls. At this stage gypsum in required quantities is added (generally about 2 to 3%) to facilitate easy working and prevent flash setting of cement. The mixture is ground to the required finesse and transferred either by road or rail to the desired destinations. Continuous monitoring of the quality of cement is exercised, both at the raw materials stage and also at the finishing stage and also the finishing stages with the help of x-ray analyzer etc.
History of cement :
Invention of cement by Joseph aspadin a leeds builder and bricklayer. 21-10-1824 paternted as port land cement. 1904 British and American standards. 1912 Indian cement company ltd establish factory at porbandar. 1951 Indian standards.
Industry Scenario :
Theb existence of modern civilization without cement is difficult to imagine in cities and towns. Cement is synonymous with progress modern states. The progress and size of cement industry in anu country industry in anu country is taken as the major indicators growth. Of economy when total demand is satisfied by home production. Cement is an indicator of economy progress. In indian, first to manufacture cement was made early in the country in the European company is the year 1904 opened a factory in chemical south Indian Industries limited for the purpose of manfacturing cement. The real beginning of cement industry was started by the formation of Indian cemenmt ltd. In 1914 under TATAs management.
The Indian cement company started manufacturer of cement at porbandar on a laerge scale total world production of cement is to around 1400 million tones. Asia is largest consumer (59%) followed by Europe and Am erica. The concentration if limestone deposits in few states has led to the formatting of cement plant cluster seven location in India such as Silapur, Santa, Chandrapur, Gulbarga, Chanderia, Nalgonda and Yerragunta, 74% of total limestone reserves are in the sates of A.P, Karnataka, Rajasthan and Gujarat. The largest producer in terms of installed capacity Is Birla group (above 25%) followed by associated cement (11%) India is the worlds fourth largest cement producer after china, Japan and U.S.
Production Process :
Cement is produced in four basic stages. Quarrying and crushing. Grinding and blending raw materials Clinker production Finish grinding
Recent acquisition :
In last four years the following cement units have been sold.
COMPANY
Narmada cement Midi cement CCI Raasi cement ltd Sri Vishnu cement ltd Sri Digvijay Cement division -
ACQISITIONED
Ultra tech cement ltd Gujarat ambuja cement ICL Zuari cement ltd Birla tisco Raymond ltd Lafarge
The Indian Cement Industry at present consists of 53 large cement companies and 113 plants varying between 1MT TO * MT in addition the country has nearly 150 mini cement plants with a cumulate capacity of almlost 10MT.
Major Players in the cement industry are Andhra cement ltd Ultra tech cement ltd Madras cement ltd Birla corporation ltd Gujarat ambuja cement ltd Kesoram cement ltd Tamilnadu cement ltd Zuari cement ltd
Significance of cement :
Cement is major of every human being in their lives to building constructions, roads, dam & bridges etc. The quality of cement playa an important role for construction of slabs, walls floors, pillar, tanks etc. Basic ingredient to construction of work. Generation of employment. Contribution to national exchequer. Helpful in development of other industries Enhancement in national income. Huge export potentials and quick marketabilitys Cement industries has Rs.15000 crores debt the cement industry has an investment value of about Rs 30,000 crores out of which almost Rs 15,000 cr is in the form of debt from financial institutions(FIS) and banks. The industry has been posing an annualized loss in excess of Rs 1,000 cr. Nearly 30 cement companies are in red out of which more than a dozen have become bureau to industrial and financial reconstruction(BIFRI) cases. Many cement units in the country are here by seeking buyers.
