INVENTORY CONTROL

Prof. Subhash Dalvi

MFM, M.Com, LLB, DMM, GDC&A
 INVENTORY

• Inventory means goods and materials held available

in stock by a business
• In accounting, inventory is considered an asset.
• In business management, inventory consists of a list
of goods and materials held available in stock.
• Inventory refers to the stock of resources, that possess
economic value, held by an organization at any point
of time. These resource stocks can be manpower,
machines, capital goods or materials at various stages
 INVENTORY MANAGEMENT

• Inventory management is primarily about

specifying the size and placement of stocked
goods. Inventory management is required at
different 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
 INVENTORY CONTROL
• Main purpose of inventory control is to discover and
maintain an optimum level of inventory investment
• In considering inventory control two limits must be
imposed
• If the stock level is less, it disrupts production and
affects sales.
• If the stock level is more, it involves locking up of
money, increases expenditure by way of carrying
costs and risk of obsolescence.
• Optimum inventory level lies somewhere between
these two levels
 VARYING INTERESTS CONCERNING STOCK
• SALES DEPARTMENT – like to have maximum stock of
finished goods to meet all its customer demand immediately

• PRODUCTION DEPARTMENT – may wish to produce large

batches of a few products so that production runs are long and
costs are low

• FINANCIAL CONTROL – would prefer low stock in order to

reduce the capital tied up in stock

• Because of these conflicting interests the level of inventory will

keep on fluctuating, although such fluctuations cannot be
eliminated entirely. Business firms can protect themselves by
keeping inventory well under control and by fixing inventory
levels and plans based on clear assessment and balancing risks.
 KEY QUESTIONS

• All decisions regarding inventory control are

influenced by two key questions
1. What quantity should be purchased or
manufactured at a time and
2. When should that quantity be purchased or
manufactured
 STOCK / INVENTORY

• Raw Materials (R/M)

• Work in Progress (WIP)
• Finished Goods (F/G)
• Spare Parts
• Stationery
• Packaging Materials
• Fuel, Oils & Lubricants
• Miscellaneous
TYPES OF COST RELATED TO MATERIALS

1. Basic Costs
2. Ordering Costs
3. Holding or Carrying Costs
4. Shortage Cost / Intangible Cost / Stock Out
 1. BASIC COSTS

• Cost of Materials • Cost on Materials

Basic price of the Packaging &
materials Forwarding, Excise,
VAT, Sales Tax, Freight
& Transportations,
Insurance, Octroi,
Material Handling,
Loading & Unloading
etc.
 2. ORDERING COST
• Purchase • Annual Cost of
Establishment Cost Purchase Department
• Salaries & Wages of -----------------------------
Staff Total No. of Orders
• Tour Expenses of
Managers Gives
• Conveyance of
Purchase Assistant
Cost Per Order
• Cost of Stationery
• Inspection Cost etc.
3. HOLDING / CARRYING COST
• Interest on Working
Capital
• Insurance Cost
• Cost towards
Establishment
• Cost of Safety & Security
• Losses (Evaporation,
Leakages, Breakages,
Spoilage, Spilage,
Pilferage, Obsolescence)
4. SHORTAGE / INTANGIBLE /
STOCK OUT COST
• Production & Sales
Commitments failure
• Image / Credibility Loss
• Order Loss
• Business Loss / Black
Listing
• Opportunity Loss
• Employee Morale Loss
PRINCIPLES FOR EFFECTIVE INVENTORY
CONTROL
• Sales are to be correctly forecasted
• Production schedule should be properly forecasted &
laid out
• (forecasting of sales & production would assist in
efficient purchasing & investment in materials and
for controlling production inventory)
• Suitable Procedures should be laid down to guide
managers in performance evaluation and decision
making
 TECHNIQUES OF INVENTORY CONTROL
• ABC Analysis
• Setting of Various Stock Levels
• Establishment of System of Budgets
• Use of Perpetual inventory records and continuous
stock verification
• Economic Order Quantity
• Provisioning & Purchase Procedure
• Review of slow and non moving items
• Use of control ratio e.g. materials consumed / average
inventory / total inventory / cost of production, cost
of sales etc)
• Just in Time management (JIT)
 ABC Analysis
• Always Better Control System
• Inventory items are classified in to 3 categories such
as A, B & C based upon its value & cost
significance.
• Category A – High Value but Small Quantity
• Category B – Moderate Value & Moderate Quantity
• Category C – Small Value but High Quantity
Setting of Various Stock Levels
• Various stock levels are fixed scientifically to
avoid over stocking and under stocking of
materials.
• Overstocking leads to unnecessary blockage of
materials and investment and under stocking
of materials leads to disputation in production
• EOQ, EBQ etc.
 Perpetual Inventory System
• System of records maintained by the controlling
department which reflects the physical movement of
stocks and their current balances
• Bin Card & Store Ledger constitute the bedrock of
perpetual inventory system
• It is a method of recording store after every receipt
and every issue and their current balances to avoid
closing down the firm for stock taking
• To ensure accuracy the physical verification may be
made which must have to agree with the balance of
Bin Card & Store Ledger, if there is any discrepancy
between the two, it may be adjusted by preparing
Debit Note & Credit Note
ECONOMIC ORDER QUANTITY (EOQ)

