35

Costs involved in Inventory

Every firms maintains inventory depending upon requirement and other features of firm for

holding such inventory some cost will be incurred there are as follows .

Carrying Cost

This is the cost incurred in keeping or maintaining an inventory of one unit of raw materials,

work-in-process or finished goods. Here there are two basic cost involved.

Cost of Storage

It includes cost of storing one unit or raw materials by the firm. This cost may be for the

storage of materials. Like rent of spaces occupies by stock, stock for security, cost of

infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc.

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 invested 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)

Cost of Ordering

The cost of ordering includes the cost of acquisition if inventories.

It is the cost of preparation and execution of an order including cost of paper work and

communicating with the supplier.

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).

Cost of Stock out

It is also called as hidden cost. The stock out is the situation when the firm is not having units

of an item is 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 faces 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

36

Production process to stop and it is expensive because employees will be paid for the time not

spine 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)

Valuation of Inventory

The methods of valuing inventory are combination of the actual cost and replacement cost

plans. The chief advantage of the cost or net realizable value rule is that it is conservative.
Hence

the methods of valuation of inventory are quite independent of system of mincing.

manufacturing or trading accounts. The inventories are valued on the basis as follows:

I) Cost of raw materials in stock may include freight charges and carrying cost. But such cost

should not exceed market price.

II) 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 degrees of completion.

III) Cost of finished goods wound normally to the total or full cost it includes prime cost plus

appropriate amount of the overhead. Selling and distribution cost is deducted on the other
hand

work in progress may be valued at work in progress may be valued at work cost, marginal cost,

prime cost or , even at direct materials.

Purchase & stores procedure

In inventory management the purchase department store department plays a major role to be

the effective inventory there must be cooperation of various departments such as purchase

receiving and inspection stores production and stock control departments.

The main functions of each department are as follows:

Purchase Department

It is responsible for purchase of all necessary goods of proper quality to produces, without

interruption to supply the finished goods.

1) It receives purchase requisitions.

2) Invites quotations or tenders from suppliers with desired quality.

3) Issue purchase orders to the selected supplier.

4) Certify the quality and quantity of order received in specified time

5) Approve purchase invoice for payment after checking invoice for paying after checking
prices and extensions if any needed.

37

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.

1. Make valuation of purchase.

2. 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 borne by 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.

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 purchaser has to bear the costs. Cost of containers with regarded 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.

38

Receiving and Inspection Department

a) Receiving all raw materials and other supplies from various suppliers.

b) Verify items by count, weight etc., and report any shortage

c) Inspect materials and supplied as to quality by analyzing them suitably.

d) Inform the purchasing department and accounts department all facts that may require
adjustment

with vendor.

e) Analyze and give them the code depending up on the type of materials.

Stores keeping Department

a) Check and accept all materials form the received department.

b) Identity each material received with the stock list, check the code number and place in the

respective bins.

c) Issue materials and supplies for use upon presentation of authorized requirement.

d) Record quantities received and issued on bin lards or stock ledger cards consisting the

perpetual inventory records.

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.

1) Check and verify that the materials of requisite quantity and quality have been received

and charged to production.

2) Keep proper records or materials received and their progress through different operations

or progress.

3) Prepare materials return note for excess materials.

4) Prepare materials transfer note to cover any transfer of materials.

5) Prepare report on scrap for reporting to management.

39

Inventory Control Department

In may be a subdivision of the cost accounting department, although in many concerns, it is a

part of the stores keeping department.

A) It keeps perpetual inventory records.

B) Adjust the stock on receipt of the property authorized adjustment notes.

C) Prepare weekly or monthly, statement of receipts, issue, balance and average consumption

of materials both in terms of quantity and value.

RECEIPT AND ISSUE OF INVENTORIES:

(a) Receipt Inventories in to store:

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 than places the

inventory in appropriate bin or shelf and make 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.