Later in 1994, zuari entered into an agrement with Toxamaco ltd a group company was the competitive advantage of being situated in product deficit areasothern India and also has the added benefit to proxomity to limestone reserves. During FTOO, the company decided do give off the cement divisio into a separate company ZUARI cements ltd and concentrate on its core business. accelarate the growth and achieve capacity additions quickly. Location of ZCL. The plant is located at a distance of 6km from Yerragunta and this plant is connected to railway station by a railway track of 7km length and is having exchange point inside the factory. To
Source
Mines near factory kavali Bellary Goa Chennai Singrains collieries Koduru village Dppll, locl
Varities of cement :
The company produces 2 grades of cement 43 grades 53 grades with following benefist Higher compressive time Lesser heat if hydration Reduction construction time Better soundness Welfare services Tele communications Postal facility Transportation Housing Park and club School Canteen facility Guests house Health center
Competitions to ZCL
Madras cement ltd Grasim cement ltd
India cements ltd Ultra tech cement ltd Penna industry ltd
SHARE CAPITAL :
Table 2.1 shows the share capital PARTICULARS Share Holders Fund Debt-long Term Total Share capital 2006-07 64693 27130 91823 2007-08 64693 28089 91782 2008-2009 64693 27198 91891 2009-10 64693 25198 89891
PRODUCT PROFILE
Zuari Cement manufactures and distributes its own main product lines of cement .We aim to optimize production across all of our markets, providing a complete solution for customer's needs at the lowest possible cost, an approach we call strategic integration of activities. Cement is made from a mixture of 80 percent limestone and 20 percent clay. These are crushed and ground to provide the "raw meal", a pale, flour-like powder. Heated to around 1450 C (2642 F) in rotating kilns, the "meal" undergoes complex chemical changes and is transformed into clinker. Fine-grinding the clinker together with a small quantity of
gypsum produces cement. Adding other constituents at this stage produces cements for specialized uses. Zuari Cements range of cement Zuari Superfine Cement Zuari 43 Grade Cement Zuari Superfine P53 Cement
PPC Superfine
Test Physical Properties FINENESS Setting Surface M2/Kg SOUNDNESS Lechatlier Method (mm) Auto clave (%) SETTING TIME Initial minutes
BISI 489 (Part-1):1991 300.0 Not more than 10 Not more than 0.8 Not less than 30
Final minutes COMMPRESSIVE STRENGTH MPa 3days 7days 28days CHEMICAL REQUIREMENTS Loss of ignition Insoluble residue Magnesium Oxide Lime saturation factor Sulphuric Anhydride Alkalis Chlorides Declared % of fly ash used
Not more than 600 Not less than 16.0 Not less than 22.0 Not less than 33.0 Not more than 5% X + 4.0(100-X)/100 X= Declared % of Fly ash % will not vary more than +- 3.0%
1 12 1.3 1.3 Not more than 6% 0.01 (X) 15% Not more than 3% Not more than 0.05
Definition :
The term inventory refers to assets, which will be sold in future in the normal course of business operations. The assests, which the firm stores as inventory in anticipation of need, are raw materials, work-in-progress/process, and finished goods. Inventory often constitute a major element of a total working captial and hence it has been management. Inventory control is a system, which ensures the provision of the required quantity at the required time with the minimum amount of capital inventories are the second largest asset category for the manufacturing firms next to plant and equipment. Inventory control includes scheduling, the requirements, purchasing, receving and inspecting, maintainig stock records and stock control. Inventory control is a matter of coordination. A proper material control helps in improving theinput-output ratio. correctly observed, Good inventory management is good financial
ZUARI CEMENT LTD DIVISION : TOTAL INVENTORY TREND : Table 3.1 Total inventory trend PARTICULARS A) Raw Material (at cost*) B) work in process (at cost*) c) Finished goods (at cost*) Total 2006 132 288 633 1053 2007 167 178 280 625 2008 168 128 236 532 2010 311 241 422 974
Table 3.2 raw materials Particulars Raw material (at cost *) 2006-07 132 2007-08 167 2008-2009 168 2009-10 311
Work in process at ZUARI CEMENT Division Table 3.3 work in process Particulars Work in process(at cost *) 2006-07 288 2007-08 178 2008-2009 128 2009-10 241
S FINISHED GOODS
3.3 NEED FOR INVENTORY CONTROL: If a cost accounting system is to be effective there must be a proper control of inventory and supplies form the time orders are placed with suppliers until they have been effectively utilized in production. Materials are equivalent to cash and they make up an important part of the total cost. It is essential that materials should be properly safeguarded and correctly Proper control of material can make a substantial contribution to the accounted.
efficiency of a business. The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting. In a large firm the planning and routing department is responsible for arranging how and where the work is to be done and issue instructions. It sets definite time schedules so that necessary materials are delivered to the proper department in proper time not too long before hand neither lest it should interface with other work nor after they are required as this result in idle time. Business firm keep inventories for different purposes. Every firm big or small trading or manufacturing has to maintain some minimum level of inventories. Based on some motives the inventories are maintained.
a. Transaction motives:
Every firm has to maintain some level of inventory to meet the day-to-day requirements of sales, production process, customer demand etc. In this finished goods
as well as raw material are kept as inventories for smooth production process of the firm.
b. Precautionary motive:
A firm should keep some inventory for unforeseen circumstances also like loss due to natural calamities in a particular area, lay outs etc so the firm must have some finished goods as well as raw-materials tc meet circumstances.
c. Speculative motive:
The firm may be made to keep some inventory in order to capitalize an opportunity to make profit due to price fluctuations. 3.4 REASONS AND BENEFITS OF INVENTORY: The optimal level of maintaining inventory is a subjective matter and depends upon the features of a particular firm,
(ii)Manufacturing firm:
A manufacturing firm should have inventory of not only the finished goods, but also of raw materials and work-in-progress for following reasons.
