Inventory or Stock Control

Inventory control includes control over raw materials,

stores , supplies, spare parts, tools, components,
assemblies, work in progress, and finished goods.
Inventory control is a system which ensures the
provision of the required quantity of inventories of
the required quality at the required time with the
minimum amount of capital.
The objective of the inventory control is to obtain the
maximum inventory turnover with sufficient stock to
meet all requirements.
What to buy ?
When to buy ?
How much to buy ?
At what price to buy ?
Finance availability
Quantity discounts allowed
The cost of storage and storage space available
Order placing and receiving costs,
Risk of loss due to falling prices
Deterioration
Evaporation
Obsolescence,
Theft, etc
EOQ
Time to obtain deleivery
Stock
Demand & Supply Method of Stock
control & EOQ
Usage
Lead time or re-order period
Economic order quantity
Reserve Stock
Maximum and Minimum levels
Reorder quantity
Buffer Stock
Re-ordering level
Minimum Stock Level
Maximum Stock Level
Danger Level
Modes for deciding Max. Min. &
reordering levels
1. ROL = Maximum consumption X Maximum
reorder period
2. Minimum level = ROL – Average consumption X
Average re-order period
3. Maximum Level = ROL – min. consumption X min.
reorder period + reorder quantity
4. Average Level = ( Maximum level + minimum
level) / 2 or Average level = minimum level + ½
Reorder quantity.
5. Danger level = Average consumption X Max. reorder
period of emergency purchases.
 Illustration 1 : From the following figure relating to two
components X & Y compute reorder level , minimum level ,
maximum level and average stock level.

Component x Component y
Maximum consumption 75 units 75 units
per week
Average consumption per 50 units 50 units
week
Minimum consumption 25 units 25 units
per week
Reorder period 4 to 6 weeks 2 to 4 weeks
Reorder quantity 400 units 600 units
Economic Order Quantity
Holding cost
Procuring or ordering cost
E= economic order quantity in units
U = Usage or consumption in units during a
particular period
O = order placing and receiving cost
Ch = Stock holding cost for one unit for the particular
period
A refrigerator manufacturer purchases 800 units of a
certain component p.a. @ rs 30 per unit from outside
supplier. The annual usage is 800 units p.a , order
placing and receiving cost is Rs 100 per order and cost
of holding one unit of the component for one year is
Rs 4 . Calculate the economic order quantity, the
number of orders placed per year, and the length of
the inventory cycle.
Calculation through tabular
method
Annual No. of Units Avg. Carrying cost Ord Total
Usage orders per Inventor @ 4 % per er annual
p.a order y units unit on placi costs
average ng
inventory cost
800 1 800 400 1600 100 1700
2 400 200 800 200 1000
3 267 133 532 300 832
4 200 100 400 400 800
5 160 80 320 500 820
6 133 67 268 600 868
7 114 57 228 700 928
10 80 40 160 1000 1160
Quantity discounts and EOQ

In the previous table lets us assume that the outside

supplier quoted different rates for different order
sizes as given below:
order size in units rate per unit Rs.
Less than 135 30.00
135 and less than 201 29.80
201 and less than 401 29.70
401 and above 29.50
The annual demand for an item of stock is 45 units.
The item costs rs 200 per unit to purchase, holding
costs per annum are 15 % of unit costs and ordering
costs are Rs 300 per order. The supplier offers a 2 %
discount for orders in excess of 60 units, and a
discount of 5 % for orders in excess of 90 units. What
is the economic order size.
Material Cost
Material cost of a cost unit can be ascertained by
multiplying the quantity of material consumed for
the cost unit by the price of the material.
Material requisition record was kept to ascertained
the consumption of material for particular cost unit.
For indirect material the material requisition will not
indicate the job number or cost unit but will indicate
__________
In order to ascertain material cost we should –
Make valuation of purchase
FIFO, LIFO, weighted average etc.
What is important in
ascertaining the material cost
Discounts
- Trade discount
- Quantity discount
- Cash discount.
Transport and storage costs
Cost of container
Sales tax excise duty , insurance etc.
Illustration
 Following quotation is received from a supplier in respect of material
X:
 Lot Price – 100 Kg – 5.00 rs per kg
 500 kg – 4.50 rs per kg
 100 kg – 4.00 rs per kg
 Trade discount 20 % and cash discount 5 % are allowed if payments is
made within 15 days. One container is required for every 100 kg of the
material and containers are charged at rs 10 each but credited rs 9 if
returned within 3 months. Transport charges per order is Rs 50 and
storage charges are rs 15. Calculate the material cost for 500 kg and
per kg of the material when the purchase decides to purchase 500 kg
of the material