INVENTORY MANAGEMENT

Inventory
The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also minimise investment in inventories. Inventory includes the following things:
Raw Material Work-in-progress Finished Goods Consumables Spares

Determination of Stock Level

Carrying of too much and too little of inventory is detrimental to the firm. If the inventory level is too little, the firm will face frequent stock-outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital. Various stock levels are: 1. Minimum Stock Level= Re-order level- (Normal consumption *Normal re-order period) 2. Re-order level= Maximum consumption*Maximum Re-order period. 3. Maximum Stock Level= Re-order level+ Re-order Quantity(Minimum consumption* Minimum Re-order period) 4. Danger Level= Average consumption*Maximum re-order for emergency purpose. 5. Average Stock level= Minimum stock level+ of Re-order quantity.

Problems
1. From the following information, calculate reorder level, maximum stock level and minimum stock level.
i. ii. iii. iv. v. vi. Maximum consumption -200 units per day Minimum consumption -150 units per day Normal consumption -160 units per day. Re-order period -10-15 days. Re-order quantity -1,600 units. Normal re-order period -12 days.

Problems
2. Two materials, X and Y are used as follows: Minimum usage 50 units per week each; Maximum usage 150 units per each week; Normal usage 100 units per each week; Ordering quantity: X 600 units and Y 1,000 units; Delivery period: X 4 to 6 weeks; Y 2 to 4 weeks. Calculate for each material:
I. II. III. IV. Minimum stock level. Maximum stock level. Re-order level. Average stock level.

Economic Order Quantity

Economic order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of material which can be purchased at minimum cost. Generally, economic order quantity is the point at which inventory carrying costs are equal to ordering costs. EOQ = Where A= annual consumption S= cost of placing an order I= inventory carrying cost of one unit.

Problems
1. A manufacturing company uses Rs. 1,00,000 material per year. The administrative cost per purchase is Rs. 100, and carrying cost is 20% of an average inventory. Calculate EOQ for the company. 2. A manufacturer buys certain equipment from outside suppliers at Rs. 30 per unit. Total annual needs are 800 units. The following further data are available:
Annual return on investment, 10% Rent, insurance and taxes per unit per year, Re. 1 Cost of placing an order, Rs. 100. Determine the economic order quantity.

Pricing of Material Issues

1. 2. 3. 4. First In First Out (FIFO) Method . Last In First Out (LIFO) Method. Simple Average Price Method. Weight Average Price Method.

Problems
1. Adarsh Company purchased and issued the material in the following order: Ascertain the quantity of closing stock as on 31st January and its value under each of the following methods of pricing the issue: a) FIFO b) LIFO and c) weighted Average Method.
Units January 1 January 5 January10 January12 January15 January20 January30 Purchase Purchase Issue Purchase Issue Purchase Issue 300 600 500 700 800 300 100 Unit Cost Rs. 3.00 4.00 4.00 5.00 -

2. Show the Stores Ledger entries as they would appear when using a. The weighted average method. b. The simple average method c. The FIFO method, and d. The LIFO method.
Units April 1 April 2 Balance b/f Purchased 300 200 Price Rs. 2.00 2.20

April 4
April 6 April 11 April 19 April 22 April 27

Issued
Purchased Issued Issued Purchased Issued

150
200 150 200 200 150

2.30 2.40

3. From the following details of stores receipts and issues of material EXE in a manufacturing unit, prepare the stores ledger using weighted average method of valuing the issues.
Nov 1 Opening stock 2,000 units @ Rs. 5.00 each 3 Issued 1,500 units to production. 4 Received 4,500 units @ Rs. 6.00 each. 8 Issued 1,600 units to production. 9 Returned to stores 100 units by production department (from the issue of Nov. 3) 16 Received 2,400 units @ Rs. 6.50 each. 19 Returned to supplier 200 units out of the quantity received on Nov. 4 20 Received 1,000 units @ Rs. 7.00 each. 24 Issued to production 2,100 units. 27 Received 1,200 units @ 7.50 each. 29 Issued to production 2,800 units.(using upto two decimal places.)