40

BIN CARD

DESCRIPTION: MAXIMUM LEVEL:

MATERIAL CODE: MINIMUM LEVE:

LOCATION CODE: ORDERING LEVE:

BIN NO: ORDERING QUANTITY:

STORES LEDGER NO: UNITS:

RECEIPTS ISSUES BALANCE AUDIT

Date Goods received

Note No.

Qty

(units)

Date Requisition

Note No.

Qty

(units)
Qty (units) Initial &

Date

41

BIN CARD

For each kind of materials or article a Bin Card attached to the bin which each individual’s

materials 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 and new balance will
be

extended.

These cards should agree with the quantities entered in the relevant accounts in the stores

ledge. The main advantage is to enable the stores keeper to ascertain at a glance the quantity
of

materials in stock and remind him to place purchase requisition for 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.

Issue of Material from Stores

The storekeeper issue materials on receipt of proper authorized document usually called a

materials requisition or a specification of material. Material requisition is a document which

authorities and records the issue of materials for use.

The materials requisition details the items required for the showing the quantity, description,

and code or past number and the cost center of job to be charged. Requisition is normally

prepared in triplicate: the department receiving the goods retains one copy and the other two
copies are handed over to the two copies are handed over to the storekeeper. He keeps one
along

with him and enters on the issue sides of the appropriate bin card day – today transactions are

noted in stores ledger. Stores ledger:

The stores ledger which is usually a loose leaf or card type , contains an account for each

class of materials their ledger is kept in the cost department and contains such information as
well

facilitate the ascertainment of all details relating to the materials in the minimum of time.

42

STORES LEDGER ACCOUNT

FORM NO: FOLIO:

MATERIALS: MAXIMUM LEVEL:

GRADE: MINIMUM LEVEL:

UNITS: ORDERING LEVEL:

CODE NO: ORDERING LEVEL;

LOCATION

Date CSRV/STDNO. MIR NO. Production Order No./Section Receipts

&Issue

Quantity

In Out Balance

43

Materials returned to Stores

Where materials are issued in excess of requirement the excess quantity is return to the

stories together with materials return note.

Since the materials return to store form a works order is a reduction in the amount recorded
as issued, the preferable entry is to enter the number of units and the value of materials
returned

and received in a different work in the issue column of the stores ledger account.

These values are deducted from total issues, and amount returned by each department as

shown by materials return note is deducted where return of materials to stores return of
material to

stores is a major problem it is customary to use a materials and supplies journal for keeping

records of items.

MATERIAL RETURN NOTE

FROM: NO:

DEPARTMENT: DATE:

JOB NO:

ORDER NO:

Qty. Description Code No. Office Use only Remarks

Rate Amount

Approved

by

Returned

by

Returned

by

Bin NO.

Stores

ledger

Follow
No.

Cost

officer

Ref. No.

Priced by

44

MATERIAL TRANSFER NOTE

NO: DATE:

FROM: TO:

DEPARTMENT: DEPARTMENT:

JOB NO: JOB NO:

ORDER NO: ORDER NO:

Qut. Description Code No. Office use only Remarks

Rate Amount

Approved

by

Issued Received

by

Cost Ref.

No.

Officer Priced by

Transfer of materials

Transfer of materials form 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 may be appropriates. Such a note
shows

are incessancy date for ordering and debiting the cost accounts affected. These not 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 of half yearly or annual

Valuation of Materials Issues

The fixation of the price at which the materials are issued are to be charged to production

is an important one from the point of view to inventory management. These are numerous
factors

to be taken into amount in pricing the material they are.

a) The nature of the business and type of production. The frequency of purchase price

fluctuations and issues of materials.

b) Rang of price fluctuation 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.

45

ISSUE PRICING METHODS

(I) Cost prices :

(a)FIFO (First in First out)

(b)LIFO (Last in first out)

(c)Specific price

(d)Base stock price

(e)HIFO (highest in first out)

(II) Delivered from cost prices

(a) Simple average price

(b) Weighted average price

(c) Periodic simple average price

(d) Periodic weighted average price

(e) Moving simple average price

(f) Moving weighted average price

(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 stocks are 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.