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 is also helps in fulfilling when some sales orders, even if the supply of raw-materials have stopped.
g) 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 of material in stock.
h) A suitable method of valuation of materials is essential because it affects the cost of jobs and the value of closing stock of materials.
VII.
It prevents delays in production due to lack of materials by supplying, Proper quantities at the right time.
a) Carrying cost :
This is cost incurred in keeping or maintaining an inventory of one unit of raw materials, work-in-progress or finished goods. Here there are two basic cost involved. i) Cost of storage : It includes cost of storing one unit of raw materials by the firm. This cost may be for the storage of materials. Like rent of spaces occupied by stock, stock for security, cost of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc.
ii) 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 investment 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)
b) Cost of ordering :The cost of ordering includes the cost of acquisitions of
inventories. 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) (c) Cost of stock out: It is also called as hidden cost. The cost is the situation when the firm is not having units of an item in 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 face 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 spend 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)
In balance sheet closing stock is shown under current assets and is also credited to manufacturing or trading accounts. The inventories are valued on the basis as follows. Cost of raw materials is stock may include freight charges and carrying cost. But such cost should not exceed market price. 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 degree of completion, Cost of finished goods wound normally to be total or full cost it includes prime cost plus appropriate amount of the overhead. Selling and distribution cost is deducted on the hand work in progress.
1) Purchase departments:
It is responsible for purchase of all necessary goods of proper quality to purchases, without interruption to supply the finished goods. It receives purchase requisitions. Invites quotations or tenders from suppliers with desired quality. Issue purchase orders to the selected supplier. Certify the quality and quantity of order received in specified time. 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; I. Make valuation of purchase. II. 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 suppliers, governments controlled prices by notifications, suppliers, catalogues and circulars may be valuable guides for obtaining rates of materials. 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 purchases has to bear the costs. Cost of containers with regard 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.
Inspect materials and supplied as to quality by analyzing them suitably. Inform the purchasing department and accounts department all facts that may require adjustment with vendor. Analyze and give them the code depending up on the type of materials.
4) Production departments:
a) 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. Check and verify that the materials of requisite quantity and quality have been received and charged to production. Keep proper records of materials received and their progress through different operations or progress. Prepare materials return note for excess materials. Prepare materials transfer note to cover any transfer of materials. Prepare report on scrap for reporting to management.
3.9RECEIPT AND ISSUE OF INVENTORIES: a) Receipt of Inventories in to stories : After incoming materials have been examined and approved they are passed on to the 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 then places the inventory in appropriate bin or shelf and makes 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 MATERIAL CODE LOCATION CODE BIN NO STORES LEDGER NO MAXIMUM LEVEL MINIMUM LEVEL ORDERING LEVEL ORDERING QUANTITY UNITS
Date
Date
BIN CARD:
For each kind of materials or article a bin card is attached to the bin on which each individuals material 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 a new balance will be extended. These cards should agree with the quantities entered in the relevant accounts in the stores ledger. The main advantage is to enable the stores keeper purchase requisition 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.
: : : : :
Table 3.6 stores ledger account Date CSR / STO No .MIR No. In Production Order No. / Section Quantity Out Balance Receipts & Issue
NO: DATE: Table 3.7 material return note Office Use Only Rate Amount Remarks
Approved By
Returned By
Received by
Priced by
Table 3.8 material transfer note Qty Description Code No. Office Use Only Rate Amount Remarks
Approved By
Returned By
Received by
Officer
Priced by
4) Transfer of Materials:
Transfer of materials from 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 and debiting the cost accounts affected. These note 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 or Half yearly or Annually.
b) Range of price fluctuations 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.
(iii)
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 stock ate used up first. The method is most suitable for use where in material is slow-moving and comparatively high unit cost.
Advantages:
(i) 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. (ii) The resulting stock balance generally represents fair commercial valuation of stock. (iii) It is based on traditional principles.
Disadvantages
(i) The number of calculations in the stores ledger involved tends to be complicated with increase in clerical error. (ii) The cost of consecutive similar jobs will differ if the price changes suddenly.
