A PROJECT REPORT 
ON 

INVENTORY MANAGEMENT SYSTEM 

A STUDY OF JOHNSON & JOHNSON 
LTD. 

Submitted By: Padam Nabh 

Roll No.9929 

Master of Management (Batch 2009-11) 

UNDER THE GUIDANCE OF: 

Dr. Bimal Anjum, H.O.D.Business 
Administration. 
 

RIMT-IET, MANDI GOBINDGARH 

 

ACKNOWLEDGEMENT  

I have prepared this study paper for the ―Inventory 

Management System  – A Study of Johnson & Johnson Ltd ‖. I 

have derived the contents and approach of this study paper  

through discussions with company executives and internet as well 

as with the help of various Books, Magazines and Newspapers etc. 

I would like to give my sincere thanks to a host of Company 

Executive, friends and the teachers who, through their guidance,

enthusiasm and counseling helped me enormously as I think there 

will be always need for improvement. Apart from this, I hope this  

study would stimulate the need of thinking and discussion on the 

topics like this one. 

 

Contents 
PART- I 

*Objective of the Study 

*Introduction of Company 

* Company Profile  

* History 

* Board of Directors 

*  Awards  

* Products 

* Guiding Principles of Company  

* Structure of the Company 

* Research Methodology  

* Introduction of the Topic 

PART- II 

* Data Collection  

* Financial Statements  

* Data Analysis and Interpretation 

* Problems and Suggestions  

* Conclusions 

* Bibliography 
 

 
OB J ECTIVE OF THE STUDY 

Inventories constitute the principal item in the working capital of  

the majority of trading and industrial companies. In inventory,
we include raw materials, finished goods, work in progress,
supplies and other accessories. To maintain the continuity in the 
operations of business enterprise, a minimum stock of inventory 
required. 

However, the physical control of inventory is the operating

responsibility of stores superintendent and financial personnel 
have nothing to do about it but the financial control of these 
inventories in all lines of activity in which they comprise a 
substantial part of the current assets is a frequent problem in 
the management of working capital. Management of inventory is
designed to regulate the volume of investment in goods on 
hand, the types of goods carried in stock to meet the needs of  
production and sales while at the same time, the investment in 
them is to kept at a reasonable level. 
 

C o m p a n y Pr o f i l e   
Johnson & Johnson and its subsidiaries have approximately 115,500   
employees worldwide engaged in the research and development,
manufacture and sale of a broad range of products in the health care field.
Johnson &Johnson is a holding company, which has more than 250 
operating companies conducting business in virtually all countries of the 
world. Johnson & Johnson‘s primary focus has been on products related to 
human health and wellbeing. 
Johnson & Johnson was incorporated in the State of New Jersey in 1887. 
The Company‘s structure is based on the principle of decentralized  
management. The Executive Committee of Johnson & Johnson is the
principal management group responsible for the operations and allocation  
of the resources of the Company. This Committee oversees and coordinates  
the activities of the Consumer, Pharmaceutical and Medical Devices and  
Diagnostics business segments. Each subsidiary within the business  
segments is, with some exceptions, managed by citizens of the country  
where it is located. . Johnson & Johnson is known for its corporate
reputation, consistently ranking at the top of Interactive National Corporate
Reputation Survey ranking as the world's most respected company by  
Barron'sMagazine,  and was the first corporation awarded the Benjamin 
Franklin Award for Public Diplomacy by the U.S. State Department for its  
funding of international education programs. Johnson & Johnson is known  
for its corporate reputation, consistently ranking at the top of Interactive
National Corporate Reputation Survey ranking as the world's most  
respected company by Barron'sMagazine,  and was the first corporation 
awarded the Benjamin Franklin Award for Public Diplomacy by the U.S.  
State Department for its funding of international education programs  

The corporation's headquarters is located in NewBrunswick,NewJersey , 

UnitedStates. Its consumer division is located in Skillman,NewJersey . The
corporation includes some 250 subsidiary companies with operations in
over 57 countries. Its products are sold in over 175 countries. J&J had  
worldwide pharmaceutical sales of $24.6 billion for the full-year 2008.  
 

Segments of Business 
Johnson & Johnson ‘s operating companies are organized into three business  
segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.  
C o n s u m e r   
The Consumer segment includes a broad range of products used in the baby 
care, skin care, oral care, wound care and women‘s health care fields, as 
well as nutritional and over-the-counter pharmaceutical products, and
wellness and prevention platforms. The Baby Care franchise includes the 
JOHNSON‘S Baby line of products. Major brands in the Skin Care franchise 
include the AVEENO; CLEAN & CLEAR; JOHNSON’S Adult;    
NEUTROGENA; RoC; LUBRIDERM; Dabao; and Vendôme product lines.
The Oral Care franchise includes the LISTERINE and REACH oral care lines 
of products. The Wound Care franchise includes BAND-AID brand adhesive 
bandages and PURELL instant hand sanitizer products. Major brands in the 
Women‘s Health franchise are the CAREFREE Pantiliners; STAYFREE 
sanitary protection products; and Vania Expansion products. The nutritional 
and over-the-counter lines include SPLENDA , No Calorie Sweetener ; the 
broad family of TYLENOL acetaminophen products; SUDAFED cold, flu 
and allergy products; ZYRTEC allergy products; MOTRIN IB ibuprofen
products; and PEPCID AC Acid Controller from Johnson & Johnson  Merck•

Consumer Pharmaceuticals Co. These products are marketed to the general 

public and sold both to retail outlets and distributors throughout the world. 

 
Pharmaceutical 
The Pharmaceutical segment includes products in the following therapeutic 
areas: anti-infective, antipsychotic, cardiovascular, contraceptive,
dermatology, gastrointestinal, hematology, immunology, neurology,
oncology, pain management, urology and virology. These products are 
distributed directly to retailers, wholesalers and health care professionals 
for prescription use. Key products in the Pharmaceutical segment include: 
REMICADE (infliximab), a biologic approved for the treatment of a number  
of immune mediated inflammatory diseases; PROCRIT (Epoetin Alfa, sold
outside the U.S. as EPREX), a biotechnology-derived product that 
stimulates red blood cell production; 
LEVAQUIN (levofloxacin) in the anti-infective field; RISPERDAL CONSTA 
(risperidone), a long-acting inject able for the treatment of schizophrenia; 
 

CONCERTA (methylphenidate HCl), a product for the treatment of  

attention deficit hyperactivity disorder; ACIPHEX /PARIET , a proton 
pump inhibitor co-marketed with Eisai 
Inc.; DURAGESIC /Fentanyl Transdermal (fentanyl transdermal system,
sold outside the U.S. as DUROGESIC ), a treatment for chronic pain that 
offers a novel delivery system; VELCADE (bortezomib), a product for the 
treatment for multiple myeloma; PREZISTA (darunavir) for the treatment 
of HIV/AIDS patients; and INVEGA (paliperidone), a once-daily atypical 
antipsychotic. 

 
M e d i c a l D ev i c e s an d D i a g n o s t i c s  
The Medical Devices and Diagnostics segment includes a broad range of  
products distributed to wholesalers, hospitals and retailers, used principally 
in the professional fields by physicians, nurses, therapists, hospitals,
diagnostic laboratories and clinics. These products include Cordis’ 
circulatory disease management products;DePuy‘s orthopaedic joint 
reconstruction, spinal care and sports medicine products; Ethicon‘s 
surgical care, aesthetics and women‘s health products; Ethicon Endo- 
Surgery’s minimally invasive surgical products; LifeScan‘sblood glucose 
monitoring and insulin delivery products; Ortho-Clinical Diagnostics‘ 
professional diagnostic products; and Vistakon‘s disposable contact lenses.
Distribution to these health care professional markets is done both directly 
and through surgical supply and other dealers. 

Geographic Areas 
The international business of Johnson & Johnson is conducted by 
subsidiaries located in 59 countries outside the United States, which are 
selling products in virtually all countries throughout the world. The products 
made and sold in the international business include many of those
described above under ―— Segments of Business — Consumer,‖―— 
Pharmaceutical‖ and ―— Medical Devices and Diagnostics.‖ However, the 
principal markets, products and methods of distribution in the international 
business vary with the country and the culture. The products sold in 
international business include not only those developed in the United
States, but also those developed by subsidiaries abroad. 
Investments and activities in some countries outside the United States are 
subject to higher risks than comparable U.S. activities because the 
investment and commercial climate is influenced by restrictive economic 
policies and political uncertainties. 
 

Raw Materials 
Raw materials essential to Johnson & Johnson‘s operating companies‘ 
businesses are generally readily available from multiple sources. 

Patents and Trademarks 

Johnson & Johnson and its subsidiaries have made a practice of obtaining
patent rotection on their products and processes where possible. They own 
or are licensed under a number of patents relating to their products and
manufacturing processes, which in the aggregate are believed to be of  
material importance to Johnson & Johnson in the operation of its businesses.
Sales of the Company‘s largest product, REMICADE ® (infliximab),
accounted for approximately 7% of Johnson & Johnson‘s total revenues for  
fiscal 2009. Accordingly, the patents related to this product are believed to 
be material to Johnson & Johnson. During 2007 through 2009, RISPERDAL ® 
(risperidone) oral and TOPAMAX ® (topiramate) lost basic patent protection 
and market exclusivity and became subject to generic competition in the 
United States and international markets. RISPERDAL ® oral sales declined
by 57.7% and 37.8% in 2009 and 2008, respectively. TOPAMAX ® lost 
market exclusivity in March 2009 and sales declined by 57.9% as compared
to 2008. The next significant patent scheduled to expire on December 20,
2010 is for LEVAQUIN ® (levofloxacin), which accounted for 2.5% of the 
Company‘s 2009 sales. A pediatric extension for LEVAQUIN ® was granted
by the U.S. Food and Drug 
 Administration ( ―FDA‖), which extends market exclusivity in the United
States through June 20, 2011. Johnson & Johnson‘s operating companies 
have made a practice of selling their products under trademarks and of  
obtaining protection for these trademarks by all available means. These 
trademarks are protected by registration in the United States and other  
countries where such products are marketed. Johnson & Johnson considers 
these trademarks in the aggregate to be of material importance in the 
operation of its businesses. 
Competition 
In all of their product lines, Johnson & Johnson‘s operating companies 
compete with companies both large and small, and both local and global,
located throughout the world. Competition exists in all product lines without 
regard to the number and size of the competing companies involved.
Competition in research, involving the development and the improvement 
of new and existing products and processes, is particularly significant. The 
development of new and innovative products is important to Johnson & 
Johnson‘s success in all areas of its business. This also includes protecting
the Company‘s portfolio of intellectual property. The competitive 
environment requires substantial investments in continuing research and in 
 

maintaining sales forces. In addition, the development and maintenance of  

customer demand for the Company‘s consumer products involves 
significant expenditures for advertising and promotion. 

Research and Development 

Research activities represent a significant part of Johnson & Johnson‘s 
subsidiaries‘ businesses. Major research facilities are located not only in the 
United States, but also in Belgium, Brazil, Canada, China, France, Germany,
India, Israel, Japan, the Netherlands, Singapore and the United Kingdom.
The costs of worldwide Company sponsored research activities relating to 
the development of new products, improvement of existing products,
technical support of products and compliance with governmental 
regulations for the protection of consumers and patients (excluding
purchased in-process research and development charges for fiscal 2008 and
2007), amounted to $7.0 billion, $7.6 billion and $7.7 billion for fiscal years 
2009, 2008 and 2007, respectively. These costs are harged directly to 
expense, or directly against income, in the year in which incurred. 

Environment 
Johnson & Johnson‘s operating companies are subject to a variety of U.S.
and international environmental protection measures. Johnson & Johnson 
believes that its operations comply in all material respects with applicable 
environmental laws and regulations. Johnson & Johnson‘s compliance with 
these requirements did not during the past year, and is not expected to,
have a material effect upon its capital expenditures, cash flows, earnings or  
competitive position. 

Regulation 
Most of Johnson & Johnson‘s businesses are subject to varying degrees of  
governmental regulation in the countries in which operations are conducted,
and the general trend is toward increasingly stringent regulation. In the 
United States, the drug, device, diagnostics and cosmetic industries have 
long been subject to regulation by various federal and state agencies,
primarily as to product safety, efficacy, manufacturing, advertising, labeling
and safety reporting. The exercise of broad regulatory powers by the FDA 
continues to result in increases in the amounts of testing and
documentation required for FDA clearance of new drugs and devices and a 
corresponding increase in the expense of product introduction. Similar  
trends are also evident in major markets outside of the United States. The 
costs of human health care have been and continue to be a subject of  
study, investigation and regulation by governmental agencies and 
 

legislative bodies around the world. In the United States, attention has been 
focused on drug prices and profits and programs that encourage doctors to 
write prescriptions for particular drugs or recommend, use or purchase 
particular medical devices. Payers have become a more potent force in the 
market place and increased attention is being paid to drug and medical 
device pricing, appropriate drug and medical device utilization and the 
quality and costs of health care. The regulatory agencies under whose 
purview Johnson & Johnson‘s operating companies operate have 
administrative powers that may subject those companies to such actions as 
product withdrawals, recalls, seizure of products and other civil and criminal 
sanctions. In some cases, Johnson & Johnson‘s operating companies may 
deem it advisable to initiate product recalls. In addition, business practices 
in the health care industry have come under increased scrutiny, particularly 
in the United States, by government agencies and state attorneys general,
and resulting investigations and prosecutions carry the risk of significant 
civil and criminal penalties. 

PROPERTIES  
Johnson & Johnson and its subsidiaries operate 143 manufacturing facilities 
occupying approximately 21.4 million square feet of floor space. The 
manufacturing facilities are used by the industry segments of Johnson & 
Johnson‘s business approximately as follows: 

Available Information 
Square Feet 
(in Segment thousands) 
Consumer 6,825
Pharmaceutical 6,369
Medical Devices and Diagnostics 8,251
Worldwide Total 21,445

Within the United States, 7 facilities are used by the Consumer segment, 12
by the Pharmaceutical segment and 37 by the Medical Devices and
Diagnostics segment. Johnson & Johnson‘s manufacturing operations 
outside the United States are often conducted in facilities that serve more 
than one business segment. 
 

