UNIVERSITY OF SOUTH ASIA

Production and Operations Management

Course Code: LEB 501

SUBMITED TO:
Md. Anisul Islam Sajib
Assistant Profesor
Department of Business Administration
University of South Asia

SUBMITED BY:
Mamunur Rashid
ID: 211-0355-009
Department of EMBA

Date: 28.08.2021
1. What do you mean by the term Inventory? Discuss different types of
Inventories.
Inventory is the accounting of items, component parts and raw materials a company uses in
production, or sells.

The verb “inventory” refers to the act of counting or listing items. As an accounting term,
inventory refers to all stock in the various production stages and is a current asset. By keeping
stock, both retailers and manufacturers can continue to sell or build items. Inventory is a major
asset for most companies.

Differents types of inventoris:

Raw Materials:

Raw materials are the materials a company uses to create and finish products. When the product
is completed, the raw materials are typically unrecognizable from their original form, such as oil
used to create shampoo.

Components:

Components are similar to raw materials in that they are the materials a company uses to create
and finish products, except that they remain recognizable when the product is completed, such as
a screw.

Work In Progress (WIP):

WIP inventory refers to items in production and includes raw materials or components, labor,
overhead and even packing materials.

Finished Goods:

Finished goods are items that are ready to sell.

Maintenance, Repair and Operations (MRO) Goods:

MRO is inventory—often in the form of supplies—that supports making a product or the

maintenance of a business.

Packing and Packaging Materials:

There are three types of packing materials. Primary packing protects the product and makes it
usable. Secondary packing is the packaging of the finished good and can include labels or SKU
information. The tertiary type of packing is bulk packaging for transport.
Safety Stock and Anticipation Stock:

Safety stock is the extra inventory a company buys and stores to cover unexpected events. Safety
stock has carrying costs, but it supports customer satisfaction. Similarly, anticipation stock
comprises raw materials or finished items a business purchases based on sales and production
trends. If a raw material’s price is rising or peak sales time is approaching, a business may
purchase safety stock.

Decoupling Inventory:

Decoupling inventory is the term used for extra items or WIP kept at each production line station
to prevent work stoppages. Decoupling inventory is useful if parts of the line work at different
speeds and only applies to companies that manufacture goods. Whereas all companies may have
safety stock.

Cycle Inventory:

Companies order cycle inventory in lots to get the right amount of stock for the lowest storage
cost. Learn more about cycle inventory formulas in the “Essential Guide to Inventory Planning.”

2. What are the basic functions of Inventory for an organization?

The functions of inventory control are listed below:

1.To Develop Policies, Plans and Standards Required: So as to achieve the inventory control
objectives.

2. Effective Running of Stores:

This may include problems of layout, utilization of storage space, issuing and receiving
procedures of items kept in stock.

3. Technological Responsibility for the State of Different Materials:

This may include the method of storage, maintenance procedures, studies of deterioration and
obsolete materials and corrective action required.

4. Stock Control System:

This includes purchase procedures of materials, ordering policies, physical verification and
records of items stored.
5. To Ensure the Timely Availability:

Of requisite input materials and avoid building up of stock levels of final product.

6. Maintenance of Specified Inputs:

Specified raw materials, finished components/parts work m process, general supplies in

sufficient quantities are maintained to meet the production requirements of the enterprise.

7. Protection of Inventories:

The inventories are to be protected from improper material handling; wrong and unauthorized
removal from the stores.

8. Pricing:

Pricing of all input materials being supplied to various shops is essential for further cost
estimation of final products.

3. Define EOQ.
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to
minimize inventory costs such as holding costs, shortage costs, and order costs.

Formula and Calculation of Economic Order Quantity

The formula for EOQ is:

Q= = Squareroot ( 2X Demand X order cost/Holding cost)

where:

Q=EOQ units

D=Demand in units (typically on an annual basis)

S=Order cost (per purchase order)

H=Holding costs (per unit, per year)

Math:
1. CNA Tex Ltd uses EOQ logic to determine the order quantity for its various components
and is planning its orders. The annual consumption is 80,000 units; cost to place one order
is Tk 1,200; cost per unit is Tk 50 and carrying cost is 6% of unit cost. Required:

a) EOQ

EOQ = Squareroot ( 2X Demand X order cost/Holding cost)

= Squareroot (2*80000*1200/ 50*6%)

= 8000 units

b) No. of order per year

No. of order per year = Annual Requirements / EOQ

= 80000/ 8000

=10 orders per year

c) Total ordering cost for the year.