(iii)
In times of rising prices, the charge to production is unduly low as the cost of replacing the material will be higher.
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 made by using this method. (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 method.
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.
because here issue prices are calculated on receipts of materials and not on issue of materials. Thus as soon as new price is calculated and issues then taken. Advantages: (i) This method is advantages where the price varies widely as its use even out the defect of these wide variations. (ii) The basis of price calculations is a simple one involving only the division of total amount of material in stock by quantity in stock. (iii) Calculation of new prices arises only when receipt of stocks are received.
(iv)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. (i) Profit or loss may be incurred as in simple average prices. (ii) As LIFO or LIFO this method calls for many calculations. (iii) 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 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. 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 the costs.
(iv)It reduces of inflation or price fluctuations is very difficult to fix a standard price. (v) The method also incurs a profit or loss on issues and closing .
Materials are equivalent to cash and they make up an important part of the total costs. It is essential that materials should be properly safeguarded and correctly accounted. Proper control of material can make a substantial contribution to the efficiency of a business. The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting.
The study is done on inventories held by zuari cement ltd. The scope of the study includes the ABC analysis of raw materials, WIP and finished goods for four financial years. The study provides insight to the management of high vale items and also brings attention of management towards movement of a class items over period of 4 years.
To review the ABC analysis and understand the impact of business dynamics on inventory.
METHODOLOGY
Information is collected form primary and secondary sources Primary Data:
The data has been gathered through interactions and discussion with the executives working in the division. Some important information bas been gathered through couple of unstructured interviews of executives. Secondary Data: Referred standards texts and reference books for collecting the information regarding the theoretical aspects, of the topic.
Annual reports and other magazines published by the company are used for collecting the required information.
1) ABC Analysis:
It is based on proposition that (ii) Managerial items and efforts are scare and limited (iii) Some items of inventory are more important than others.
1)ABC Analysis:
ABC Analysis classifies various inventory into three sets or groups priority and allocates managerial efforts in proportion of the priority the most important item are classified into classified into classes-A, those of intermediate importance are classified as class-B and remaining items are classified into class-C.assume these three classes A, B, C are A-blended cement, B-Portland cement, C-premier cement. The financial manager has to monitor the items belonging to monitor the items belonging to different groups in that order of priority and depending upon the consumptions. The items with the highest value is given tcp priority and soon and are more controlled them low value item. The re-rational limits are as follows. Category A B C % of Items 5-10 10-20 70-85 %of total materials cost 70-85 10-20 5-10
* A-Blended Cement,B-portland cement,C-premerier cement Procedure: (i) Items with the value is given top priority and soon. (ii) There after cumulative totals of annual of consumption are expressed as percentage of total value of consumptions. (iii) Then these percentage values are divided into three categories. ABC Analysis helps in allocating managerial efforts in proportion to importance of various items of inventory. ABC Analysis at ZUARI CEMENTS Division: Table: RAW MATERIAL (AT COST*) Particulars Raw Material (at cost*) A B C 70% 20% 10% 92 26 14 69% 23% 8% 14 38 14 72% 19% 9% 120 32 16 70% 17% 13% 218 53 40 2007 132 2008 167 *Rs In millions 2009 168 2010 311
Interpretation:
Consumption of raw material A(blended cement) gradually increased every year from 2006 to 2010, raw material Bs(Portland cement) consumption increased from 2006 to 2007 and decreased thereafter and raw material Cs(premiere cement) Consumption increased gradually every year from 2006 to 2010.
Table 4.2WORK IN PROCESS (AT COST*) *Rs In Millions Particulars Work in process(at cost*) A(blended cement) B(Portland cement) C(premeier cement) 70% 20% 10% 2007 288 201 58 29 69% 23% 8% 2008 178 123 41 14 72% 19% 9% 2009 128 92 24 12 70% 17% 13% 2010 241 169 43 81
Interpretation: The consumption of work-in-progress A gradually increased from 2006 to 2008 and it decreased in the year 2010, work-in-progress Bs consumption increased from 2006 to 2010 and decreased there after and work-in-progress Table FINISHED GOODS (A t cost*) Table * Rs In millions Cs consumption decreased in the year 2007 compared to 2006 and increased thereafter.