46

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.

Last in first out (LIFO)

This is the price paid for the material last taken into stock from which the materials to be

priced could have been drawn. This method also ensure material being issued at the actual
cost.

Its use is based on the principle that costs should be as closely as possible related to current
price

level. Under this method production cost is calculated on basis on replacement cost.

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 ascertaining the replacement price.
(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.

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.

Weighted average price

This is the price which is calculated by Z dividing the total cost of material in the stock from

which the material to be priced have been drawn, by the total quantity of material in the stock.

This method differs from all other methods because here issue prices are calculated on receipts
of

materials and not on issue of materials. Thus as soon as new lot is received a new price is

calculated and issues are then taken.

47

Advantages

(I) this method is advantageous where the price varies widely as its use even out the effect 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.

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 price.

(II) As LIFO or FIFO 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 housing 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 job costs.

(IV) It reduces classical costs be eliminating detailed cost records.

(V) In times of inflation or price fluctuations is very difficult to fix a standard price.

(VI) This method also incurs a profit or loss on issues and closing stock.

Inflated price

This is the price, which includes a charge designed to cover the cost of contingencies or

related costs.
This price include not only the cost involved in bringing the material to the purchase

premises but also the loss due to evaporation and breakage etc, as well as carrying costs.

Increased gradually every year from 2002 to 2005.

DATA ANALYSIS

Technique of Inventory Management:

Main problems in inventory management are to answer:

_ What are Indus problems in managing inventories?

_ Which inventory policy optimum for Indus? Why? Show calculations.

_ What should be the over level?

To answer these following techniques are used:

* ABC analysis

* Economic Order Quantity

* VED Analysis

* Re-Order Level

* Safety stock

* Inventory Turnover Ratio

ABC Analysis

* It is based on proposition that

* Managerial items and efforts are scare and limited.

* Some items of inventory are some important than others.

ABC Analysis

ABC analysis classifies various inventory into three sets or groups of priority the allocates

managerial efforts in proportion of

The priority the most important item are classified into class - A,
Those of intermediate importance are classified as “class - B’’ and remaining items are classified

into class - C’.

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 values is given priority and soon and are more controlled then low

value item. The re - rational limits are as follows.

Category % of items % of total cost of materials

A 5 - 10 70 - 85

B 10 - 20 10 - 20

C 70 - 85 5 - 10

52

Procedure

(I) Items with the highest value is given top priority and soon.

(II) There after cumulative totals of annual value consumption are

Expressed as percentage of total value of consumption.

(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

Raw material (at closing stock)

YEAR AMOUNT OF RAW MATERIALS

2006 274.94

2007 582.11

2008 1858.17
2009 2031.85

2011 1768.52

Interpretation:

The above graph shows the amount of raw materials at cost. In 2006 the cost of material is
274.94

rs increased in this year and in 2007-2008.It is more increased to 1858.17rs and in 2009 it is

increased to rs2031.85 and in 2011 it is decreased to 1768.52.

500

1000

1500

2000

2500

2006 2007 2008 2009 2011

Amount of raw

materials in

Lakhs

53

Stock in process (at closing stock):-

YEAR AMOUNT OF STOCK in PROCESS

2006 2006.20

2007 82.67

2008 122.82

2009 110.96
2011 NILL

Interpretation:

The above graph shows that work in progress at cost. In 2006 the cost of material is 2006.20 rs

increased in this year and in 2007 it is decreased to rs 82.67 in the year 2008 it is increased to

122.82and it is also maintained in the year 2009 and in 2011 it is nill.