The locations of the manufacturing facilities by major geographic areas of  

the world are as follows: 

Geographic Area  Number of Facilities  (Square Feet in thousands) 

United States 56 7,489
Europe 38 7,336
Western Hemisphere, excluding U.S. 16 3,372
 Africa, Asia and Pacific 33 3,248
Worldwide Total 143 21,445

EXECUTIVE OFFICERS OF THE  

REGISTRANT 

Listed below are the executive officers of Johnson & Johnson as of February 
8, 2010, each of whom, unless otherwise indicated below, has been an 
employee of the Company or its affiliates and held the position indicated
during the past five years. There are no family relationships between any of  
the executive officers, and there is no arrangement or understanding
between any executive officer and any other person pursuant to which the 
executive officer was selected. At the annual meeting of the Board of  
Directors, the executive officers are elected by the Board to hold office for  
one year and until their respective successors are elected and qualified, or  
until earlier resignation or removal. 
Information with regard to the directors of the Company, including those of  
the following executive officers who are directors, is incorporated herein by 
reference to the material captioned ―Election of Directors‖ in the Proxy 
Statement. 
 

Name & Position 

Dominic J. Caruso 
Member, Executive Committee; Vice President, Finance; Chief  
Financial Officer (a)  

Russell C. Deyo 
Member, Executive Committee; Vice President, Human  
Resources and General Counsel (b)  
Colleen A. Goggins 

Member, Executive Committee; Worldwide Chairman,  

Consumer Group(c) 

Alex Gorsky 
Member, Executive Committee; Worldwide Chairman, Medical  
Devices and Diagnostics Group (d)  

Sherilyn S. McCoy 
Member, Executive Committee; Worldwide Chairman,  
Pharmaceuticals Group (e)  

William C. Weldon 
Chairman, Board of Directors; Chairman, Executive 
Committee; Chief Executive Officer  

 
History 
RobertWoodJohnson, inspired by a speech by  antisepsis advocate 
JosephLister, joined brothers JamesWoodJohnson and  EdwardMead  
Johnson t o create a line of ready-to-use surgicaldressings i n 1885. The 
company produced its first products in 1886 and  incorporated i n 1887. 

Robert Wood Johnson served as the first president of the company. He  

worked to improve sanitation practices in the nineteenth century, and lent  
his name to a hospital i n NewBrunswick,NewJersey. Upon his death in 
1910, he was succeeded in the presidency by his brother James Wood
Johnson until 1932, and then by his son, RobertWoodJohnson II.  

RWJ's granddaughter, MaryLeaJohnsonRichards,  was the first baby to  

appear on a J&J baby powder label. His great-grandson, JamieJohnson,  
made a documentary called BornRich about the experience of growing up  
as the heir to one of the world's greatest fortunes.  
 

Since the 1900s, the company has pursued steady diversification. It  
added consumer products in the 1920s and created a separate division for  
surgical products in 1941 which became Ethicon. It expanded into
 pharmaceuticals with the purchase of  McNeilLaboratories, Inc., Cilag , and
JanssenPharmaceutical , and into women's sanitary products and toiletries  
in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded
into such diverse areas as biopharmaceuticals, orthopedic devices, and
Internet publishing. Recently, Johnson & Johnson has purchased Pfizer's  
Consumer Healthcare department. The transition from Pfizer to Johnson and
Johnson was completed December 18, 2006.  

Johnson & Johnson has been consistently named one of the 100 Best  
Companies for Working Mothers by Working Mother.  

 Along with Gatorade, Johnson & Johnson is one of the founding sponsors of  

the NationalAthleticTrainers'Association . 

A b o u t E t h i c o n (B r an d N am e)   
Our company was founded 80 years ago on the pillars of research,
vision, innovation, and a commitment to improving the quality of patient s’  
lives. The first group of Ethicon scientists and researchers, who thought  
about healing in a new way - and in doing so, pioneered our sutures to  
enhance the work of surgeons and the lives of patients - recognized the  
opportunity for limitless innovation.  

 Almost a century later, Ethicon produces much more than sutures. We have 
continuously introduced innovations in all areas where we focus our  
expertise including: wound closure; general surgery; biosurgery; women ’s 
health, and aesthetic medicine. While a lot has changed in healthcare, one  
thing has not: Ethicon remains committed to developing the best surgical  
solutions to help doctors heal both the wounds you can see and the ones  
 

you can’t . Innovations that Restore Bodies...and Lives. How do we do it?  

How do we stay on the cutting edge of science? By way of our greatest  
asset: the talented, highly educated, experienced group of professionals  
who work at ETHICON - 8,500 gifted professionals around the world come
together every day to advance, innovate, and respond to their custome rs’  
needs. Our commitment to fulfilling the needs of surgeons and their  
 patients, of transforming surgery, of helping patients heal faster and more
safely is never ending. And so our work must be, too.  
Ethicon has a legacy all its own. But w e’ re part of a broader heritage,
too. As a member of the Johnson & Johnson Family of Companies, w e’ re 
guided by Our Credo: company values that empower all of our employees to  
consider first the needs of our customers and patients we serve and to  
improve the health, education, and quality of life in the communities where  
we work and live.  

Caring for the world, one person at a time … inspires and unites the  
 people of Johnson & Johnson. We embrace research and science - bringing
innovative ideas, products and services to advance the health and well-  
being of people. Our 119,400 employees at more than 250 Johnson &  
Johnson companies work with partners in healthcare to touch the lives of  
over a billion people every day, throughout the world.  

S u t u r e M an u f ac t u r i n g P lan t s i n  
I n d i a   
 

Baddi 

Aurangabad 

G r o w t h & E x p an s i o n O f

 
Johnson & Johnson 
 

Since our founding in 1886, we have grown to meet the health care  
needs of people worldwide. Through mergers, acquisitions and the  
formation of new companies, we have become the world ’s largest and  
most broadly based health care company. Here are some highlights of  
our historical growth.  

1886  – 1 926: J o h n s o n & J o h n s o n F o u n d e d W i th S u r g i c a l  

 
a n d W o u n d C a re Pr o d u c t s  

In 1886, our founders  – Robert Wood Johnson, James Wood Johnson  and
Edward Mead Johnson  – started a small medical products company  in
New Brunswick, New Jersey. They made the first-ever commercial  
sterile surgical dressings, which helped save the lives of patients.  
  We introduced dental floss, the first Aid kits, sanitary napkins for  
women, sterile sutures, JOHNSON ’S  Baby Powder, and BAND-AID  
Brand Adhesive Bandages. 
  Our international expansion began with Canada in 1919 and  
England in 1924.  
  Our disaster relief program began in 1906 when, within hours of  
the San Francisco earthquake and fire, we sent trainloads of our  
 products to the city to help survivors.  

1926  – 1 94 6: G r o w t h o f P r o d u c t L i n e s a n d E x p a n s i o n  
 
O v er s eas H e lp J o h n s o n & J o h n s o n G o P u b l ic  

In 1943 our chairman Robert Wood Johnson wrote Our Credo, outlining  
our responsibilities to doctors, nurses, patients, consumers,  
employees, and the community. During this period we also continued  
our overseas growth and began to broaden our efforts in  
 pharmaceuticals and medical products.  
   We expanded into Mexico, South Africa, Australia, France,  
Belgium, Ireland, Switzerland, Argentina, and Brazil.  
   We introduced MODESS sanitary napkins and JOHNSON ’S  Baby   Oil   
and Baby Lotion. We also launched the first U.S. prescription birth  
control product, ORTHO GYNOL Gel, in 1931. 
   In 1944 we became a publicly traded company.  

1946  – 1 96 6: C o n t i n u e d P r o d u c t G r o w t h a n d O u r C r ed o  
P o s it i o n J o h n s o n & J o h n s o n as R e s p o n s i b l e In d u s t r y  
L e a d e r . 
 

 


We steadily continued our growth during these decades.  

   We expanded to Zimbabwe, Austria, Sweden, the Philippines,  
Colombia, Puerto Rico, the Netherlands, India, Scotland,  
Pakistan, Zambia, Venezuela, Italy, Malaysia and Portugal.  
   New companies formed or acquired included:  
   ETHICON, Inc., Personal Products Company (products related  
to women’s health);  
   McNeil Laboratories, Inc. (bringing us TYLENOL  
acetaminophen); 
 
 European pharmaceutical companies Cilag Chemie, A.G. and  
Janssen Pharmaceutical, and Codman & Shurtleff, Inc.  
(medical and surgical instruments). 
   In 1963 Ortho Pharmaceutical began marketing its first birth  
control pill, ORTHO-NOVUM 10 mg. 

1966  – 1 98 6: M e d i c a l A d v a n c e s C r ea t e G r o u n d b r e a k i n g  
P r o d u c t s   

Our operating companies pioneered several important medical  

advances during this period. The acquisition of Frontier Contact Lenses  
would grow into our vision care business, the pioneer in disposable  
contact lenses. In 1985 we expanded to China. We introduced a wide  
range of groundbreaking products during these decades including:  
  RhoGAM a life saving treatment for hemolytic disease in  


newborns. 
  HALDOL (haloperidol),
 the gold standard for treating  
schizophrenia for over 25 years.  
  MONISTAT (miconazole nitrate) Cream, a milestone product for  


women’s health.  
  VICRYL Synthetic absorbable sutures, an important new tool for  


surgeons. 
  The PROXIMATE Linear Stapler, a new way to close


  surgical  incisions without sutures.  

  ORTHOCLONE OKT3, the first therapeutic monoclonal antibody to  


treat the rejection of transplanted organs.  

 

1986  – 2 00 8: In d u s t r y L e ad e r s h i p E n h a n c e d b y A c q u i s i t io n s  
 
a n d I n t e r n a l D e v el o p m e n t  

From the 1980s to the present, we continue to grow through  

acquisitions and internally developed businesses that give us  
leadership positions in a number of areas.  
  We acquired Life Scan, Inc. (blood glucose monitors for diabetics),  
Neutrogena Corporation, and skin care brands such as CLEAN &  
CLEAR, RoC and AVEENO. 
  The acquisition of DePuy, Inc. made us a world leader in  
orthopedics. 
  We formed Ortho Biotech Products, LP (a biotechnology pioneer)  
and Ethicon Endo-Surgery, Inc. (minimally invasive surgery) out of  
internal businesses. 
  We merged with Centocor, Inc. which brought us REMICADE  
(infliximab). 
  Through our operating companies, we introduced the first mass  
market disposable contact lenses, the first coronary stent and the  
first drug eluting stent.  
  Prescription medications we introduced during this period   include: 
  PROCRIT/EPREX (Epoetin Alfa)  
  RISPERDAL (risperidone)  
  RAZADYNE (galantamine hydro bromide) 
  PREZISTA (darunavir) 
  INVEGA (paliperidone) Extended Release Tablets  
  INTELENCE (etravirine) 

L o o k i n g t o t h e F u tu r e   

Johnson & Johnson is dedicated to advancing the health and well-being  

of people around the world. Our people come to work each day  
inspired by their personal knowledge that their caring transforms  
 people's lives. Our whole history has been based on their passion for  
making a difference in this world and we aspire, in the years to come,  
to take human health and well-being to new levels. We are arguably  
 

the best-positioned company to do this because of our breadth,  

financial strength and collaborative nature.  

STRUCTRE OF THE COMPANY 

Johnson & Johnson Ltd. act upon the rules & regulations of the 
Companies Act, 1948. The company has well defined structure 
.It have the following departments: 

1. HR/ Personnel department 

2. Accounts departments 

3. Purchase departments 

4. Store department 

5. Quality Assurance & Quality Control  

6. IT department 

7. R&D Department 

8. Sales & Excise department 

 

RESEARCH METHODOGY 
Research methodology is the way to systematically solve 
the research problem. Objective of research study is Analysis of  
inventory of Johnson & Johnson Ltd. Analyzing of inventory, we 
determining following inventories-1. Raw materials inventory. 

2. Work in progress inventory. 

3. Finished goods inventory & 

4. Supplies inventory. 

In this section of inventories, we should analyze the annual 

investment in inventories, Valuation of inventory after closing
balance of items in inventory. In this manner, we calculate 
reorder point, safety stock levels, minimum & maximum levels of  
inventory. 

Working hypothesis of the objective is that inventories are the

stock piles of goods .The all organization on their inventories. J&J 
invests about 60%of total assets inventory should be analyzed 
their records. 

The analysis of inventory according to their data available in 

the company. The data collection of inventory for analysis by the 
 

direct store department. We should record primary and

secondary data by the helps of assistants ledger books M R N 
etc. We went to the all inventories as raw material, work in 
progress inventory, finished goods inventory by the proper  
observation of data‘s  of the company. 

INTRODUCTION OF THE TOPIC  

INTRODUCTION: 

Inventories constitute the most significant part of current 

assets of a large majority of companies in India. On an 
average, inventories are approximately 60% of current assets 
in public limited companies in India. Because of the large size 
of inventories maintained by firms, a considerable amount of  
feuds is required to be committed to them. It is therefore,
absolutely imperative to ménage inventories efficiently and
efficiently in order to avoid unnecessary investment. A firm 
neglecting the management of inventories will be jeopardizing
its long run profitability and may fail ultimately. It is possible 
for fore a company to reduce its levels of inventories to a 
considerable degree e.g. 10 to 20 percent, without any 
adverse effect on production and sales, by using simple 
 

inventory planning and control techniques. The reduction in 

excessive inventory carries a favorable impact on a 
company‘s  profitability. 

MEANING OF INVENTORY:- 

Inventory is the physical stoke of goods maintained in an 

organization for its smooth sunning. In accounting language it may 
mean stock of finished goods only. In a manufacturing concern, it 
may include raw materials, work-in-progress and stores etc. In the 
form of materials or supplies to be consumed in the production 
process or in the rendering of services. In brief, Inventory is 
unconsumed or unsold goods purchased or manufactured. 

NATURE OF INVENTORIES:- 

Inventories are stock of the 

product a company is manufacturing for sale and components that 
make up the product. The various forms in which inventory exist in 
a manufacturing company are raw materials, work in progress and
finished goods. 

RAW MATERIALS:- 
 

Raw materials are those inputs that are converted

into finished product though the manufacturing process. Raw 
materials inventories are those units which have been purchased
and stored for future productions. 

WORK IN PROGRESS:- 

These inventories are semi manufactured products.