• Economic ordering quantity is that quantity of

material which are to be ordered in one time in
order to minimize ordering cost, carrying cost
as well as cost of holding stock
 Practical Problem 1
• In a leading biscuit manufacturing company the
demand for corrugated boxes is 20000/- numbers per
year. The cost of placing an order is Rs.100/-
Inventory carrying cost are estimated at 20% of the
average inventory cost per year. The price per box is
Rs.10/-. Find the following
• EOQ
• No. of Orders per year
• TVC of inventory per year
• Gap between successive orders assuming 300
working days per year
EBQ – Economic Batch Quantity
 Practical Problem 2
• A contractor has to supply 10000 bearings per day to
an automobile manufacturer. He finds when he starts
production run he can produce 25,000 bearings per
day. The cost of holding bearings in stock for 1 year
is Rs.2/- and the set-up cost for the production run is
Rs.1800/- Find
• EBQ
• No of set-ups per year
• Gaps between batch starts
• TVC at EBQ
• Maximum Inventory Level
 VED Analysis
• Used for control of “spare parts”
• Vital – cost of stock is very high
• Essential – essential spares for the production
to continue
• Desirable – spares which are needed but their
absence even a week or more will not lead to
stoppage of production
 FACTORS THAT TEND TO INCREASE INVENTORY
• Product Diversification (Colgate)
• Inefficient purchase organization
• Economic Batch Quantity having not been
established
• Ineffective control on issues and consumption.
Excessive wastage & spoilage require more stock
• Absence of suitable system of classification and
codification
• Increase in the market price
• Reduced / slow sales
• Non existence of research for simplification and
standardization of products
• Management policy to overstock for some reason
 REASONS FOR KEEPING STOCK
• Time - The time lags present in the supply chain, from
supplier to user at every stage, requires that you
maintain certain amounts of inventory to use in this
"lead time."
• Uncertainty - Inventories are maintained as buffers to
meet uncertainties in demand, supply and movements
of goods.
• Economies of scale - Ideal condition of "one unit at a
time at a place where a user needs it, when he needs it"
principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings
in economies of scale, thus inventory.
 WHY STOCK VALUATION
• An inventory valuation allows a company to
provide a monetary value for items that make
up their inventory.
• Inventories are usually the largest current asset
of a business, and proper measurement of them
is necessary to assure accurate financial
statements.
• If inventory is not properly measured,
expenses and revenues cannot be properly
matched and a company could make poor
business decisions.
 METHODS OF STOCK VALUATION
• First-in First-Out (FIFO): the first goods to be sold (cost of
sales) are the first goods that were purchased or consumed
(cost of production). The ending inventory is formed by the
last goods that were purchased and came in at the end to the
inventory.
• Last-in First-out (LIFO): the first goods to be sold (cost of
sales) are the last goods that were purchased or consumed
(cost of production). The ending inventory is formed by the
first goods that were purchased and came in at the beginning
to the inventory.
• Average Cost: this method requires to calculate the average
unit cost of the goods in the beginning inventory plus the
purchases made in the period. Based on this average unit cost
the cost of sales (production) and the ending inventory of the
period are determined.
• Specific Identification: each article sold and each unit that
remains in the inventory are individually identified.
 INVENTORY ACCOUNTING SYSTEM
• Perpetual: The perpetual inventory system requires
accounting records to show the amount of inventory
on hand at all times. It maintains a separate account in
the subsidiary ledger for each good in stock, and the
account is updated each time a quantity is added or
taken out.

• Periodic: In the periodic inventory system, sales are

recorded as they occur but the inventory is not
updated. A physical inventory must be taken at the
end of the year to determine the cost of goods sold.
Regardless of what inventory accounting system is
used, it is good practice to perform a physical
inventory at least once a year.
 Practical Problem

From the following particulars value the closing stock

under FIFO & LIFO
1.9.2010 Opening stock 200 units @Rs.3.50 pu
3.9.2010 Purchased 300 units @Rs.4.00 pu
13.9.2010 Purchased 900 units @4.30 pu
23.9.2010 Purchased 600 units @3.80 pu
Issues-
5.9.2010 Issued 400 units
15.9.2010 Issued 600 units
25.9.2010 Issued 600 units
 COMPUTERIZED INVENTORY CONTROL

• Computerized Inventory control means using a

software program designed to keep track of
inventory items (items numbers, descriptions,
quantities, cost and selling price) for every
item received and produced and every item
sold.
 COMPUTERIZED INVENTORY CONTROL SYSTEM

• An inventory control system is an integrated

package of software and hardware used in warehouse
operations, and elsewhere, to monitor the quantity,
location and status of inventory as well as the related
shipping, receiving, picking and put-away processes.
In common usage, the term may also refer to just the
software components.

• An inventory control system may be used to automate

a sales order fulfillment process. Such a system
contains a list of order to be filled, and then prompts
workers to pick the necessary items, and provides
them with packaging and shipping information
THANK YOU