5000

10000

15000

20000

2006 2007 2008 2009 2011

Amount of stock in

process

54

Finished goods (at closing stock):-

YEAR AMOUNT OFFINISHED GOODS

2006 2704.08

2007 6717.44

2008 15019.79

2009 16880.69

2011 7443.66

Interpretation:

The above graph shows the amount of finished goods at cost. In 2006 the cost of material is

2704.08 rs.It is increased to rs6717.44 in the year 2007..It is increased in the year 2008-09 the
cost of goods is rs 1,6880.69 and in the year 2011 it is decreased to 7443.66.

5000

10000

15000

20000

2006 2007 2008 2009 2011

Amount of Finished

goods in Lakhs

55

Stores, spares & consumables (closing stock):-

YEAR AMOUNT OF COST OF STORES AND SPARES

2006 673.25

2007 1628.44

2008 3617.38

2009 3539.05

2011 973.02

Interpretation:

The above graph shows the amount of stores and spares at cost. In 2006 the consumable is rs

673.25 and it is highly increased to rs 1628.44 in the year 2007.The form maintains goods in

proper way rs 3617.38 in the year 2008 and it is decreased to rs 3539.05 in the year 2009 and in

the year 2011 it is decreased to 973.02.

50000
100000

150000

200000

2006 2007 2008 2009 2011

Amount of Raw

material consumed in

Lakhs

56

Raw material consumed:-

YEAR AMOUNT

2006 65875.45

2007 68699.73

2008 172305.70

2009 16,9697.36

2011 38607.65

Interpretation:

The above graph shows consumption of raw materials .The consumption of raw material in the

year 2006 is rs 65875.45 the consumption of raw material increased in the year 2007-08 in the
rs

172305.70. And it is decreased to Rs 16,969,736,368 in the year 2009 and it decreased to Rs 3,

8607.65 in the year 2011.ss

50000

100000
150000

200000

2006 2007 2008 2009 2011

Amount of Raw

material consumed in

Lakhs

57

Economic order quantity:

During 2006-2007:

The firm requires below given units of material for manufacturing of steel. The following are

the details of their operation during 2006-2007.

PARTICULARS

Billets/Blooms 28,889 Qty (mt)

Ordering cost per

order

Rs. 2000

Carrying cost 10%

Purchase price per

unit

400

1. Calculation of EOQ:-

Total units required (A) =28889

The ordering cost per order (O) = Rs.2000

Carrying cost per unit (C) = 10%

EOQ =⌐√2AO/C

=2*28889* 2000/40

=Rs.1699.67

2. Number of orders for the year = A/EOQ

=2889/1699.67

=16.99~17orders

58

3. Total annual cost = carrying cost + ordering cost

= 1445000+ 34000

= Rs.1479000

_ Carrying cost = order size * average inventory

• order size = A/no of orders

=28889/17

= 1699.67

• Average inventory = order size/2

=1700/2

= Rs.850

• Carrying cost = 1700*S850

= Rs.1445000

• Ordering cost = cost per order * no of orders

= 2000*17

=Rs.34000

59
EOQ DURING 2007-2008

The firm requires below given units of material for manufacturing of steel. The

following are the details of their operation during 2007-2008.

PARTICULARS

Billets/Blooms 123596Qty (Mt)

Ordering cost per order 2200

Carrying cost 10%

Purchase price per unit Rs 420

1. Calculation of EOQ:-

Total units required (A) =123596mt

The ordering cost per order (O) = Rs.2200

Carrying cost per unit (C) = 10%

(i.e.) 10% of Rs.2000 =Rs.42

EOQ = √2AO/C

= 2*123596*2200/42

= Rs.3598.354

2. Number of orders for the year = A/EOQ

= 123596/3598.354

= 34.79~35orders

3. Total annual cost = carrying cost + ordering cost

= 6245669+ 77000

= Rs.6322669

60

_ Carrying cost = order size average inventory

= 123596/35

= 3531.31

• Average inventory = order size/2

= 3531.1/2

= Rs.1768.655

• Carrying cost = 3531.31*1768.655

= Rs.6245669

• Ordering cost = cost per order no of orders

= 2200 *35

= Rs.77000

61

EOQ DURING 2008-2009

The firm requires below given units of material for manufacturing of steel. The following

are the details of their operation during 2008-2009.