Interpretation:
The consumption of finished goods A (blended cement) increased in the year 2008 when compared 2009 and then it decreased in the year 2008 and again it is increased in the year 2010. increased in the year 2010. 2010 it again increased. The determination of the appropriate quantity to be purchased in each lot to replenish stock as a solution to the order quantity problems necessitates resolution of conflicting goals. Buying in a higher average inventory level will assure. (i) Smooth production / sale operation and (ii) Lower ordering or setup costs. But it will involve higher carrying costs. On the other hand small orders would reduce the carrying cost of inventory by reducing the average inventory level but the ordering costs would increase, Finished goods Bs (Portland cement) consumption Finished goods Cs (premiere cement) consumption
gradually decreased in the years 2007 and 2008 when compared to 2008. In the year
as there is a likelihood of interruption in operations due to stock-outs. A firm should not place either to high or small orders on the basis of a trade off between benefits derived from the availability of inventory and cost of carrying that level of inventory, appropriate or optimum level of order to placed should be determined. The optimum level of inventory is popularly referred to as the economic order quantity or economic lot size. It may be defined as that level of inventory order that minimizes the total cost associated with inventory management. It is based on some assumptions, which are restrictive. a. The firm knows with certainty the annual usage of a particular item of inventory. b. c. Rate at which the firm uses inventory is steady over time. The orders placed to replenish inventor stocks are received at exactly that point that point in time when inventories reach zero.
Interpretation: The interpretation increased to 61 in 2009-2010 from 36.5 implying there was a consistent and good management control. inventory will be high. Being Cement Company, generally the
Interpretation: From the above table it can be understand that the 55% of inventory over current assets ration was showing trend for two years 2005-06. 1) How ever from the year 2009-10 it is showing an increasing trend. 2) The lowest inventory over current assets ratio was recorded at 40% during the year 2005-06 and the highest inventory over current assets ratio we recorded at 107% during 2009-10. 3) The average inventory over current assets ratio was recorded at 80
4) Current ratio:
In order to know the current ratio the percentage of current assets to current liabilities is calculated and which is presented in the following table. Current assets Current ratio= ---------------------Current liabilities
Calculation of Current ratio: Year 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Current assets 24172.33 28770.78 53063.75 45598.02 49713.32 86811.49 Current liabilities 7862.11 8042.62 16204.14 14876.45 17728.22 36253.41 Ratio 3.07% 3.57% 3.27% 3.06% 2.80% 2.39%
Interpretation:
1) From the above table it can be interpreted that the 3.07% of current assets over current liabilities ratio i.e., current ratio was showing a decreasing trend from year 2005-06. 2) In the year 2004-05 the ratio was 3.07 and has increased to 3057 in the 2005-06.
3) The lowest current ratio was recorded at 2009-10 which is 2.39% and the highest ratio was recorded at 3.57 during the year 2005-06. 4) The average current ratio was recorded at 3.02 during the review period.
6)Quick ratio:
The quick ratio is the relationship between quick to current liabilities quick assets is more rigorous test of liability position of a firm it is computed by applying the following formula. Quick ratio= current assets-current liability Where quick assets = current assets- inventory
Interpretation:
1) From the above table it can be understand as that the % of quick assets to current liabilities i.e., the quick ratio was 0.002 in 2006-07 and from that year it is showing increasing trend. 2) The highest quick ratio was recorded at 2.12 during the year 2005-06 and the lowest quick ratio was recorded at 0.002 during the year 2006-07. 3) The average quick ratio was recorded at 0.66 during the review period. 6) Inventory conversion period: It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of the days by inventory turns over. This formula may be as: Days in a year (360 days) Inventory conversion period = Inventory conversion period: (in crores) Year 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 Cost of goods sold 59567.65 57046.56 118561.78 126368.65 129568.89 299726.18 Avg. inventory 7200.12 36822.20 94022.27 11365.07 12225.77 155627.91 Ratio 8.27 1.54 1.26 11.11 10.59 1.92 ICP (Days) 43 233 285 32 33 187 _____________________ Inventory turnover ratio
Interpretation: From the above table it can be identified the following observations: 1) The inventory conversion period was 233 days during the year 2005 06 but it declined to 285 during 2006 - 07, which indicates that the stock has been very quickly converted into sales which mean the company is managing the inventory efficiently. 2) The lowest inventory conversion period was recorded at 285 days in the year 2006 07 and the highest inventory conversion was recorded at 187 days in the year 2009 10. The average inventory conversion period was recorded at 97days during the review period
SUGGESTIONS
The Zuari Cement ltd work-in-process time period is should be reduced. The Zuari cement ltd to countinue the ABC analysis The investment on raw material should be made as per the requirement. Unnecessary investment may block up the funds. Neither too high nor too may inventory turnover ratios reduce profit and liquidity position of the industry. So, proper balance should be made to increase profits and to ensure liquidity. The raw material should be acquired from the right source at right quality and at right cost. The process that was being used by Zuari Cement with the purchasing department should undergo changes, so that, it seeks enhance the celerity of the delivery of a product without compromising its quality by improving the utilization of material, labour and equipment. To reduce the work, the purchasing department may enter the purchasing order into a database and did not send a copy to any one.