They represent products that need more work before they become 
finished products for sales. 

FINISHED GOODS:- 

Finished goods inventories are those completely 

manufactured products which are ready for sale. Stock of raw 
materials and work in progress facilitate production. While stock of  
finished goods is required for smooth marketing operation. Thus,
inventories serve as a link between the production and
consumption of goods. 

The levels of three kinds of inventories for a firm depend on 

the nature of its business. A manufacturing firm will have 
substantially high levels of all three kinds of inventories, while a 
retail or wholesale firm will have a very high and no raw material  
and work in progress inventories. Within manufacturing firms,
there will be differences. Large heavy engineering companies 
produce long production cycle products, therefore they carry large 
inventories. On the other hand, inventories of a consumer product 
company will not be large, because of short production cycle and 
 

fast turn over. Firms also maintain a fourth kind of inventory,

supplies or stores and spares. 

SUPPLIES: 

It includes office and plant cleaning materials like 

soap, brooms, oil, fuel, light, bulbs etc. These materials do not 
directly enter production, but are necessary for production 
process. Usually, these supplies are small part of the total 
inventory and do not involve significant investment. Therefore, a 
sophisticated system of inventory control may not be maintained
for them. 

OBJECTIVES OF INVENTORY  
MANAGEMENT  

The basic managerial objectives of inventory control are two- 

fold; first, the avoidance over-investment or under-investment in 
inventories; and second, to provide the right quantity of  
standard raw material to the production department at the right 
time. In brief, the objectives of inventory control may be 
summarized as follows: 
A.Operating Objectives:  
 

(1)  Ensuring Availability of Materials: There should

be a continuous availability of all types of raw materials in the 
factory so that the production may not be help up wants of any 
material. A minimum quantity of each material should be held in 
store to permit production to move on schedule. 

(2)  Avoidance of Abnormal Wastage: There should be 

minimum possible wastage of materials while these are being
stored in the godowns or used in the factory by the workers.
Wastage should be allowed up to a certain level known as 
normal wastage. To avoid any abnormal wastage, strict control 
over the inventory should be exercised. Leakage, theft,
embezzlements of raw material and spoilage of material due to 
rust, bust should be avoided. 

(3)  Promotion of Manufacturing Efficiency: If the right 

type of raw material is available to the manufacturing
departments at the right time, their manufacturing efficiency is 
also increased. Their motivation level rises and morale is 
improved. 

(4)  Avoidance of Out of Stock Danger: Information about 

availability of materials should be made continuously available 
to the management so that they can do planning for  
procurement of raw material. It maintains the inventories at the 
 

optimum level keeping in view the operational requirements. It 

also avoids the out of stock danger. 

(5) Better Service to Customers: Sufficient stock of finished

goods must be maintained to match reasonable demand of the 
customers for prompt execution of their orders. 
(6) Highlighting slow moving and
  obsolete items of  materials. 

(7)Designing poorer organization for inventory   management:

Clear cut accountability should be fixed at  various levels of
organization. 

B. Financial Objectives:  

(1) Economy in purchasing:  A proper inventory control 

brings certain advantages and economies in purchasing also.
Every attempt has to make to effect economy in purchasing
through quantity and taking advantage to favorable markets. 
 

(2) Reasonable Price: While purchasing materials, it is to be  

seen that right quality of material is purchased at reasonably 
low price. Quality is not to be sacrificed at the cost of lower  
price. The material purchased should be of the quality alone 
which is needed. 

(3)  Optimum Investing and Efficient Use of capital: The 

basic aim of inventory control from the financial point of view is  
the optimum level of investment in inventories. There should be 
no excessive investment in stock, etc. Investment in inventories 
must not tie up funds that could be used in other activities. The 
determination of maximum and minimum level of stock attempt 
in this direction. 

TYPES OF INVENTORY 

1. Movement Inventories: - Movement inventories are also called

transit or pipeline inventories. Their existence owes to the fact that 
transportation time is involved in transferring substantial amount of  
resources. 
 

2. Buffer inventories: -In Buffer inventories are held to protect against 

the uncertainties of demand and supply. An organization generally knows the 
average demand for various items that it needs. Prod.deptt. issue store 
inspect receive supplier  

 
S upplies 

Demand 

Inventory in 

Hand place 

Orders 

Purchase 

dep‘t. 

Net order issue receive tender  

Quantity tenders quotation evaluations 

Inventory cycle 

3. Anticipation Inventories.  Anticipation inventories are held for the 

reason that future demand for the product is anticipated. Production of  
specialized times like crackers well before dewily, umbrellas and raincoats 
before taints set in, fans while summers are approaching; or the piling up of  
 

inventory stocks when a strike is on the anvil, are all examples of  
anticipation inventories. 

CONTROL OF MATERIALS: 

Rigid control over materials are necessary not only to guard against theft,
but also to minimize waste and misuse from causes such as excessive 
inventories, over issue, deterioration, spoilage, and obsolescence. There are 
certain prerequisites to an effective control system for materials: 

1. Materials of the desired quantity will be available when needed; 

2. Materials will be purchased only when a need exists and in economical 

qualities; 

3. Purchases of materials will be made at most favorable 

prices; 

4. Vouchers for the payments of materials purchased will be approved only 

if the materials have been received in good condition; 

5. Materials will be protected against loss by proper physical  control; 

6. Issue of materials will be properly authorized and accounted for;  and 

7. All materials, at all times, will be charged, as the responsibility of some 

individual. 

The control of materials, as an element of cost of production, is illustrated

with reference to the purchase and issues procedures, inventory systems,
and inventory control techniques. 

IMPORTANCE OF INVENTORY  
CONTROL: 
 

The importance or necessity of inventory control is well 

explained in the terms of the objects of inventory control, which 
are obtained through it. A proper inventory control lowers down 
the cost of production and improves profitability of enterprise.
ADVANTAGES OF INVENTORY CONTROL: 

(1) Reduction in investment in inventory. 

(2) Proper and efficient use of raw materials. 

(3) No bottleneck in production. 

(4) Improvement in production and sales. 

(5) Efficient and optimum use of physical as well as financial 

resources. 

(6) Ordering cost can be reduced if a firm places a few large 

orders in place of numerous small orders. 

(7) Maintenance of adequate inventories reduces the set-up cost 

associated with each production run. 
 

Risk and cost Associated with 

Inventories: 
Holding of Inventories expose the firm to a number of risks and
costs. 
Major risks are: 
(a)  Price decline: They may be due to increase in market supply of  
the product, introduction of a new competitive product, price-cut 
by the competitors etc. 
(b)  Product deterioration: This may due to holding a product for  
too long a period or improper storage conditions. 
(c)  Obsolescence: This may due to change in customer‘s  taste,
new production technique, improvements in product design,
specifications etc. 

The Costs of holding inventories are as follows: 

(a)  Material Cost: This include the cost of purchasing the goods,
transportation and handling charges less any discount allowed
by the supplier of goods. 

(b)  Ordering Cost: This includes the variables cost associated

with placing an order for the goods. The fewer the orders, the 
lower will be the ordering costs for the firm. 
 

(c)  Carrying Cost: This includes the expenses for storing and
handling the goods. It comprises storage costs, insurance costs,
spoilage costs, cost of funds tied up in inventories etc. 

ESSENTIAL OF INVENTORY  
CONTROL SYSTEM 
For an efficient and successful inventory control there are 
certain important conditions that are as follows: 
(1) Classification and Identification of inventories: The 
usual inventory of manufacturing firm includes raw- 
material, stores, work-in-progress and component etc. To 
facilitate prompt recording the dealing, each item of the 
inventory must be assigned a particular code number and it 
must be classified in suitable group or sub-divisions. ABC 
analysis of material is very helpful in this context. 
(2)  Standardization and simplification of inventories:  
In order to facilitate inventory control, the inventory line should
be simplified. It refers to the elimination of excess types and
sizes of items. Simplification leads to reduction in classification 
of inventories and its carrying costs. Standardization, on the 
other hand, refers to the fixation of standards of raw material to 
be purchased and specification of the components and tools to 
be used. 
 

(3)  Setting the Maximum and Minimum limits for each  

part of inventory: The third step in this process is to set the  
maximum and minimum limits of each item of the inventory. It 
avoids the chances of over-investment as well as running a 
short of any item during the cost of producing. Reordering point 
should also be fixed beforehand. 

(4)  Economic Order Quantity: It is also a basic 

inventory problem to determine the quantity as how much 
to order at a time. In determining the EOQ, the problem is 
one to set a balance between two opposite costs, namely,
ordering costs and carrying costs. This quantity should be 
fixed beforehand. 

(5) Adequate storage Facilities: To make the system

of   inventory control successful and efficient one, it is also 
essential to provide the adequate storage facilities. Sufficient 
storage area and proper handling facilities should be 
organized. 

(6) Adequate Reports and Records: Inventory control 

requires the maintenance of adequate inventory record and
reports. Various inventory records must contain information 
to meet the needs of purchasing, production, sales and 
 

financial staff. The typical information required about any 

class of inventory may be relating to quantity on hand,
location, quantities in transit, unit cost, code for each item of  
inventory, reorder point, safety level etc. Statements forms 
and inventory records should be so designed that the clerical 
cost of maintaining these records must be kept a minimum. 

(7) Intelligent and Experienced Personnel:  An

important  requirement of successful inventory control
system is the  appointment of qualified and experienced
staff in purchase  and stores department. Mere
establishment of procedures  and the maintenance of
records would not give the desired results as there is no
substitute for sincere and devoted as  well as experienced
hands. Hence, the whole inventory  control structure should
be manned with trained, qualified, experienced and devoted
employees. 

(8) Coordination: There must be proper coordination of

all  departments involved in the process of inventory control,
such as purchase, finance, receiving, approving, storage and
accounting departments. These all departments have 
different outlook and objects in inventory management but 
financial manager has to coordinate them all. 
 

(9) Budgeting:  An efficient budgeting system is also

required. Preparation of budgets concerning materials,
supplies and equipment to ensure economy in purchasing and
use of material is also necessary. 

(10) Internal Check: Operating of a system of internal

check is  also vital in inventory management so that all
transactions  involving material supplies and equipment
purchase are properly approved and automatically checked. 

FACTORS AFFECTING STOCK INVESTMENT

LEVEL 

These factors can be put in two categories: General and

Specific. 

General Factors: These factors include those factors, which 

affect directly or indirectly level of investment in any asset.
These are as follows: 

(1) Nature of Business  

(2) Size and scale of Business  
(3) Expected Sales Volumes  
(4) Price Level Changes 
(5)  Availability of Funds 
 

(6) Management view Point 

Specific Factors: These factors are directly related with 

investment instock. Following are the main factors: 
(1)  Seasonal Character of Raw Materials: If supply of   raw
material used in the firm is seasonal, the firm will require 
more funds for the purchase of raw material during season.
Usually, raw materials are available at cheaper rates during its 
production season. 
(2)  Length and Technical Nature of the production  
process: If production process is lengthy and of technical 
nature, higher investment is required in raw material. In the 
technical nature production process, quality control of raw 
material is given more emphasis. 
(3)  Terms of Purchase: If some concessions or discount in 
price or facilities of credit are provided by suppliers on purchase 
of raw materials in huge quantity then the firm is inspired for  
excessive purchase of goods and hence comparatively more 
investment is required in inventory. 
(4)  Nature of End Product: Nature of end product also 
influences investment in inventory. If the end product is a 
durable good, high investment will be required because durable 
goods can be stored for a long period. On the other hand,
perishable goods cannot be stored for a long period. Hence,
investment in inventory of such products is low. 
 

(5)  Supply Conditions: If the supply of raw material is regular  

and there is no possibility of interruption in future, high 
investment in inventories is not required. 
(6)  Time Factor: The lead time of raw material time token in 
production process and sale of product also influence 
investment in inventories. Longer the period, higher will be the 
investment in inventories. 
(7)  Loan Facilities: If raw materials are purchased on credit or  
loan from the bank or other financial institution can be obtained
on the security of raw material, lesser investment would be  
required. In the absence of such loan facility, higher investment 
would be required. 
(8)  Price Level Fluctuations: If there are expectations of price 
rise in future then raw materials may be store in high quantity 
and so more investment would be required. On the contrary, if  
the prices of raw materials are expected to go down in future,
then comparatively lesser investment would be required. 

T E C H N IQ U E S O F IN V E N T O R Y  

CONTROL  

In managing inventories, the firm‘s  objective should be in 

consonance with the wealth maximization principle. To achieve 
 

this, the firm should determine the optimum level of investment 

in inventory. To deal with the problems of inventory 
management effectively, it becomes necessary to be conversant 
with the different techniques of inventory control. Although the 
concepts involved in inventory management are production- 
oriented and are not strictly financial it is important that the 
financial manager understand them since they have certain 
built-in financial costs. The different techniques of inventory 
control may be summarized as follows: 

(1)  Inventory level Technique 

The main objective of stock control is to determine and
maintain the optimum level of stock so that there is neither  
shortage of any material nor unnecessary investment in 
inventory. For this purpose, determination of maximum and
minimum limits of inventory and ordering level is necessary. 
(2)  Maximum stock Limit: This represents the quantity of  
inventory above which it should not be allowed to be kept. The 
main object of fixing this limit is to ensure that unnecessary 
working capital is not blocked in stores. The quantity is fixed 
keeping in view the disadvantages of overstocking. 
The disadvantages of overstocking are:  

1. Capital is blocked up unnecessarily in stores so there will be 

loss of interest. 
 

2. More godown space is needed so more rent will have to be

paid. 
3. There are chances of deterioration in quality because large 
stocks will require more time for use is the factory. 
4. There is the possibility of loss due to obsolescence.  
5. There is danger of depreciation in market values. 

The maximum stock level is fixed by taking into account 

the following factors: 

(1) Amount of capital available for maintaining stores. 

(2) Godown space available. 

(3) Rate of consumption of the material. 

(4) The time lag between indenting and receiving of the 

material. 

(5) Length and technical nature of the production process. 

(6) Possibility of loss in stores by deterioration, evaporation etc.

There are certain stores, which deteriorate in quality if they are 
stored for longer period. 
 

(7) Cost of maintaining 

stores. 

