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Chapter
Inventory
Management and
Accounting
!  




ë tock of items kept to meet future demand

ë Purpose of inventory management
± how many units to order
± when to order





ë ¦aw materials
ë Purchased parts and supplies
ë Work-in-process (partially completed)
products (WIP)
ë Items being transported
ë Tools and equipment





 




ë 0ullwhip effect
± demand information is distorted as it moves away from the
end-use customer
± higher safety stock inventories to are stored to compensate
ë easonal or cyclical demand
ë Inventory provides independence from vendors
ë Take advantage of price discounts
ë Inventory provides independence between stages
and avoids work stop-pages








ë Customers usually perceive quality service

as availability of goods they want when they
want them
ë Inventory must be sufficient to provide high-
quality customer service in TQM





 

^ Continuous system (fixed-

(fixed-
order--quantity)
order
^ constant amount ordered
when inventory declines to
predetermined level
^ Periodic system (fixed-
(fixed-time
time--
period)
^ order placed for variable
amount after fixed passage of
time
Œ0
CT Œ Inventory CŒT¦Œ

ë To ensure about the right quality of material

ë To make availability of material as and when
required to ensure un interrupted flow of
material
ë To minimize wastage, shortage and losses of
material
ë To derive maximum economy in the cost of
purchasing, storing handling


TIA Œ Inventory CŒT¦Œ

ë Proper co-ordination of all departments

ë Centralisation of purchasing in a purchase
department
ë Use of standard form
ë Use of material, supplies, and equipment
budgets
ë Œperation of a system of interal checks


TIA Œ Inventory CŒT¦Œ

ë torage of all materials and supplies in a

designated location
ë Assignment of minimum quantity of each item of
material
ë Development of a system of controlling accounts
and subsidiary records
ë ¦egular reports
 Œ¦AIZATIŒ Œ Inventory
CŒT¦Œ

ë Divided in three stages:

1. Purchase control of material

2. tock control of materials
3. Issue and consumption constrol of material
 PU¦CHA
CŒT¦Œ Œ Inventory

ë The purchasing function cycle generally begins

with a purchase requisition and ends the
receipts of material in the stores and the
payment of bills therefore.
ë The system of purchase is controlled by
purchase department.
ë An officer, called Purchase Œfficer, controls
overall activities of this department.
 PU¦CHA
CŒT¦Œ Œ MAT
¦IA

ë The purchasing procedure in textile industry travels

through the following different stages:
1. Purchase requisition
2. Issuing of tenders of suppliers
3. Comparison of various quotations and placing of
purchase order
4. ¦eceiving, inspecting, accepting of material
5. Checking and passing of bill for payment
TŒCK CŒT¦Œ Œ Inventory

ë The function of store department is proper

keeping of stocks, identifying and classifying
them according to their nature, type and size
and price and proper maintenance of stock
records.
 TŒCK CŒT¦Œ Œ Inventory

ë The store keeping and stock control

procedure which adopted in various
industries are:
1. Material records
2. Various stock levels
3. Classification and codification
4. A0C analysis store control
5. Physical verification of stock
 VA¦IŒU Inventory 
V


1. ¦ecorder level:
The ¦ecorder level is that level of stock
at which purchase order should be issued
for fresh supplies of the material.
¦ecorder level = Maximum consumption
in a given period X Maximum period of
supply
 VA¦IŒU Inventory 
V


2. Minimum level:
The minimum level stock level is that level of
stock below which the quantity of stock of
any item should not be allowed to fall.

Minimum stock level = ¦ecorder level ±

(ormal consumption x ormal period of
supply)
 VA¦IŒU Inventory 
V


3. Maximum stock level:

Maximum level of stock is the upper limit
beyond which the quantity of any item held in
store should not rise.

[¦ecorder level ± (Minimum consumption x

Minimum time of delivery)] + ¦eorder
quantity
 VA¦IŒU Inventory 
V


4. Danger level:
The stock of material falls below the
minimum stock level due to abnormal
reasons.

Danger evel= ormal consumption x period

of supply from nearest local market
 VA¦IŒU TŒCK 
V


5. ¦eorder quantity:
¦eorder quantity also named as
conomic order
quantity (
ŒQ).

ŒQ is the most economical quantity to be
ordered under normal conditions.

ŒQ = ¥2¦ŒC
¦ = ¦equirement of material for one year
Π= ordering cost for placing one order
C = Carrying cost per unit of inventory for
one year
 P¦ICI Œ Inventory IU


ë The following are the methods of pricing the issue

of materials which are used in various industries:
i) irst in irst out Method
ii) ast in irst out Method
iii) Highest in irst out Method
iv) Average Pricing Method ± imple and weighted
Average
v) Market Price Method
vi) tandard Price Method
IU
(CŒUMPTIŒ) CŒT¦Œ Œ
Inventory

ë The stores department is responsible for

receiving, safeguarding, handling, issuing
and maintaining appropriate accounting
records for materials
 Inventory Œ


ë Problems of losses, wastage, damage arise

in almost all manufacturing industries. These
losses can be divided into two categories i.e.

i) ormal and
ii) Abnormal
 Inventory Œ


ë ormal Material losses:

1) oss in quantity due to evaporation,

deterioration, shrinkage
2) Wastage due to receipt in bulk and issue in
small quantities
3) oss due to other routine and natural
reasons
 Inventory Œ


ë Abnormal Material losses:

1) Pilferage
2) Defective storage
3) Careless handling
4) Œbsolescence due to irregular issue