CONCLUSION
After analyzing the inventories to ZCL during the last three years, it is clear that inventories of the company are not stable. The company by strictly following inventory management like EOQ, ABC analysis cab increases its profits. However the management needs to focus more on the inventories.
BALANCES SHEETS
BALANCE SHEET AS AT 2006-2007
S.no 1. Particulars SOURCE OF FUNDS A. Share holders funds: Share capital Share application money Reserves and surplus B. Loans funds: Secured loans Unsecured loans TOTAL 2. APPLICATION OF FUNDS A. Fixed assets: Gross block Less: Depreciation Net block Capital work in progress including advance for capital expenditure B. Investments C. Advance /expenses D. Current assets, loans &advance: Inventories Sundry debtors Cash & bank balances Loans & advances Less: current liability& provisions: Current liabilities Provisions Net current assets E. miscellaneous expenditure F. Profit &loss account 53355.44 14266.83 39088.61 78.64 39167.25 36233.99 ----As on 31st March 2006 Rs.Lacs 25796.14 17000.00 21901.93 64698.07 22645.23 4484.79 27130.02 91828.09 34614.73 3719.16 38333.89 86031.96 53222.48 11504.89 41717.59 105.82 41823.41 0.11 2759.37 Amount As on 31st March 2007 Rs.Lacs 15196.14 10600.00 21901.93
TOTAL
42796.14 ----21901.93
19018.51 9070.51
28089.02 92787.09
2.
TOTAL APPLICATION OF FUNDS A. Fixed assets: Gross block Less: Depreciation Net block Capital work in progress including advance for capital expenditure B. Investments C. Advance /expenses D. Current assets, loans &advance: Inventories Sundry debtors Cash & bank balances Loans & advances Less: current liability& provisions: Current liabilities Provisions Net current assets E. miscellaneous expenditure F. Profit &loss account TOTAL
39167.25 36233.99
92787.09
92721.42
S.no 1.
BALANCE SHEET AS AT 2008-2009 Particulars As on 31st Amount March 2008 Rs.Lacs SOURCE OF FUNDS A. Share holders funds: Share capital 42796.14 Reserves and surplus 21901.93 64698.07 B. Loans funds: Secured loans Unsecured loans 17431.03 9767.41 27198.44 TOTAL APPLICATION OF FUNDS A. Fixed assets: Gross block 53550.07 Less: Depreciation 19787.74 Net block 33762.33 Capital work in progress including advance for capital expenditure 140.42 B. Investments C. Advance /expenses D. Current assets, loans &advance: Inventories Sundry debtors Cash & bank balances Loans & advances 2503.20 Less: current liability& provisions: Current liabilities Provisions Net current assets E. mliscellaneous expenditure F. Profit &loss account TOTAL 2467.39 1290.71 1906.20 8167.50 91896.51
As on 31st March 2009 Rs.Lacs 42796.14 21901.93 64698.07 19018.51 9070.51 28089.02 92787.09 53331.74 16982.13 36349.61 128.23
2.
333902.75 36557.57
36477.84 36525.14
42796.14 21901.93
2.
TOTAL APPLICATION OF FUNDS A. Fixed assets: Gross block Less: Depreciation Net block Capital work in progress including advance for capital expenditure B. Investments C. Current assets, &advance: Inventories Sundry debtors Cash & bank balances Loans & advances loans
89896.69
Less: current liability& provisions: Current liabilities Provisions Net current assets E. miscellaneous expenditure F. Profit &loss account TOTAL
BIBLIOGRAPHY
I.M PANDAY FINANCIAL MANAGEMENTY Vikas publishing house PVT limited, New Delhi, 10th edition 2008. ASWATHAPAPRODUCTION MANAGEMENT Himalaya publishing house, New Delhi, Hyderabad, 5th edition, 1999. MANAGEMENT ACCOUNT AND CONTROL S.N. Maheswari.
WEBSITES:
www.zuari.com www.google.com