PARTICULARS

Billets/Blooms 106,066,Qty (Mt)

Ordering cost per order Rs 2400

Carrying cost 10%

Purchase price per unit Rs 440

Calculation of EOQ:-

Total units required (A) =106066mt

The ordering cost per order (O) = Rs.2400

Carrying cost per unit (C) = 10%

EOQ =√2AO/C

=2 *106066* 2400/44

=Rs.3401.59

Number of orders for the year = A/EOQ

=106066/3401.59

=31.18~32orders

Total annual cost = carrying cost + ordering cost

= 5.493154+ 76800

= Rs.5569954

62

_ Carrying cost = order size * average inventory

• Order size = A/no of orders

= 106066/33/2

= 3314.56

• Average inventory = order size/2

= 3314.56/2

= Rs.1657.28

• Carrying cost = 3314.56*1657.28

= Rs.5493154

• Ordering cost = cost per order * no of orders

= 2400*32

= Rs.76800

63
EOQ DURING 2009-2011

The firm requires below given units of material for manufacturing of steel. The following

are the details of their operation during 2009-2011.

PARTICULARS

Billets/Blooms 184,661

Ordering cost per order 3000

Carrying cost 12%

Purchase price per unit Rs 500

Calculation of EOQ:-

Total units required (A) =184,661mt

The ordering cost per order (O) = Rs.3000

Carrying cost per unit (C) = 12%

(i.e.) 12% of Rs.500 =Rs.50

EOQ =√2AO/C

= 2*184,661*3000/50

= Rs.4, 707.37

Number of orders for the year = A/EOQ

= 184661/4707.37

= 39.23~39 orders

Total annual cost = carrying cost + ordering cost

= 11209639+ 117000

= Rs.11326639.

64

_ Carrying cost = order size* average inventory

= 184661/39

= 4734.90

• Average inventory = order size/2

= 4734.90/2

= Rs.2367.45

• Carrying cost = 4734.90 *2367.45

= Rs.11209639

• Ordering cost = cost per order* no of orders

= 3000* 39

= Rs.117000

65

VED ANALYSIS

Vital Essential and Desirable analysis is done mainly for control of spare parts keeping in

view of the criticality to production.

Vital spares are spare the stock – out of which even for a short time will stop production for

quite some time. Essential spares are spares the absence of which cannot be tolerated for more

than a few hours a day. Desirable spare are those, which are needed, but their absence for even
a

week or so will lead to stoppage of production.

MATERIAL CLASS VALUE PRIORITY MATERIAL

10% “A” 70% V 10%

E 20%

D 70%
70%

10%

10%

20% “B” 20% V 10%

E 20%

D 70%

70%

20%

10%

70% “C” 10% V 10%

E 20%

D 70%

70%

20%

10%

66

THE RE-ORDER LEVEL

The re-order level is the level of inventory at which the fresh order for that item must be

placed to procure fresh supply. The re-order level depends upon.

1. Length of time between the placement of an order and receiving the supply.

2. The usage rate of the item. The inventory is constantly being used up. The rate at which the

inventory is being used up. The rate at which the inventory is being used up is called the usage

rate.

The reorder level can be determined as follows:

R=Reorder level

M=Minimum level of inventory

T=time gap/delivery time

U=Usage Rate

The reorder level and inventory patterns have be shown as follows:

The figure shows that if the usage rate is constant, the order are made at even intervals for the

same amounts each time and the inventory goes to zero just before an order is received.

Safety stock:

The safety stock protects firm from tradeoffs due to unanticipated demand for the items level

of inventory investments is however increased by the amount of safety stock. Safety level is

ascertained in inventory as a part because there is always an uncertainly involved in time lag

usage rate or other factors.