(8) Likely fluctuation in prices. For instance, if there is a  

possibility of a substantial increase in prices in the coming
period, a comparatively large maximum stock level will be fixed.
On the other hand, if there is the possibility of decrease in price 
in the near future, stocks are kept at a much reduced level. 

(9) The seasonal nature of supply of material. Certain materials 

are available only during specific periods of year. So these have 
to be stocked heavily during these periods. 

(10) Restrictions imposed by the government or local

authority in  regard to materials which there are inherent risks,
e.g. fire and explosion. 

(11) Risk of obsolescence, i.e., possibility of change in

fashion and habit which will necessitate change in requirements
of  materials.  

The following formula may be applied to calculate the 

maximum stock: 
 

(1) Maximum Stock = Minimum Inventory + Lot size 

(2) Maximum Stock = Reorder Level - Minimum consumption 

during Minimum lead time + Lot size 

Minimum Stock Limit (Safety or Buffer stock) 

This represents the quantity below which stock should not 

be allowed to fall. It is maintained to save from the situation of  
stock out in the event of abnormal increase in material usage 
rate and/or delivery period. In fact determination of this quantity 
is significant because of uncertainty in respect to material usage 
rate and delivery period. The main purpose of this level is to 
ensure that production is not held up due to shortage of any 
material. This level is fixed for all items of stores and following
factors are taken into account for the fixation of this level: 

(a)  Lead time i.e. time lag between intending and receiving the 
material. 

(b)  Rate of consumption of the material during the lead  time. 

(c) Re-order Level 
 

The following formula is applied to calculate Minimum 

Stock: 
Minimum Stock = Re-order Level - Normal usage during 
Normal Lead time 

But if normal usage and normal lead time is not known then 
average usage will be treated as normal usage and average re- 
order will be treated as normal re-order period. 

Re-ordering Level (Ordering Level) 

It is the point at which if the stock of the material in stores 
reaches, the storekeeper should initiate the purchase requisition 
for fresh supply of material. This level is fixed somewhere 
between maximum and minimum level is such a way that the  
difference of quantity of the material between the reordering
level and the minimum level will be sufficient to meet  
requirements of production up to the time of fresh supply of the 
material. It is fixed after taking into consideration the following
factors: 

(a)  Rate of material usage: Generally this rate is found out as 
usage rate per day, pre week or per month. The quantity of  
production fluctuates according to demand of the product which 
results in variation in usage rate. 
 

Hence, the following three factors: 

(i)  Maximum usage rate: It implies quantity of material required

at maximum capacity production. 
(ii) Minimum usage rate: It implies quantity of material required
at capacity production in most unfavorable business conditions. 

(iii) Normal or average Usage Rate: It implies quantity of  

material required at capacity production under normal business 
conditions. 

(b)  Ordering Period: The time taken in preparing the order for  
purchase of material is called ordering period. In some concerns 
this period may be significant but in large concerns this period is 
significant because before placing the order the purchase 
manager has to trace out the best suppliers, after that only he 
places the order. 

© Delivery, Lead or Procurement Time: The time taken 

from the date of placing the order to the date of delivery by the 
suppliers is called procurement time. The maximum, minimum 
and average procurement time should also be determined. 
 

(D) Minimum Stock Level: This is the level of stock below 

which stocks should normally not be allowed to fall. 

Calculation of Re-order Point: 

 After taking into account the above facts re-order quantity is 
ascertained. For this purpose, the following formula is applied: 
Situation1: 
When rate of usage and lead time are known with certainty; 
Re-order point = Rate of usage x lead time. 

Situation2: 
When rate of usage is known with certainty and lead time is also 
known but is variable: 

(i)  Re-order point = Minimum Inventory + Average usage during 

Normal lead Time. 
(ii) Re-order point = Rate of usage x Maximum Lead Time. 
Situation3: 
When rate of usage and lead time is known but variable and
lead time is known with certainty: 
(i)  Re-order point = Minimum Inventory + Average usage during
lead time. 
(ii) Re-order point = Maximum Usage rate x Lead time. 
 

Situation4: 

When the rate of usage and lead time are known and are 
variable; 

(i)  Re-order point = Minimum Inventory + Average usage during 

lead period. 
(ii) Re-order point = Maximum Usage rate x Maximum Lead time. 

Danger Level 

This means a level at which normal issues of the material are  

stopped and issues made only under specific instructions. The 
purchase officer will make special arrangements to procure the 
materials reaching at their danger levels so that the production 
may not stop due to shortage of materials. It is determined as 
follows: 

Danger level = Average Consumption x Maximum Re- 

order period for Emergency Purchase 
 

ECONOMICORDERQUANTITY
TECHNIQUE

One of the major inventory management problems to be 

resolved is how much inventory should be added when inventory 
is replenished. If the firm is buying raw materials, it has to decide 
lost in which it has to be purchased on replenishment. If the firm is 
planning a production run, the issue is how much production to 
schedule (or how much to make). These problems are called
order quantity problems, and the task of the firm is to 
determine the optimum or economic order quantity (or economic 
lot size). Determining an optimum inventory level involves two 
type of costs: (a) ordering costs and (b) carrying costs: The 
economic order quantity is that inventory level that minimize the 
total of ordering and carrying costs. 

Ordering costs: the term ordering costs is used in case of raw 

materials (or supplies) and includes the entire costs of acquiring 
 

raw materials. They include costs incurred in the following

activities: requisitioning, purchase ordering, transporting,
receiving, inspecting and storing (store placement). Ordering costs 
increase in proportion to the number of order placed. 

Ordering costs increase with the number of order; thus the more 
frequently inventory is acquired, the higher the firm‘s  ordering
costs. Ordering costs decrease with increasing size of inventory. 

Carrying costs: Costs incurred for maintaining a given level of  

inventory are called carrying costs. They include storage,
insurance, taxes, deterioration and obsolescence. The storage 
costs comprise cost of storage space (warehousing cost), stores 
handing costs and clerical and staff service costs (administrative 
costs). 

Table: Ordering and Carrying Costs 

OrderingCosts Carrying Costs 

(1)Requisitioning (1) Warehousing 

(2)Order placing (2) Handling 

(3) Transportation (3) Clerical and staff  

(4) Receiving inspecting and storing (4) Insurance 

(5) Clerical and staff (5) Deterioration 

 

Carrying costs vary with inventory size. The economic size of  
inventory would thus depend on trade-off between carrying costs 
and ordering costs. 

Ordering and Carrying Costs trade-off: The optimum 

inventory size is commonly referred to as economic order  
quantity. It is that order size at which annual total costs of  
ordering and holding are the minimum. We can follow three 
approaches-the trial and error approach, the formula approach 
and the graphic approach-to determine the economic order  
quantity (EOQ). 

Trail and Error Approach: The trail and error, or analytical,

approach to resolve the order quantity problem can be illustrated
with the help of a simple example. Let us assume the following
data for a firm. 

Estimated three month requirements, A 

1,200 Dz. 

Purchasing cost (per order), (Rs) 50 

Ordering cost (per order), (Rs.)  37.50 

 

Carrying cost per unit, (Re) 1 

 Average inventory - (1200 + 0)/2 = 600 units 

 Average value - Rs 30,000 (600*Rs50) 

If we choose the multiple order than we order 100units on 

monthly basis 

 Average inventory - (400+0)/2 = 150units) 

 Average value - 150 * Rs 50 = 7, 500 

Many other possibilities can be worked out in the same manner. 

1200 

1000 

800  

Q/2 

600  

Stock 400 

200  
 

50 

0 2 4 6 8 10 15 

Time 

Inventory level over time 

Order- formula approach: The trial error, or analytical,

approach is somewhat tedious to calculate the EOQ. An easy 
way to determine EOQ is to use the order-formula approach. Let 
us illustrate this approach. 

Suppose the ordering cost per order, O, is fixed. The total 

order costs will be number of orders during the year multiplied
by ordering cost per order. If a represents total annual 
requirements and Q the order size, the number of orders will be 
 A/Q and total order costs will be: 

Total ordering cost = (Annualrequirement*Perordercost) 

Order size 
 

TOC = AO/ Q 

Let us further assume the carrying cost per unit, c, is constant 

The total carrying costs will be the product of the average  

inventory units and the carrying cost per unit. 

If Q is the order size and usage is assumed to be steady, the 

average inventory will be. 

Average inventory = ordersize = Q 

2 2 

 And total carrying costs will be: 

Total carrying cost = Average inventory 

* Per unit carrying cost 

TCC =Qc 

2 
 

The total inventory cost, then, is the sum of total carrying

and ordering costs: 

Total cost = Total carrying cost + Total order cost 

TC = Qc + AO 

2 Q 

Equation (4) reveals that for a large order quantity, Q, the carrying
cost will increase, but the ordering costs will decrease. On the 
other hand, the carrying costs will be lower and ordering cost will 
be higher with the order quantity. Thus, the total cost function 
represents a trade-off between the carrying costs and ordering
costs for determining the EOQ. 

To obtain the formula for EOQ, Equation (4) is differentiated with 

respect to Q and setting the derivative equal to zero, we obtain: 

Economic order quantity = 2*quantityrequired*orderingcost 

Carrying cost 

EOQ = 2AO  
 

C 

Graphic approach: 

The economic order quantity can also be found out graphically.

Figure illustrates the EOQ function. In the figure, costs-carrying,
ordering and total- are plotted on vertical axis and horizontal axis 
is used to represent the order size. We note that total carrying
costs increase as the order size increasers, because, on an 
average, a larger inventory level will be maintained, and ordering
costs decline with increase in order size means less number of  
orders. The behaviors of total costs line is noticeable since it is a 
sum of two types of cost which behave differently with order size.
The total costs decline in the first instance, but they start rising
when the decrease in average ordering cost is more than offset by 
the increase in carrying costs. The economic order quantity occurs 
at the point Q* where the total cost is minimum. Thus, the firm‘s 
operating profit is maximized at point Q*. 

Minimum total 

Cos t 

Carrying cost 
 

Costs ordering cost 

Q* order size (Q) 

Economic order quantity 

Optimum productions run:  

The use of the EOQ approach can be extended to production 

runs to determine the optimum size of manufacture. Two costs 
involved are set-up costs and carrying costs. Set-up costs include 
costs on the following activities: preparing and processing the 
stock orders, preparing drawings and specifications, tooling
machines set-up, handling machines, tools, equipment and
materials, over time etc. Production runs but carrying costs will 
increase as large stocks of manufactured inventories will be held.
The economic production size will be the one where the total of  
set-up and carrying costs is minimum. 

Reorder Point: 

The problem, how much to order, is solved by determining the 

economic order quantity, yet answer should be sought to be 
second problem, when to order. This is a problem of determining 
 

the reorder point. The reorder point is that inventory level at 
which an order should be placed to replenish the inventory. To 
determine the reorder point under certainty, we should known: (a) 
lead time (b) average usage, and (c) economic order quantity.
Lead time is the normally taken is replenishing inventory after  
the order has been placed. By certainty we mean that usage and
lead time do not fluctuate. Under such a situation, reorder point is 
simply that inventory level which will be maintained for  
consumption during the lead time. That is: 

Reorder point = Lead * Average usage 

Safety stock: 

The demand for inventory is likely to fluctuate from time to 

time. In particular, at certain points of time the demand may 
exceed the anticipated level. In other words, a discrepancy 
between the assumed (anticipated/expected) and the actual usage 
rate of inventory is likely to occur in practice. 

The effect of increased usage and/or slower delivery would be 

shortage of inventory. That is, the firm would disrupt production 
schedule and alienate the customers. The firm would, therefore,
be will advised to keep a sufficient safety margin by having 
 

additional inventory to guard against stock-out situation. Such 

stocks are called safety stocks. This would act as a buffer/cushion 
against a possible shortage of inventory. Safety stock may,
thus, be defined as minimum additional inventory to serve as 
safety margin/buffer/cushion to meet unanticipated increase in 
usage resulting from unusually high demand and/or uncontrollable 
late receipt of incoming inventory. 

The carrying costs are the costs associated with the maintenance 
of inventory. Since the firm is required to maintain additional 
inventory, in excess of the normal usage, additional carrying costs 
are involved. 

The stock-out and carrying costs are counterbalancing. The larger  

the safety stock, the larger the carrying costs and vice versa. 
Conversely, the larger the safety stock, the smaller the stock-out 
costs. 

Max. Inventory 

 Average usage 

EOQ 
 

 Avg. inventory----------------------------------------------------  

Re-order point----------------------------------------------------- 

max.usage 

Safety stock ------------------------------------------------------- 

Weeks lead time

Re-order point under safety stock  

VED Analysis: The VED analysis is used generally for spare

parts. The requirement and urgency of spare parts is different 
from that of materials. A-B-C analysis may not be properly used for  
spare parts. The demand for spares depends upon the 
performance of the plant and machinery. Spare parts are classified
as: Vital (V), Essential (E) and Desirable (D). The vital spares are a 
must for running the concern smoothly and these must be stored
adequately. The non-availability of vital spares will cause havoc in 
the concern. The E types of spares are also necessary but their  
stocks may be kept at low figures. The stocking of D types of  
 

spares may be avoided at times. If the lead time of these spares is 
less, then stocking of these spares can be avoided. 

The classification of spares under three categories is an important 

decision. A wrong classification of any spare will create difficulties 
for production department. The classification of spares should be 
left to the technical staff because they know the need, urgency 
and use of these spares. 

Assumptions: In applying EOQ formula, it is assumed that:

(i) Total demand is known with certainty. 

(ii) The usage rate of material is steady. 
(iii) Orders for replenishment on inventory are placed exactly 
when inventories reach ordering level. 
(iv) The ordering cost per order and holding cost per unit are 
constant. 

EOQ and Total Inventory Cost:  At EOQ level total inventory 
cost is minimum. Total inventory cost is the sum of material 
purchase cost, ordering cost and carrying cost 

 As per the formula:  

Total Inventory Cost (TIC) = Material Purchase Cost + Total 
Ordering Cost + Total Carrying Cost 
 

= (R x P) + (R/Po x Cp) + (Qo/2 x Ch) 

Discount Offer and Economic Order Quantity:  

Sometimes supplier offers different discounts on orders of large 
quantity. In such a situation, at first we should calculate EOQ 
and find out TIC without considering discount offer. Then we 
should calculate TIC of each alternative offer. That quantity will 
be EOQ at TIC is the lowest. 