We know,

Total inventory cost= Ordering Cost + Caring Cost

Here,

Ordering cost= F/N

= 1200*10

= 12000 tk

Caring Cost= (C* EOQ)/2

= (50*0.06* 8000)/ 2

=12000 tk

∴ Total inventory cost= 12000+12000

= 24000 tk
2. Apex Spinning Ltd. has developed the following costs and other data pertaining to one of

its raw materials:

Normal use per day 400 units

Maximum use per day 600 units

Minimum use per day 100 units

Working days per year 250

Lead time 8 days

Cost of placing one order Tk 20

Cost per unit of material Tk 2.5

Carrying cost % 10%

Required:

a. Economic order quantity:

EOQ = Squareroot ( 2X Demand X order cost/Holding cost)

= Squareroot (2* 100000*20/2.5*10%)

= 4000 units

b. Safety stock:

Maximum use per day ________600 units

(-) Normal use per day___________ 400 units

200 units

Safety stoke= 200 units* 8 (lead time)

=1600 units

c. Reorder point:

Record point = (Normal use per day * Lead time) + safety stock

= (400*8) + 1600
= 4800 units
 d. Normal maximum inventory:

Normal maximum inventory= (Record point - Normal uses during lead time) + EOQ

= (4800- 3200)+ 4000

= 1600 + 4000

= 5600 units

e. Absolute maximum inventory:

Absolute maximum inventory = (Record point - minimum uses during lead time) + EOQ

= (4800 – 800) + 4000

= 4000+4000

= 8000 units

f. Average normal inventory:

Average normal inventory= (EOQ /2) + Safety Stock

= (4000/2) + 1600

= 3600 units

3. The following information is to be used in costing inventory on October 31,

2020 of BSRM Steel Ltd:
October 1 Beginning balance: 800 units @ Tk 6

October 5 Purchased 200 units @ Tk 7

October 9 Purchased 200 units @ Tk 8

October 16 Issued 400 units

October 24 Purchased 300 units @ Tk 9

October 27 Issued 500 units

Required: Compute the cost of materials used and the cost assigned to the inventory at

the end of the month.

a. FIFO costing method:

First In First Out:

Date Details Taka
Oct 1 Beginning balance: 800 units * Tk 6 4800 tk

Oct 5 Purchased 200 units * Tk 7 1400 tk

Oct 9 9 Purchased 200 units * Tk 8 1600 tk

7800 tk
Oct 16 Issued 400 units *Tk 4 1600 tk

6200 tk
0ct 24 Purchased 300 units * Tk 9 2700 tk

8900 tk
Oct 27 Issued 500 units (400*6+ 100*7) 3100 tk

Balance 5800 tk

b. LIFO costing method:

Last In First Out:
Date Details Taka
Oct 1 Beginning balance: 800 units * Tk 6 4800 tk

Oct 5 Purchased 200 units * Tk 7 1400 tk

Oct 9 Purchased 200 units * Tk 8 1600 tk

7800 tk
Oct 16 Issued 400 units (200* 8+ 200*7) 3000 tk

4800 tk
0ct 24 Purchased 300 units * Tk 9 2700 tk

7500 tk
Oct 27 Issued 500 units (300*9+ 200*6) 3900 tk

Balance 3600 tk
c. Average costing method:

Date Details Taka Average

Oct 1 Beginning balance: 800 units * Tk 6 4800

Oct 5 Purchased 200 units * Tk 7 1400 6.2

6200 (6200/1000)
Oct 9 Purchased 200 units * Tk 8 1600 6.5

7800 (7800/1200)
Oct 16 Issued 400 units * tk 6.5 2600

5200
0ct 24 Purchased 300 units * Tk 9 2700 7.18

7900 (7900/1100)
Oct 27 Issued 500 units * tk 7.18 3590

4310