Usually smaller the safety level greater the risk of stock – outs. If stock levels are

predictable then there is a chance of stock out occurring. However stock inflows and outflows
are

unpredictable or lesser predictable it becomes to carry additional safety to prevent unexpected

stock outs so usage rate is estimated if cost is low then no safety stock is needed.

Just – In – Inventory:

The Basic concept is that every firm should keep a minimum level of inventory on hand,

relying suppliers to furnish just in time as and when required. JIT helps in emphasizing sufficient

level of stock to ensure that production will not be interrupted. Although the large inventories

may be had idea due to heavy carrying JIT is a modern approach to inventory management and

the goal is essentially to minimize such inventories and there by maximizing turnover.
JIT system significantly reduces inventory carrying cost be requiring that the raw material

be procured just in time to be placed into production. Additionally the work in process
inventory

is minimized by eliminating inventory buffers between different production departments.

67

If JIT is to be implemented successfully there must be a high degree of coordination and co

operation between the supplier and manufacturer and among different production centers. JIT

does not appear to have any relation with EOQ however it is in fact alters some of the

assumptions of EOQ model. The average inventory level under the EOQ model is defined as

Average inventory =1/2EOQ+safety level JIT attacks this equation in two ways.

• By reducing the order cost.

• By reducing the safety stock

The basic philosophy in JIT is that benefits, associated with reducing inventory and

delivery time to a bare minimum through adjustment iEOQ model, will more than offset the
costs

associated with the increased possibility of stock – outs.

68

Inventory Turnover Ratio

What it is

This ratio is often a firm’s inventory turns over during the course of the year. Because
inventories

are the least liquid form of assets, a high inventory turnover ratio is generally positive. On the

other hand, and usually high ratio compared to the average for the industry could mean a
business

is losing sales because of inadequate stock on hand.

When to use it
If a firm’s business has significant assets tied up in inventory, tracking its turnover is critical to

successful planning. If inventory is turning too slowly, it could indicate that is may be hampering

the firm’s cash flow.

Because this ratio judge’s annual inventory turns, it is usually conducted once a year.

The formula: cost of goods sold

Average value of inventory

YEAR COST OF GOODS

SOLD

AVG VALUE

OF

INVENTORY

INVENTORY

TURN OVER

RATIO

2006 70340.33 4076.86 17.25

2007

75687.45 4800.64 15.76

2008 184082.21 12583.99 14.63

2009 190053.62 16067.13 11.83

2011 419760.92

10185.20

41.21

RAW MATERIAL CONSUMED:

Interpretation:
The above graph shows inventory turnover ratio of the form. The ratio can be continuously

decreased from the year 2006-09.The turnover ratio of the form is 17.25 in the year 2006. The

decreased turnover shows good consumption of raw material. The ratio will be decreased to
11.83 in

the year 2009 but it is increased in the year 2011 is 41.21.

20

40

60

2006 2007 2008 2009 2011

70

STOCK LEVELS

During 2006-2007

The company requires 28889 units of billets/blooms to manufacture of steel for the year

2006-07.EOQ is 1700 units. The company makes safety stock equal to 30 day requirement and
the

normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*96.29) + 2888.9

= 3851.9

Safety stock = usage * period of safety stock/ total working days in a year

= 28889*30/300

= 2888.9

Average usage = usage/total working days in a year

= 28889/300
= 96.29

b. Minimum stock level = re-order level –(Average usage * Average lead time)

= 3851.9 – (96.29* 10+20/2)

= 2408

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 3851.9+1700-(96.29*10)

= 5551.9-962.9

= 4589

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 96.29*20

= 1925.8

e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 2408+4589/2

= 3496

71

During 2007-2008

The company requires 123596 units of billets/blooms to manufacture of steel for the year