PERPETUAL INVENTORY CONTROL TECHNIQUE 

Perpetual inventory system implies maintenance of up-to- 

date stock records and in its broad sense it covers both 
continuous stock taking as well as up-to-date recording stores 
books. According to Weldon, It may be defined as ―a method of  
recording stores balances after every receipt and issue to 
facilitate regular checking and to obviate closing down for sock- 
taking‖.  The basic object of this system is to make available  
details about the quantity and value of stock of each item at all 
times. The system thus provides a rigid control over stock of  
each item of store can regularly be verified with the stock
records in the bin cards kept in the stores and stores ledger  
maintained in cost office. 
 

Advantages of Perpetual Inventory system:  

1.  Saving in time: The long and costly work

of stocktaking is avoided. Hence, interim and final financial 
accounts can be prepared with greater convenience. 

2.  Arrangement of proper verification: In 

this system a detailed and more reliable checking of the store is 
exercised because of the continuous and random checking. 

3.  Verification of Errors: Errors are easily 

located and rectified. This gives an opportunity for preventing a 
recurrence in many cases. 

4.  Double control: Due to separate records 

in Bin card and stores ledger, double control is maintained. 

5.  Optimum size of material: Overstocking

and under stocking can be avoided because perpetual inventory 
system covers verification of stock with regards to maximum,
minimum and other levels. 
6.  Lack of misuse of Material: Under this 
system, effective control on issue of material is possible, thus 
misuse of material can be avoided. 
 

7.  Moral Check on Stores staff: Due to 

continuous checking, this system serves as a moral check on 
the stores staff. They are discouraged from committing
dishonesty. 
8.  Loss of stock due to obsolescence: It is 
detected at an early stage and so timely action can be taken to 
prevent recurrence. 

THE SELECTIVE INVENTORY CONTROL  

OR ABC SYSTEM OF CONTROL 

Most manufacturing firms find themselves confronted with 

virtually thousands of different inventory items. Most of these 
items are relatively inexpensive, while other items are quite 
expensive and account for a large portion of the firm‘s 
investment. Some inventory items, although not expensive,
turnover slowly and therefore, they require a high average 
investment. The firm should classify them into A.B.C category 
items. Category A will include more expensive items (in cost of  
product) with high investment and it will require more intensive 
control. 
 

The ‗B‘  group will consist of the items accounting for the next 
largest investment. 

The ‗C‘ group will consist of a large number of items of inventory 

accounting for small investment. 

The  ‗A‘  items require intensive inventory control and most 

sophisticated inventory control techniques should be applied to 
these items. 

The ‗B‘  items can be controlled using less sophisticated

technique, and their level can be viewed less frequently than  ‗A‘ 
items. 

The ‗C‘  items can receive the minimum attention: they will 
probably be ordered in large quantities in order to obtain them 
at the lowest price. 

Though the ABC technique is a good technique but it cannot be 

universally applied. Certain items of inventory may be 
inexpensive but may be critical to the product in process and
cannot be easily obtained. Therefore, they may require special 
attention. 
 

These types of items must be treated as ― A‖  class items even 

though, using the broad framework, they would be ―B‖  or ―C‖ 
class items. 

 Although, not perfect, the ABC system is an excellent method

for determining the degree of inventory control efforts required
to expand each item of inventory. 

The following points should be kept in mind for ABC 

analysis: 

(1) Where items can be 

substituted for each other, they should be preferably treated as 
one item. 
(2) More emphasis should be 
given to the value of consumption and not to price per unit of the 
item. 
(3)  All the items consumed by 
an organization should be considered together for classifying as A,
B or C instead of taking item as spare, raw materials, semi-finished
and finished items and then classifying as A, B and C. 
There can be more then three classes and the period of  
consumption need not necessarily be one year  
 

Application of ABC Analysis: 

 ABC analysis can be effectively 

used in Material Management. The various stages where it can be
applied are: 

(1) Information of items which 

require higher degree of control. 
(2) To evolve useful re-ordering 
strategy.
(3) Stock records. 
(4) Priority treatment to different 
items. 
(5) Determination of safety 
stock items. 
(6) Stores layout. 
(7) Value analysis. 

Just-in-time(JIT)System:  
Japanese firms popularized the just- 
in-time (JIT) system in the world. In a JIT system material or the 
 

manufactured components and part arrive to the manufacturing

sites or stores just few hours before they are put to use. The 
delivery of material is synchronized with the manufacturing cycle 
and speed. JIT system eliminates the necessity of carrying large 
inventories, and thus, saves carrying and other related costs of  
manufacturer. The system requires perfect understanding and
coordination between the manufacturer and supplier in terms of  
the timing of delivery and quality of the material. Poor quality 
material or complements could halt the production. The JIT 
inventory system complements the total quality management 
(TQM). The success of the system depends on how well a 
company manages its suppliers. The system puts tremendous 
pressure on suppliers. They will have to develop adequate system 
and procedures to satisfactory meet the needs of manufacturers. 

System of Accounting for Material Issued/Inventory 

Systems 

Either the periodic inventory system or the perpetual inventory 

system may be used to account for materials issued to production 
and ending materials inventory. 
 

Periodic Inventory System 

Under the periodic inventory system,

the purchase of materials is recorded in Purchase of Raw 
Materials Account. The opening/beginning inventory, if any, is 
recorded in a separate Materials Inventory- Opening Account.
The materials available for use during a period equal purchases 
plus opening inventory. A physical count is made of the materials 
on hands at the end of the period to arrive at the closing/ending
materials inventory. The cost of materials for the period is  
determined as shown in Exhibit: 

Cost of Materials Issued 

Materials inventory-opening 

+ Purchases 

= Materials available for use 

- Materials inventory-closing (based on physical count) 

= Cost of materials issued 

 

The entire book inventory is verified at a given date by an actual 

count of materials on hand. This physical inventory is usually 
taken near the end of the accounting year/period. This method
provides for the recording of the purchases on a daily basis but 
does not provide for a continuous inventory-taking. Neither a 
physical count is made of the quantity of goods on hand, nor the 
value of the inventory in determined by using an appropriate 
pricing method and attaching costs to units counted. It is assumed
that goods not on hand at the end of the period have been sold.
There is no system and accounting period, and they can be 
discovered only at the end. 

INVENTORY TURNOVER RATE TECHNIQUE 

One important technique of inventory control is to use 

inventory turnover ratios. These ratios are calculated to assess 
the efficiency in use of inventories. Following control ratios can 
be computed for inventory analysis: 
(i)  Inventory Turnover Ratio = Cost of goods sold/ Average 
Inventory 

Where Average Inventory = (Opening Inventory + Closing 

Inventory)/2 
 

Inventory Turnover Ratios ca be calculated separately for raw 

materials and finished goods. 

(A)  Raw Material Turnover Ratio = Raw Material Consumed/ 

 Average stock of Raw material. 

(B)  Finished Goods Turnover Ratio = Cost of Goods Sold/ 

 Average Stock of Finished Goods 

 Average Age of inventory of inventory Turnover in Days = Days 

during the period/ Inventory Turnover Ratio 

(ii)  Average inventory to total cost of production = 

(Average Inventory/ total cost of production) x 100 

(iii)  Slow Moving Stores to Total Inventory = Average Cost of

Slow Moving Stores/Average Inventory 

(iv)  Inventory Performance Index = (Actual Material 

Turnover Ratio/ Standard Material Turnover Ratio) x 100 

These ratios provide a broad framework for the control and

provide the basis for future decisions regarding inventory 
control. The ratios provide a tough indication of when Inventory 
levels are going to be high. Even if it appears from the ratio that 
 

the levels are too high there might be a perfectly good reason 
why the level of Inventory is being maintained. The ratios also 
indicate the situation and trend. However, the limitation of  
ratios should be kept in mind. They are not an end themselves,
but only tools of sound Inventory Management. 

FINANCIAL MANAGER’S  ROLE IN INVENTORY 

MANAGEMENT 

Inventory represents a large investment by manufacturing

concern: therefore, great emphasis must be placed on its 
efficient management. Though, the operative responsibility for  
Inventory management lies with the inventory manager, the 
financial manager must also be concerned with all types of  
inventories- raw materials, work-in-progress and finished goods.
He must monitor Inventory levels and see that only an optimum 
amount is invested in Inventory. He should be familiar with the 
Inventory control techniques and ensure that Inventory is 
managed well. 
He should try to resolve the conflicting view points of all the 
departments in order to have efficient inventory management.
He has to act as a careful inspector levels. He should introduce 
the policies which reduce the lead time, regulate usage and 
 

thus, minimize safety stock. All these techniques of Inventory 

management lead to the goal of wealth maximization. 

VALUATION OF INVENTORIES 

OBJECTIVE: 

 A primary issue in accounting for inventories is the 

determination of the value at which inventories are carried in 
the financial statements until the related revenues are 
recognized. This statement deals with the determination of such 
value, including the ascertainment of cost of inventories and
any write-down thereof to net realizable value. 

1. This statement should be applied in accounting for  

inventories other than: 

(a) Work-in-progress arising under construction contacts, including

directly related service contracts. 

(b) Work-in-progress arising in the ordinary course of business of  

service providers. 

(c) Shares, debentures and other financial instruments held as

stock-in-trade. 
 

(d) Producer‘s  inventories of livestock, agricultural and forest 

products and mineral oils, ores and gases to the extent that 
they are measured at net realizable value in accordance with 
well established practices in those industries. 

2. The inventories referred are measured at net realizable 

value at certain stages of production. This occurs, for example,
when agricultural crops have been harvested or mineral oils,
ores and gases have been extracted and sale is assured under a 
forward contract or a government guarantee or when a 
homogenous market exists and there is a negligible risk of  
failure to sell. These Inventories are excluded from the scope of  
this statement. 

DEFINITIONS 

The following terms are used in this statement with the 

meanings specified: 

Inventories are assets: 

(a) Held for sale in the ordinary course of business. 

(b) In the process of production for such sale, or  
 

(c) In the form of materials or supplies to be consumed in 

the production process or in the rendering of services. 

1. Inventories encompass goods purchased and held for resale,

for example, merchandise purchased by a retailer and held for  
resale, computer software held for resale, or land and other  
property held for resale. Inventories also encompass finished
goods produced, or work-in-progress being produced, by the 
enterprise and include materials, maintenance supplies,
consumables and loose tools awaiting use in the production 
process. Inventories do not include machinery spares which can 
be used only in connection with an item of fixed asset and
whose use is expected to be irregular; such machinery spares 
are accounted for in accordance with Accounting Standard (AS) 
10, Accounting for Fixed Assets. 

2. Inventories should be valued at lower of cost net realizable 

value. 

3. Cost of Inventories 
The cost of inventories should comprise all costs of purchase,
costs of conversion and other costs incurred in bringing the 
inventories to their present location and condition. 
 

4. Costs of Purchase 
The costs of purchase consist of the purchase price including
duties and taxes (other than those subsequently recoverable by 
the enterprise from the taxing authorities), freight, inwards and
other expenditure directly attributable to the acquisition. Trade 
discounts, rebates, duty drawbacks and other similar items are 
deducted in determining the costs of purchase. 

5. Costs of Conversion  
The costs of conversion of inventories include costs 
directly related to the units of production, such as direct 
labour. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting
materials into finished goods. Fixed production overheads are 
those indirect costs of production that remain relatively 
constant regardless of the volume of production, such as 
depreciation and maintenance of factory buildings and the cost 
of factory management and administration. Variable production 
overheads are those indirect costs of production that vary 
 

directly, or nearly with the volume of production such as indirect 

materials and indirect labour. 

6. The allocation of fixed production overheads for purpose of  

their inclusion in the costs of conversion is on based on the 
normal capacity of the production facilities. Normal capacity is 
the production expected to be achieved on an average over a 
number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned
maintenance. The actual level of production may be used if it 
approximates normal capacity. The amount of fixed production 
overheads allocated to each unit of production is not increased
as a consequence of low production or idle plant. Unallocated
overheads are recognized as an expense in the period in which 
they are incurred. In periods of abnormally high production, the 
amount of fixed production overheads allocated to each unit of  
production is decreased so that inventories are not measured
above cost. Variable production overheads are assigned to each 
unit of production on the basis of the actual use of the 
production facilities. 

7. A production process may result in more than one product 

being produced simultaneously. This is the case, for example,
when joint products are produced or when there is a main 
 

product and a by- product. When the costs of conversion of each 

product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The 
allocation may be based, for example, on the relative sales 
value of each product either at the stage in the production 
process when the products become separately identifiable, or at 
the completion of production. Most by- products as well as scrap
or waste materials, by their nature, are immaterial. When this is 
the case, they are often measured at net realizable value and
this value is deducted from the cost of the main product. As a 
result, the carrying amount of the main product is not materially  
different from its cost. 

8. Other costs are included in the costs of inventories only to the 

extent that they are incurred in bringing the inventories to their  
present location and condition. For example, it may be 
appropriate to include overheads other than production 
overheads or the costs of designing product for specific 
customers in the cost of inventories. 

9. Interest and other borrowing costs are usually considered as 

not relating to bringing the inventories to their present location 
 

and condition and are, therefore, usually not included in the cost 
of inventories. 

10. Exclusions from the cost of Inventories 

In determining the cost of inventories in accordance with 
paragraph 3. It is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are 
incurred. Examples of such costs are; 

1.  Abnormal amounts of wasted materials, labour, or other  

production costs. 

2.  Storage costs, unless those costs are necessary in the 

production process prior to a further production stage. 

3.  Administrative overheads that do not contribute to bringing

the inventories to their present location and condition, and 

4.  Selling and distribution costs. 

 

11. The cost of inventories of items that are not ordinarily 

interchangeable and goods or services produced and
segregated for specific projects should be assigned by specific 
identification of their individual costs. 

12. Specific identification of cost means that specific costs are 

attributed to identify items of inventory. This is an appropriate 
treatment for items that are segregated for a specific project,
regardless of whether they have been purchased or produced.
However, when there are large numbers of items of inventory 
which are ordinarily interchangeable, specific identification of  
costs is inappropriate since, in such circumstances, an 
enterprise could obtain predetermined effects on the net profit 
or loss for the period by selecting a particular method of  
ascertaining the items that remain in inventories. 

13. The cost of inventories, other than those dealt with in 
paragraph 11, should be assigned by using the first-in, first-out 
(FIFO), or weighted average cost formula. The formula used
should reflect the fairest possible approximation to the cost 
incurred in bringing the items of inventory to their present 
location and condition. 
 

14. A variety of cost formulas is used to determine the cost of  

inventories other than those for which specific identification of  
individual costs is appropriate. The formula used in determining
the cost of an item of inventory needs to be selected with a view 
to providing the fairest possible approximation to the cost 
incurred in bringing the item to its present location and
condition. 

The FIFO formula assumes that the items of inventory which 

were purchased or produced first are consumed or sold first, and
consequently the items remaining in inventory at the end of the 
period are those most recently purchased or produced. Under  
the weighted average costs formula, the cost of each item is 
determined from the weighted average of the cost of similar  
items at the beginning of a period and the cost of similar items 
purchased or produced during the period. The average may be 
calculated on a periodic basis or as each additional shipment is 
received, depending upon the circumstances of the enterprise. 

15. Techniques for the measurement of the cost of  

inventories, such as the standard cost method or the retail 
method, may be used for convenience if the results approximate 
the actual cost. Standard costs take into account normal levels 
of consumption of materials and supplies, labour, efficiency and 
 

capacity utilization. They are regularly reviewed and if  

necessary, revised in the light of current conditions. 

16. The retail method is often used in the retail trade for  
measuring inventories of large numbers of rapidly changing
items that have similar margins and for which is impracticable 
to use other costing methods. The cost of the inventory is 
determined by reducing from the sales value of the inventory 
the appropriate percentage gross margin. The percentage used
takes into consideration inventory which has been marked down 
to below its original selling price. An average percentage for  
each retail department is often used. 

17. The cost of inventories may not be recoverable if those 

inventories are damaged, if they have become wholly or  
partially obsolete, or if their selling prices have declined. The 
cost of inventories may also not be recoverable if the estimated
costs of completion or the estimated costs necessary to make  
the sale have increased. 

The practice of writing down inventories below cost to net 

realizable value is consistent with the view that assets should 
 

not be carried in excess of a amounts expected to be realized

from their sale or use. 

18. Inventories are usually written down to net realizable value on 
an item-by-item basis. In some circumstances, however, it may  
be appropriate to group similar or related items. This may be  
the case with items of inventory relating to the same product 
line that have similar purposes or end uses and are produced
and marketed in the same geographical area and cannot be 
practicably evaluated separately from other items in that 
product line. It is not appropriate to write down inventories 
based on a classification of inventory, for example, finished
goods, or all the inventories in a particular business segment. 

19. Estimates of net realizable value are based on the most 

reliable evidence available at the time the estimates are made 
as to the amount the inventories are expected to realize. These 
estimates take into consideration fluctuations of price or cost 
directly relating to events occurring after the balance sheet date 
to the extent that such events confirm the conditions existing at 
the balance sheet date. 

20. Estimates or net realizable value also take into consideration the 
purpose for which the inventory is held. For example, the net 
 

realizable value of the quantity of inventory held to satisfy firm 

sales or service contracts is based on the contract price. If the 
sales contracts are for less than the inventory quantities held,
the net realizable value of the excess inventory is based on 
general selling prices. 

Contingent losses on firm sales contracts in excess of inventory 

quantities held and contingent losses on firm purchase contracts 
are dealt with in accordance with the principles enunciated in 
 Accounting Standard (A.S) 4, contingencies and events 
occurring after the balance sheet date. 

21. Materials and other supplies held for use in the 

production of inventories are not written down below cost if the 
finished products in which they will be incorporated are 
expected to be sold at or above cost. However, when there has 
been a decline in the price of materials and it is estimated that 
the cost of the finished products will exceed net realizable 
value, the materials are written down to net realizable value. In 
such circumstances, the replacement cost of the materials may 
be the net available measure of their net realizable value. 
 An assessment is made of net realizable value as at each 
balance sheet date. 

22. Disclosure. 
 

The financial statements should disclose:  

The accounting policies adopted in measuring inventories,

including the cost formula used, and The total carrying amount 
of inventories and its classification appropriate to the enterprise. 

24. Information about the carrying amounts held in different 

classifications of inventories and the extent of the changes in 
these assets is useful to financial statement users. Common 
classifications of inventories are raw materials and components,
work in progress, finished goods, stores, spares and loose tools. 

DATA COLLECTION 
In analysis of inventory of J&J, We collect the data by the
different sources. We collect the primary and secondary data.  

SECONDARY DATA  –  The secondary data are those data the
already in presence for specific purpose we use the secondary 
 

data about inventory to looks old records of the company .For  

the daily information about the items We show the MRN, ledger  
register and daily issue slip of materials the purchase register  
and other documentary evidence used for the findings. 

In the analysis of inventory the secondary data are not 

sufficient .then We collect primary data. 

PRIMARY DATA  – 

Primary data are those data that are 

originated very first time or fresh data .with the help of primary 
data formulated the research objectives. Primary data are the 
accurate attainable reliable and useful data. 

1. Inventory control techniques used by the company 

2. Inventory systems as perpetual and periodic systems. 
3. Stock levels etc. 
4. Companies website 

JOHNSON & JOHNSON AND SUBSIDIARIES  

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS 
Fiscal Years Ended January 3, 2010, December 28, 2008 and  
December 30, 2007 
(Dollars in Millions) 
2009  Balance  Accruals  Payments /  Balance 
at  Other   at End of  
Beginni  Period 
ng of  
Period 
 Accrued Rebates   $1808  6584  (6,753 )  1639 
(1) 
 

 Accrued Returns   $794  355  (460 )  689 

 Accrued  $356  2446  (2,373 )  429 
Promotions 
Subtotal  $2958  9385  (9,586 )  2757 
Reserve for   $267  110  (44 )  333 
doubtful accounts 
Reserve for cash   $79  $1163  (1,141 )  101 
discounts 
Total  $3304  $10658  (10,771 )  3191 
2008  Balance  Accruals  Payments /  Balance 
at  Other   at End of  
Beginni  Period 
ng of  
Period 
 Accrued Rebates   $1802  $5578  (5572)  1808 
(1) 
 Accrued Returns   $648  $402  (256)  794 
 Accrued  $578  $2991  (3213)  356 
Promotions 
Subtotal  $3028  $8971  (9041)  2958 
Reserve for   $193  $101  (927)  267 
doubtful accounts 
Reserve for cash   $71  $905  (897)  79 
discounts 
Total  $3292  $9977  (9965)  3304 

) Includes reserve for customer rebates of $729 million, $721 million, $710
(1

million at January 3, 2010, 

December 28, 2008 and December 30, 2007, respectively. 
(2) Includes $171 million adjustment related to previously estimate accrued
sales reserve.

MEDICAL DEVICES AND DIAGNOSTICS SEGMENT  

The Medical Devices and Diagnostics segment achieved sales of $23.6
billion in 2009, representing an increase of 1.9% over the Prior year, with 
operational growth of 4.2% and a negative currency impact of 2.3%. U.S.
sales were $11.0 billion, an increase of  
 

4.5% over the prior year. International sales were $12.6 billion, a decrease 
of 0.2%, with growth of 4.0% from operations and a decrease of 4.2% 
resulting from the negative impact of currency fluctuations. The DePuy 
franchise achieved sales of $5.4 billion in 2009, a 4.6% increase over the 
prior year. This was primarily due to growth in the spine, hip and knee 
product lines. Additionally, new product launches in the Mitek sports 
medicine product line contributed to the growth. 
The Ethicon Endo-Surgery franchise achieved sales of $4.5 billion in 2009, a 
4.8% increase over the prior year. This was attributable to growth in the 
endoscopy, HARMONIC ® , ENSEAL ® and Advanced Sterilization product 
lines. The Ethicon franchise achieved sales of $4.1 billion in 2009, a 7.3% 
increase over the prior year. This was attributable to growth in the sutures,
biosurgical and mesh product lines in addition to sales of newly acquired
products from the acquisitions of Omrix Biopharmaceuticals, Inc. and
Mentor Corporation. The growth was partially offset by the divestiture of the 
Professional Wound Care business of Ethicon, Inc. in the fiscal fourth quarter  
of 2008. 
Sales in the Cordis franchise were $2.7 billion, a decline of 10.3% versus the
prior year. The decline reflects lower sales of the CYPHER ® Sirolimus-  
eluting Coronary Stent due to increased global competition. The decline was  
partially offset by growth of the Biosense Webster business. The Vision Care
franchise achieved sales of $2.5 billion in 2009, a 0.2% increase over prior  
year primarily related to growth in the Astigmatic contact lens product line
offset by the negative impact of currency. Sales in the Diabetes Care
franchise were $2.4 billion in 2009, a decline of 3.7% versus the prior year.  
Declines in the LifeScan product line were partially offset by growth of the
 Animas insulin delivery business resulting from new product launches and  
continued development in international markets. The Ortho-Clinical  
Diagnostics franchise achieved sales of $2.0 billion in 2009, a 6.6% increase
over the prior year primarily attributable to the recent launch of the VITROS  
® 3600 and 5600 analyzers. 
The Medical Devices and Diagnostics segment achieved sales of $23.1
billion in 2008, representing an increase of 6.4% over the prior year, with 
operational growth of 3.5% and 2.9% due to a positive impact from currency 
fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International 
sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations 
and a positive currency impact of 5.5%. Analysis of Consolidated Earnings  
Before Provision for Taxes on Income Consolidated earnings before 
provision for taxes on income decreased by $1.1 billion to $15.8 billion in 
2009 as compared to the $16.9 billion earned in 2008, a decrease of 6.9%. 
The decrease was primarily related to lower sales, the negative impact of  
product mix, lower interest income due to lower rates of interest earned and
restructuring charges of $1.2 billion. This was partially offset by lower  
 

selling, marketing and administrative expenses due to cost containment 

efforts across all the businesses. 2008 included purchased in-process 
research and development (IPR&D) charges of $0.2 billion and increased
investment spending in selling, marketing and administrative expenses 
utilized from the proceeds associated with the divestiture of the Professional 
Wound Care business of Ethicon, Inc. The increase in 2008 of 27.4% over 
the $13.3 billion in 2007 was primarily due to lower  
IPR&D charges of $0.6 billion, gains from divestitures of $0.5 billion and
higher litigation gains of $0.5 billion versus restructuring charges of $0.7
billion and the write-down of the NATRECOR ® intangible asset of $0.7
billion recorded in 2007. As a percent to sales, consolidated Major Medical 
Devices and Diagnostics Franchise Sales*: 
MANAGEMENT‘S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS 
 AND FINANCIAL CONDITION 29 % Change
(Dollars in Millions) 2009 2008 2007 ‘09 vs. ‘08 ‘08 vs. ‘07 
DEPUY ® $ 5,372 5,136 4,698 4.6 % 9.3  
ETHICON ENDO-SURGERY ® 4,492 4,286 3,834 4.8 11.8 
ETHICON ® 4,122 3,840 3,603 7.3 6.6 
CORDIS ® 2,679 2,988 3,314 (10.3 ) (9.8 ) 
Vision Care 2,506 2,500 2,209 0.2 13.2  
Diabetes Care 2,440 2,535 2,373 (3.7 ) 6.8 
ORTHO-CLINICAL DIAGNOSTICS ® 1,963 1,841 1,705 6.6 8.0 
Total $ 23,574 23,126 21,736 1.9 % 6.4 

OPERATING PROFIT BY SEGMENT  

Operating profits by segment of business were as follows: 

Percent of Segment Sales (Dollars in Millions) 2009 

2008 2009 2008 

Consumer $ 2,475 2,674 

15.7 % 16.7 
Pharmaceutical 6,413 7, 605 
28.5 % 31.0 
Med Devices and Diagnostics 7,694 7,223  
32.6% 31.2 
Total (1) 16,582 
17,502 26.8% 27.4 
Less: Expenses not allocated to segments (2) 827 573 
Earnings before provision for taxes on income $ 15,755 16,929 25.4 % 26.5 
 

Operatlll'lig Profit. 
 by Segment.  
( n b. lll()t'rj. of ooll.:us.) 

• 
• 
C:.tn""'"'cr  
Ph....-""'"'-"t!ulic_,. 
loJiedK:< I Uevices 
ar- Cl ...;·.a:gros.t..c.s.  
 

PHARMACEUTICAL SEGMENT  

Balance at Balance at 

Beginning Payments/ End 
(Dollars in Millions)  of Per iod Accruals Other of Per iod 
2009 
 Accrued r ebates 11>  $ 1,261 3,975 (4,172) 1,064 
 Accrued r eturns  490 147 (295) 342 
 Accrued promotions  107 330 (353) 84 
Subtotal  $ 1,858 4,452 (4,820) 1,490  
Reser ve f or doubtful accounts  48  37  (2)  83 
Reserve f or cash discounts 23 462 (437) 48 
Total  $ 1,929  4,951  (5,259)  1,621 
2008 
 Accrued r ebates (1)  $ 1,249  3,331  3,319   1,261 
 Accrued r eturns  345  168  (23)  490 
 Accr ued pr omotions 263 414 (570) 107  
Subtotal $ 1,857 3,913 (3,912) 1,858 
Reser ve f or doubtful accounts 26 24 (2)  48 
Reser ve f o r cash discounts 24 376 (377) 23 
Total $ 1,907 4,313(2) (4,291) 1,929 

(tJ Inc ludes reseJVe for customer rebates of $372 million at January 3, 2010 and $344 million at December 28 , 2008, recorded as 
a contra asset. 
2
< ! Includes $115 million adj ustment related to previously estimated accr ued sales reserves. 