2007-08.EOQ is 3335 units. The company makes safety stock equal to 30 day requirement and
the

normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*412) + 12360

= 16480
• Safety stock = usage * period of safety stock/ total working days in a year

= 123596*30/300

= 12360

• Average usage = usage/total working days in a year

= 123596/300

= 412

b. Minimum stock level = re-order level – (Average usage * Average lead time)

= 16480 – (412* 10+20/2)

= 10300

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 16480+3335-(412*10)

= 19815-4120

= 15695

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 412*20

= 8240

e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 10300+15695/2

= 13000

72

During 2008-2009

The company requires 106066 units of billets/blooms to manufacture of steel for the year
2008-09.EOQ is 3257 units. The company makes safety stock equal to 30 day requirement and
the

normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*354) + 10606.6

= 141476

• Safety stock = usage * period of safety stock/ total working days in a year

= 106066*30/300

= 10606.6

• Average usage = usage/total working days in a year

= 106066/300

= 354

b. Minimum stock level = re-order level –(Average usage * Average lead time)

= 14147 – (354* 10+20/2)

= 8837

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 14147+3257-(354*10)

= 13864

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 354*20

= 708

e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 8837+13864/2
= 11350

73

During 2009-2011

The company requires 184661 units of billets/blooms to manufacture of steel for the year

2009-11.EOQ is 6155 units. The company makes safety stock equal to 30 day requirement and the

normal lead time is 10-20 days. The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*615.53) + 18466.1

= 24621.4

• Safety stock = usage * period of safety stock/ total working days in a year

= 184661*30/300

= 18466.1

• Average usage = usage/total working days in a year

= 184661/300

= 615.53

b. Minimum stock level = re-order level –(Average usage * Average lead time)

= 24621.4 – (615.53* 10+20/2)

= 15389

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 24621.4+6155-(615.53*10)

= 24521.1

d. Danger level = Average usage * Maximum re-order period for emergency purchases

= 615.53*20

= 12310.6
e. Average stock level = ½(Minimum stock level + Maximum stock level)

= 15389+24521.1/2

= 27649.55

FINDINGS & SUGGESTIONS

_ The inventory turnover ratio is on a declining trend year after year in the period of the study.

It indicates inefficiency of management in turning of their inventory into sales.

_ The company should adopt sophisticated techniques to manage its inventory in a better

manner.

_ The EOQ calculated is suggesting that the company should obtain its inventory requirements

by placing orders frequently to its suppliers rather than one time replenishment.

_ Company should take measures for maintenance of proper stores and spares so as to avoid
the

frequent breakdown of the machinery.

_ There is a need to develop good communication system between various departments like

marketing, planning, procurement, and production and distributions functions.

_ The company should follows Just-in-Time technique, their by it can do away with waiting

time for a receipt of materials.

75
 CONCLUSION
Inventory management has to do with keeping accurate records of finished goods that are

ready for shipment. This often means posting the production of newly completed goods to the

inventory totals as well as subtracting the most recent shipments of finished goods to buyers.
When

the company has a return policy in place, there is usually a sub-category contained in the
finished

goods inventory to account for any returned goods that are reclassified or second grade quality.

Accurately maintaining figures on the finished goods inventory makes it possible to quickly
convey

information to sales personnel as to what is available and ready for shipment at any given time.

Inventory management is important for keeping costs down, while meeting regulation. Supply
and

demand is a delicate balance, and inventory management hopes to ensure that the balance is

undisturbed. Highly trained Inventory management and high-quality software will help make

Inventory management a success. The ROI of Inventory management will be seen in the forms
of

increased revenue and profits, positive employee atmosphere, and on overall increase of
customer

satisfaction.
 BIBLIOGRAPHY
Referred following standard text and websites:

Financial Management

………. I.M. Pandey

Financial Management

………. Prasanna Chandra

Financial Management

………. Van Horn

Management Accounting and Control

………. S.N.Maheswari

Financial Management

……….Khan and Jain

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