MEDICAL DEVICES AND DIAGNOSTICS SEGMENT  

Balance at Balance at 

Beginning Payments/ End 
(Dollars in Millions)  of Period  Accruals Other of Per iod 
2009 
 Accrued r ebates (1)  $ 416 2,229 (2,191) 454 
 Accruedr eturns  189 74 (43) 220 
 Accrued promotions  47 120 (94) 73 
Subtotal  $ 652 2,423 (2,328) 747 
Reser ve f or doubtful accounts  109  50  (16)  143 
Reser ve f o r cash discounts  34 416 (418) 32 
Total  $ 795 2,889 (2,762) 922 
2008 
 Accrued r ebates (1)  $ 336 1,947 (1,867) 416 
 Accrued r eturns  190 99 (100) 189 
 Accrued pr omotions  18 208 (179) 47 
Subtotal  $ 544 2,254 (2,146) 652 
Reser ve f or doubtful accounts  96 36 (23) 109 
Reserve f or cash discounts 24 257 (247) 34 
Total  $  664 2,54712) (2,416) 795 
 

Consolidated Balance Sheets  Johnson & Johnson and Subsidiaries 

 AIJanuary 3. 2010 andDecember 28,2008 (Dollars 11Millions Excep1Share and Per Shar e Data){Note 1)  2009 2008 
 Asse ts 
Currentassets 
Cash and cash equivalents (Notes 1and 2)  $15,810  10,768 
Marketable securities (Notes 1and 2)  3,615  2,041 
 Accounts r eceivable tr ade,less allowances f or doubtfulaccounts $333 (2008, $268)  9,646  9,719 
Inventor ies (Notes 1and 3)  5,180  5,052 
Def er re  dtaxesonincome(Note 8)  2,793  3,430 
Pr epaid expenses and other r eceivables  2 497  3.367 

Totalcur re  nt assets  39,541 34.377 

Pr operty, plant and equipment,net (Notes 1and 4)  14,759  14,365 

Intangibleassets,net (Notes 1and 5)  16,323  13,976 
Goodwill(Notes 1and 5)  14.862  13.719 
Def er red taxes onincome (Note 8)  5,507  5,841 
Other assets  3 690 2 634 

Totalassets  594,682 84,912 

liabilities and Shareholders'Equity 

Current liabilities 
Loans and notes payable (Note 7) s 6,318  3,732 
 Accounts payable 5,541  7,503 
 Accr uedliabil ies 5,796  5,531 
 Accrued r ebates, r eturns and promotions 2,028  2,237 
 Accrued salar ies,wages and commissions 1,606  1,432 
 Accrued taxes on income 442 417 

Totalcur re  nt liabilities  21,731  20,852 

Lon -ter m debt Note 7   8 223  8,120 

Def er red taxes onincome (Note 8)  1,424  1,432 
Employee r elated obligat ons (Notes 9 and 10)  6,769  7,791 
Other liabilities 5947 4.206 

Totalliabilities  44,094  42,401 

Shareholder s' e uit  
Pr eferred stock -without par value 
(authoriZed and unissued 2,000,000 shares) 
Common stock -par value $1.00 pershare(Note 12) 
(authoriZed 4,320,000,000 shares; issued 3,119,843,000 shar es)  3,120  3,120 
 Accumulatedothercompr ehensive income (Note 13)  (3,058)  (4,955) 
Retained earnings  70 306 63.379 
70,368  61,544 
Less:commonstock held in tr easury,at cost (Note 12) 
(365,522,000 shar es and 350,665,000 shar es)  19,780  19,033 

Totalshareholder s' equity  50,588  42,511 

Totalliabilities and shar eholder s' equity  594,682 84.912 

 

Consolidated Statements of Earnings Johnson & Johnson and Subsidiaries 

(Dollars in Millions Except Per Share Figures) (Note 1) 2009 2008 2007 

Sales to customers  $61,897  63,747   61,095 

Cost of products sold  18447  18,511  17 751 

Gross profit  43,450  45,236  43,344 

Selling, marketing and administrative expenses  19,801  21,490  20,451 

Research expense  6,986   7,577  7,680 
Purchased in-process research and development (Note 20)  181  807 
Interest income  (90)  (361)  (452) 
Interest expense,net of portion capitalized (Note 4)  451   435   296  
Other (income) expense,net  (526)  (1,015)  534 
Restructur ing (Note 22) 1,073 745 
Earnings bef ore provision for taxes on income 15,755 16,929 13,283  
Pr ovision f or taxes on income (Note 8) 3,489 3,980 2,707 

Net earnings  $12,266  12,949  10,576 

Basic net earnin s er share Notes 1and 15   $ 4.45  4.62  3.67 

Diluted net earnings per share (Notes 1and 15)  $ 4.40  4.57  3.63 

Cash dividends per share  $ 1.930  1.795  1.620 

Basic average shares outstanding (Notes 1and 15)  2,759.5  2,802.5  2,882.9 
Diluted average shares outstanding (Notes 1 and 15)  2,789.1  2,835.6  2,910.7 
 

Normally each fiscal year consists of 52 weeks, but every five or six years 
the fiscal year consists of 53 weeks, as was the case in 
2009 and will be the case again in 2014.
RECLASSIFICATION 
Certain prior period amounts have been reclassified to conform to current 
year presentation. 
2. Cash, Cash Equivalents and Current Marketable Securities 
 As of January 3, 2010, current marketable securities consist of $3,434
million and $181 million of government securities and obligations and
corporate debt securities, respectively. 
 As of December 28, 2008, current marketable securities consist of $1,663
million, $342 million and $36 million of government securities and
obligations, corporate debt securities and time deposits, respectively.
Fair value of government securities and obligations and corporate debt 
securities were estimated using quoted broker prices in active markets. 
The Company invests its excess cash in both deposits with major banks 
throughout the world and other high-quality money market instruments. The 
Company has a policy of making investments only with commercial 
institutions that have at least an A (or equivalent) credit rating. 
3. Inventories 
 At the end of 2009 and 2008, inventories were comprised of: 
4. Property, Plant and Equipment 
 At the end of 2009 and 2008, property, plant and equipment at cost and
accumulated depreciation were: 
The Company capitalizes interest expense as part of the cost of construction 
of facilities and equipment. Interest expense capitalized in 2009, 2008 and
2007 was $101 million, $147 million and $130 million, respectively.
Depreciation expense, including the amortization of capitalized interest in 
2009, 2008 and 2007, was $2.1 billion, $2.0 billion 
January 3, 2010 December 28, 2008  
Amortized Unrealized Estimated Amortized Unrealized Estimated 
(Dollars in Millions) Cost Gains/(Losses) Fair Value Cost Gains/ 
(Losses) Fair Value 
Current Investments 
Cash $ 2,517 — 2,517 3,276 — 3,276 
Government securities and obligations 13,370 1 13,371 7,486 4 7,490 
Corporate debt securities 426 — 426 627 1 628 
Money market funds 1,890 — 1,890 813 — 813  
Time deposits 1,222 — 1,222 607 — 607 
Total cash, cash equivalents and current marketable securities $ 19,425 1 
19,426 12,809 5 12,814 

(Dollars in Millions) 2009 2008 

 

Raw materials and supplies $ 1,144 839  

Goods in process 1,395 1,372  
Finished goods 2,641 2,841
$ 5,180 5,052(Dollars in Millions) 2009 2008 
Land and land improvements $ 714 886
Buildings and building equipment 8,863 7,720 
Machinery and equipment 17,153 15,234 
Construction in progress 2,521 3,552 
29,251 27,392 
Less accumulated depreciation 14,492 13,027 $ 14,759 14,365 and $1.9
billion, respectively. Upon retirement or other disposal of property, plant 
and equipment, the costs and related amounts of accumulated depreciation 
or amortization are eliminated from the asset and accumulated depreciation 
accounts, respectively. The difference, if any, between the net asset value 
and the proceeds are recorded in earnings. 
5. Intangible Assets and Goodwill 
 At the end of 2009 and 2008, the gross and net amounts of intangible 
assets were: 
43 
(Dollars in Millions) 2009 2008 
Intangible assets with definite lives: 
Patents and trademarks — gross $ 5,697 5,119
Less accumulated amortization 2,177 1,820
Patents and trademarks — net $ 3,520 3,299 
Other intangibles — gross $ 7,808 7,376 
Less accumulated amortization 2,680 2,433
Other intangibles — net $ 5,128 4,943 
Total intangible assets with definite lives — gross $ 13,505 12,495
Less accumulated amortization 4,857 4,253 
Total intangible assets with definite lives — net $ 8,648 8,242 
Intangible assets with indefinite lives:
Trademarks $ 5,938 5,734 
Purchased in-process research and development* 1,737 — 
Total intangible assets with indefinite lives $ 7,675 5,734 
Total intangible assets — net $ 16,323 13,976 
 

DATA ANALYSIS AND INTERPRETATION 

INVENTORY TURN OVER RATIO- 

Total sales 
Inventory turn over ratio = Average inventory 

The sale of J&J in year 2007 is 720 million & its investment  
on inventory is 126 million.  

Then inventory turnover ratio = 720/126 

= 5.71  

J&J used Rs. 6 million worth inventory for operation. It could  

generates additional sales, sales 

Sales = 6 million * 5.71 

= 34.26 million 
 

If J&J increases investment more on their inventories, then 

company increases their sales. 
Inventory turn in year 2008 
Total sales in 2008 = 670 million 
Investment on inventories = 118 million 

Turnover ratio = 670/118 

= 5.67 
Inventory turnover in year 2007- 

Total sales in 2007 = 620 million 

Investment on inventories = 110 million 

Turnover ratio = 620/ 110 

= 5.63

Inventory turn ratio in year 2006 

Total sales in 2006 = 615 million 

Investment on inventories = 100 million 
Turnover ratio = 615 / 100 
= 6.15  
 

Investment of inventories & sales on wards 2006-  

year   Investment on  total sales in 

inventories in  million  
million  
2006  100  615 
2007  110  620 
2008  118  670 
2009  126  720 

Johnson & Johnson Ltd. increases investment on their inventories. 

Every year, then total sales increases year by year.  
Date  Q Co Valu  Qt  Co Valu  Qt  Co Valu 
t  st  e  y  st  e  y  st  e 
y 
Jan 

1  10  2.1  210 

00  0  00 
0 
9  1  2.2  221  11  -  232 
0  1  0  00  10 
0  0 
0 
12  20  2.1  420  90  -  190 
00  0  0  00  10 
27  2.3  231  10  -  213 
1  0  00  20 
 

0 
Feb 
10  40  2.1  840  60  -  129 
00  0  0  00  20 
16  2  2.4  482  80  -  177 
0  1  0  00  40 
0 
0 
March 
3  2  2.4  482  10  -  225 
0  1  0  00  60 
0  0 
0 
17  40  2.1  840  60  -  141 
00  0  0  00  60 
29  4  2.2  916  10  -  233 
0  9  0  00  20 
0  0 
0 
 Apr  
4  2  2.1  428  12  -  276 
0  4  0  00  00 
0  0 
0 
18  40  @ 934  60  -  182 
00  0  00  60 
0 
23  2  2.0  408  10  -  223 
0  4  0  00  40 
0  0 
0 
May 
 

12  10  2.4  240  90  -  199 

00  0  0  00  40 
24  3  2.0  600  12  -  259 
0  0  0  00  40 
0  0 
0 
Jun 

10  10  2.4  240  11  -  235 

00  0  0  00  40 
0 
30  2  2.0  404  13  -  275 
0  2  0  00  80 
0  0 
0 
Total  1  2.1  417  16  -  351 
9  9  00  00  40 
0  0 
0 
0 
Where @ is 1000   2.21  2210 

1000  2.31  2310 

2000  2.41  4820 

Total 4000  -  9340 

Interpretation - 

The FIFO method of valuation of inventory is based on the assumption 

that the inventory consumed in chronological order. That is received first 
are issued / consumed first and value fixed accordingly. From the table 
with an opening inventory of 10000 units at rs 2.10, the first 10000 units 
issued are charged to the cost of goods sold at these opening inventory 
 

rate rs 2.10. The April 18 issue or consignment of 4000 units is cosseted

on the basis of first received of the year. January 9, 1000 units at rs 2.21,
January 27 1000 units at rs 2.31, and February 16, 2000 units at rs 2.41.
The 1000 each issued on May 12 and June 10 are cosseted on the basis of  
the 2000 units received on March 3. Therefore the cost of the 13000
inventory on June 30 is composed of the received of March29, April 4 and
23, May 24 and June 30 and the value is the sum of the cost of these 
receipts. 

Valuation under perpetual inventory system- 

Date Receipts Issues  Balance

Q R A Q R  A Q   A 

1Jan - - - - - - 200 1400  

6Jan - - - 100 7 700 100 700  

8Jan 1100 8.50 9350 - - - 1200 10050 

9Jan - - - 200 8.50 1700 1000 8350 

15Jan - - - 400 8.50 3400 600 4950  

25Jan 300 9 2700 - - - 900 7650  

27Jan - - - 300 8.50 2550 300 240  

300 9 2700 0 

31Jan 400 9.20 3680 - - - 700 6080  

The value of inventory after 31 January is 6080 /rs 

Interpretation:-  

The value of inventory under periodic & perpetual inventory system is 
different. The value of inventory under perpetual system is more than 
periodic system 
 

DETERMINATION OF STOCK LEVELS 

Data of concentrate at J&J is as follows  – 

Maximum consumption = 5000Dz per day 

Minimum consumption = 55 units per day 

Normal consumption = 59 units per day 

Re-order period = 10-15 days 

Re-order quantity = 878 units 

Normal re-order period = 12 days 

Re-order level = Maximum consumption * Maximum 

Re-order period  

Data of concentrate at J&J is as follows  – 

Maximum consumption  =  65 units per day 

Minimum consumption  =  55 units per day 

Normal consumption  =  59 units per day 

Re-order period  =  10-15 days 

Re-order quantity  =  878 units 

Normal re-order period  =  12 days 

 

Re-order level = 65 units * 15 days 

= 975 units 

Minimum stock level = re-order level – (normal consumption * 

Normal re-order period) 

= 975 - (59 units * 12 days) 

= 267 units 

Maximum stock level = (re-order level + re-order quantity )

- ( min. consumption  – order period)  

= ( 975 units + 878 units ) - (55 units * 15 days) 

= 1028 units 

 Average stock level = minimum stock level + ½ of Re-ordering  

Quantity 

= 267 units + ½ * 878 units 

= 267 units + 439 units 
 

= 706 units 

Interpretationofresult : - 

1.  After calculation the re-order level of J&J is 975 units but the actual re-  
order quantity is 878 units.  
2. The minimum stock level of J&J is 267 units.  
3. The maximum stock level of J&J is 1028 units.  
4. The average stock level must be 706 units. 

Calculation of expected stock out cost  – 

Safety stock stock prob. Of expected total 

Stock out (units) out stock stock out expt. 

Level cost (40/unit) out cost SOC 

500  0  0  0  0  0 

400  100  4000  0.01  40  40 

250  250  10000  0.01  100 

 

150 6000 0.02 120 220 

100 400 16000 0.01 160 

300 12000 0.02 240 580 

150 6000 0.03 180 

50 450 18000 0.01 180 

350 14000 0.02 280 

200 8000 0.03 240 780 

50 2000 0.04 80 

0 500 20000 0.01 200 

400 16000 0.02 320 

250 1000 0.03 300 1180 

100 4000 0.04 160 

50 2000 0.10 200 

Expected stock out cost == stock out cost * probability of stock out . 

PROBLEMS AND 
SUGGESTIONS 
PROBLEMS FACED BY THE ORGANITION 

J&J faces the following problems-  

1 Johnson & Johnson Ltd. Faces the problem of competition. 

 

2. Organization facing the problem of proper skilled employees in the 

production department. 

3. There is no proper sequence &acknowledgement board for certain 

items in store department .It is not good when external auditing held in 
company. 

4. Organization has no record of wastage items. It is not good for  

operating profit of the company. 

5. In organization store assistants have no proper knowledge about 

engineering goods & raw materials. 

SUGGESTIONSTOTHEORGANISATION:  

The organizations give proper knowledge & training for unskilled 

employees about their work. 

1. In store department items should placed their proper sequence & 

acknowledgement. 
2. There should be proper record of wastage. It is good for the company. 

4. Store manager give the proper knowledge about engineering & raw 
materials. 

CONCLUSION 
The goal of the wealth maximization is affected by the efficiency with 
which inventory is managed. Inventories constitute about 60% of  
current assets of companies in India. The manufacturing companies 
hold inventories in the form of raw materials, work in progress and
finished goods. Inventories facilitate smooth production and sales 
operation (transaction motive), to guard against the risk of  
 

unpredictable changes in usage rate and delivery time (precautionary 

motive), & to take advantage of price fluctuations (speculative 
motive). 

Inventories represent investment of a 

firm‘s funds. The objectives of the inventory management 
should be the maximization of the value of the firm. Therefore 
the firm should consider: 

1. Cost 2. Return 3. Risk factors 

In inventory maintenance two types of costs are involved

carrying cost & ordering cost .the firm should minimize the 
total cost (carrying plus ordering cost).The firm follows 
inventory control techniques as A-B-C technique EOQ & JIT 
techniques for better holding inventories. 

PRIMARY DATA ANALYSIS (Bio  –  Profile of the 

Respondents):- 

1 30 percent of the officials belong to the age group of 35 and 50 

 

2 58 percent of the officials belong to the age group of 25 to 34

3 12percent of the officials belong to the age group of above 50

4 69 percent are male officials 

5 31 percent are female officials 

6 72 percent are graduates and above 

7 12 percent are those who are having technical and professional 

qualifications 

8 16 percent are undergraduates. 

9 55 percent are those who are associated with the field 

10 25 percent are those who are in the managerial and

administrative posts. 

11 20 percent belongs to the others category 

 

DATA ANALYSIS 

1 Are you aware about Inventory Management System? 

 Yes ------------------------------------------ 75 per cent  

 No ------------------------------------------- 17 per cent 

  Do not know/ Can not say ---------------- 08 per cent 

Interpretation:The awareness level among the company officials 

regarding the existence, functioning and applicability of inventory 

management system is high that is 75 per cent, as per the result 

of the study. 
 

2 Do you know that your company has an inventory 

management system? 

 Yes ---------------------------------------------- 72 per cent  

 No ------------------------------------------------ 20 per cent  

  Do not know/ Cannot say -------------------- 08 per cent  

80% 

70% 

60%

50%

40%  Yes 

30% No 

20%  Do not know/Can Not 

10% 

0% 
 
Yes  72%  
No  20%  
Do not know/Can Not say   8%  

Interpretation: The company officials are aware about their  

company having an inventory management system. 72 per cent of  

the respondents do have this awareness as against 20 per  

 

cent+08 per cent of the respondents who are either not aware or  

not able to provide any information in this regard. 

3 Do you agree that there should be an inventory 

management system in place in any organization / 

company? 

  Agree ------------------------------------------------ 68 per cent 

 Disagree --------------------------------------------- 12 per cent  

 Do not know/ Cannot say ------------------------- 20 per cent  

 

Interpretation: According to the response to the above question, 

it appears that every company/organization should have a system 

or mechanism in place for managing their inventory. 

4 For what reasons do you feel that there should be an 

inventory management system? 

  To smoothen operational requirement --------------------- 27 per  

cent 

 To save time ---------------------------------------------------- 22 per  

cent 

  To maintain accountability and transparency --------------- 30 

per cent 

 Other reasons --------------------------------------------------- 15 per  

cent 

 Do not know/ Cannot say ------------------------------------ 06 per  

cent 
 

Interpretatio 

n: 

To everyone‘s surprise, 30 per cent of the respondents feel that it 

is for accountability and transparency purpose that inventory 

records are maintained and hence the need for an inventory 

management system. This is followed by the need for saving time 

and the requirement of operational smoothness. 

5 Do you agree that the inventory management system in 

your company has fulfilled the needs for which it was 

evolved? 
 

 Strongly Agree -------------------------------------- 20 per cent  

  Agree ------------------------------------------------- 47 per cent 

 Disagree ----------------------------------------------- 15 per cent 

 Strongly Disagree ------------------------------------- 07 per cent  

 Do not know/ Cannot say ---------------------------- 11 per cent  

Interpretatio 
n: 

From the above response, it appears that the inventory 

management system has more or less achieved its objectives for  

which it was in place. This is evident from the 67 per cent of the 

respondents‘ opinion who have either agreed or strongly agreed in 

 

favor of this proposition. However the response of 22 per cent of  

the respondents who think otherwise also speaks something. 

6 What according to you is the major benefit of going for  

an inventory management system by your company? 

  It has made storage and retrieval of material easier   ---------- 37 

per cent 

 Improved Sales Effectiveness ---------------------------------- 26 per  

cent 

 Reduced Operational Cost ----------------------------------- 18 per  

cent 

 Other Benefits -------------------------------------------------- 10 per  

cent 

 Do not know/ Cannot say ------------------------------------ 09 per  

cent 
 

Interpretatio 

n: 

 As regards the benefits of having an inventory management 

system by the company, the respondents are of the opinion that 

the major benefit lies in relaxation in terms of storage and

retrieval of material. This is followed by increasing sales 

effectiveness and reduction in operational cost. However, all these 

benefits are interlinked and the spearing between them is more 

analytical than anything else. 

 

7 Do you have skilled professionals in your company for  

inventory management? 

 Yes ----------------------------------------------- 48 per cent  

 No ------------------------------------------------- 30 per cent  

  Do not know/ Cannot say ---------------------- 22 per cent 

50% 

45%

40%

35% 

30%

25%  Yes 

20% No 

15%
Do not know/Can Not 
10% 

5%

0% 
  Yes  48%  
No  30%  
Do not know/Can Not say   22%  

Interpretatio 

n: 

Recruitment of skilled professionals well vesed with latest 

inventory management technology, particularly in chemicals and 

 

paint industry is a concern for the company as it appears that it 

lacks in this domain. 

What category of professionals is managing your company  

inventory? 

 Skilled and trained --------------------------------- 32 per cent  

  Only skilled but not trained ----------------------- 16 per cent  

  Non skilled but trained professionals -------------- 20 per cent 

  Non skilled and non trained professionals --------- 25 per cent  

 Others --------------------------------------------------- 07 per cent  

35%

30%

25% 

20% 
Skilled and trained
15%
Only skill ed but not 
10%
trained 

5% Non skilled but traine

professionals  
0% 
Non skilled and non
Skilled and trained 32%   trained professionals  
Only skilled but not trained 16%  
Others  
Non skilled but trained 
20%
professionals  
Non skilled and no n trained 
25%
professionals  
Others 7%  
 

Interpretation:  

 As already stated above in the earlier question, availability of  

trained and skilled professionals for inventory management needs 

serious attention of the company. 

8. Do you agree that your company gives more emphasis on 

software than skilled manpower with regard to inventory 

management? 

 Strongly Agree -------------------------------------- 18 per cent  

  Agree ------------------------------------------------- 52 per cent 

 Disagree ----------------------------------------------- 15 per cent  

 Strongly Disagree ------------------------------------- 07 per cent  

 Do not know/ Can not say ---------------------------- 08 per cent 

 

Interpretation:  

The above response gives an impression that the company puts 

greater emphasis on software than skilled manpower for inventory 

details management. 

9. Do you think that the software used by your company is  

according to the design and needs of the system?  

 Yes -------------------------------------------------- 86 per cent  

 No ---------------------------------------------------- 10 per cent  

 

 Do not know/ Cannot say ------------------------- 04 per cent  

Interpretation:  

The company appears to be using the software according to the 

system requirement and design and according to the customers‘ 

needs. 

10. What is the prime challenge before Yor Company with 

reheard to inventory management? 

 

 Lack of trained professionals ------------------------------- 42 per  

cent 

 Maintenance cost --------------------------------------------- 21 per cent  

 Changing requirements of customers ------------------------ 27  

per cent 

 Other problems -------------------------------------------------- 06 per  

cent 

 Do not know/ Cannot say ------------------------------------- 04 per  

cent 

Interpretatio  

n: 
 

Lack of availability of trained professionals coupled with 

maintenance cost and changing needs of the customers are 

perceived to be the inventory challenges before the company. 

12. What is the future of inventory management system in 

your company? 

 Will continue as a successful mechanism ----------------------- 43  

per cent 

  May change according to time ---------------------------------- 33  

per cent 

 Shall collapse ------------------------------------------------------- 12 per  

cent 

 Do not know/ Cannot say ----------------------------------------- 12 per  

cent 
 

Interpretation:  

The future of inventory management system at Johnson & 

Johnson Ltd. appear to pretty good, going by the response of our  
study 
 

ANNEXURER 

QUESTIONNAIRE 

1 Are you aware about Inventory Management System?  

 Yes ------------------------------------------ 75 per cent  

 No ------------------------------------------- 17 per cent  

  Do not know/ Can not say ---------------- 08 per cent  

2 Do you know that your company has an inventory management  

system? 

 Yes ---------------------------------------------- 72 per cent  

 No ------------------------------------------------ 20 per cent 

  Do not know/ Can not say -------------------- 08 per cent  

3 Do you agree that there should be an inventory management  

system in place in any organisation / company? 

  Agree ------------------------------------------------ 68 per cent  

 Disagree --------------------------------------------- 12 per cent  

 Do not know/ Can not say ------------------------- 20 per cent  

 

4 For what reasons do you feel that there should be an inventory

management system? 

  To smoothen operational requirement --------------------- 27 per cent  

 To save time ---------------------------------------------------- 22 per cent  

  To maintain accountability and transparency ----------------30 per cent  

 Other reasons --------------------------------------------------- 15 per cent  

 Do not know/ Can not say ------------------------------------ 06 per cent  

5 Do you agree that the inventory management system in your  

company has fulfilled the needs for which it was evolved? 

 Strongly Agree -------------------------------------- 20 per cent  

  Agree ------------------------------------------------- 47 per cent 

 Disagree ----------------------------------------------- 15 per cent  

 Strongly Disagree ------------------------------------- 07 per cent  

 Do not know/ Can not say ---------------------------- 11 per cent  

6 What according to you is the major benefiit of going for an  

inventory management system by your company?  

  It has made storage and retrieval of material easier --------- 37 per cent 

 Improved Sales Effectiveness ---------------------------------- 26 per cent  

 Reduced Operational Cost ----------------------------------- 18 per cent  

 Other Benifits -------------------------------------------------- 10 per cent  

 Do not know/ Can not say ------------------------------------ 09 per cent  

 

 

7 Do you have skiled professionals in your company for inventory 

management? 

 Yes ----------------------------------------------- 48 per cent  

 No ------------------------------------------------- 30 per cent 

  Do not know/ Can not say ---------------------- 22 per cent  

8. What category of professionls are managing your company  

inventory? 

 Skilled and trained --------------------------------- 32 per cent  

  Only skilled but not trained ----------------------- 16 per cent  

  Non skilled but trained professionals -------------- 20 per cent  

  Non skilled and non trained professionals --------- 25 per cent  

 Others --------------------------------------------------- 07 per cent  

9. Do you agree that your company gives more emphasis on  

software than skilled manpower with regard to inventory

management? 

 Strongly Agree -------------------------------------- 18 per cent  

  Agree ------------------------------------------------- 52 per cent 

 Disagree ----------------------------------------------- 15 per cent  

 Strongly Disagree ------------------------------------- 07 per cent  

 

 Do not know/ Can not say ---------------------------- 08 per cent  

10. Do you think that the software used by your company is 

according to the design and needs of the system? 

 Yes -------------------------------------------------- 86 per cent 

 No ---------------------------------------------------- 10 per cent 

 Do not know/ Can not say ------------------------- 04 per cent  

11. What is the prime challenge before yor company with rehard to  

inventory management?  

  Lack of trained professionls ------------------------------- 42 per cent  

 Maintenance cost --------------------------------------------- 21 per cent  

  Changing requirements of customers ------------------------- 27 per cent  

 Other problems -------------------------------------------------- 06 per cent  

 Do not know/ Can not say ------------------------------------- 04 per cent  

12. What is the future of inventory management system in your  

company?  

  Will continue as a successful mechanism --------------------- 43 per cent  

 

 May change accoeding to time ----------------------------------- 33 per cent  

 Shall collapse ------------------------------------------------------- 12 per cent  

 Do not know/ Can not say ----------------------------------------- 12 per cent  

Bibliography 
   Advanced Accountancy 
Ninth Edition 

S N Maheshwari, S K Maheshwari 

Vikas Publishing House Pvt. Ltd. 

   Financial Management  
Ninth Edition 

I M Pandey 

Vikas Publishing House Pvt. Ltd 

   Management Accounting 
Third Edition 

M Y Khan, P K Jain 

Tata Mc-Graw Hill Publishing Company Ltd 

 

  Purchase , Sales Boucher & Other Documents of the 



Company 
Johnson & Johnson Ltd.