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A SUMMER TRAINING PROJECT REPORT ON INVENTORY MANAGEMENT

IN JUBILANT ORGANOSYS LTD. GAJRAULA, (U.P.)


PROJECT REPORT SUBMITTED IN PARTIAL FULFILMENT OF MASTER OF BUSINESS ADMINISTRAT
ION OF Uttar Pradesh Technical University Under the Guidance of: Mr. Anil Kumar
Goal (Finance Faculty) IVS Institute of Management (Mathura)
Submitted By: VAIBHAV AGARWAL M.B.A. IIIrd Sem. Roll. No. 0730870025
IVS Institute of Management Mathura
(Affiliated to Uttar Pradesh Technical University, Lucknow)
NH-2 Delhi Mathura Highway, Akbarpur, Mathura -281406(UP)
ACKNOWLEDGEMENT
I express my sincere gratitude to Mr. N. K. Agarwal (Senior Manager, Jubilant Or
ganosys) under whose supervision has helped to clarify my concepts of Inventory
Management, distinguished scholars and authors, whose work I heve used in this p
roject. I would also like to thank to Mr. Anil Goal Faculty Finance]. No words o
f appreciation are good enough for the constant encouragement, which I have rece
ived from him. I thank Mr. Mahesh Jain (Head Accounts and Finance, Jubilant Orga
nosys) for his unstinted support to the project. Finally, I would like to thank
Mr. J. L. Gupta (Factory Manager, Jubilant Organosys) to give the opportunity to
complete the project in the esteemed organization.
VAIBHAV AGARWAL MBA IIIrd Sem
Preface
As a part of the partial fulfillment of the M.B.A. programme at IVS Institute of
Management, Akbarpur (Mathura), Summer Training was undertaken with the interna
tional company, JUBILANT ORGANOSYS LIMITED, Gajraula (J. P. NAGAR). This project
is specially designed to understand the subject matter of Inventory Management
of the company. This project gives us information and report about companys Inven
tory Management. Throughout the project the focus has been on presenting informa
tion and comments in easy and intelligible manner. The purpose of the training w
as to have practical experience of working in a organization and to have exposur
e to the various management practices in the field of Finance. This training has
also given me an on the job experience of Financial Management. This project is
very useful for those who want to know about company and Inventory Management o
f the company.
Contents
PART- I *Objective of the Study *Introduction of Company * Company Profile * His
tory * Board of Directors * Presence Across Value Chain * Awards * Products * Gu
iding Principals of Company * Structure of the Company * Research Methodology *
Introduction of the Topic * Conceptual Discussions PART- II * Data Collection *
Financial Statements * Data Analysis and Interpretation * Problems and Suggestio
ns * Conclusions * Bibliography
OBJECTIVE OF THE STUDY
Objective 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, fi
nished goods, work in progress, supplies and other accessories. To maintain the
continuity in the operations of business enterprise, a minimum stock of inventor
y required.
However, the physical control of inventory is the operating responsibility of st
ores 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 co
mprise a substantial part of the current assets is a frequent problem in the man
agement 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 me
et the needs of production and sales while at the same time, the investment in t
hem is to kept at a reasonable level.
INTRODUCTION OF COMPANY
COMPANY PROFILE
Company Profile:
Jubilant Organosys Limited is the largest specialty chemical company of India an
d a leading global manufacturer in defined chemical categories viz, second large
st in pyridine and its derivatives, third largest in solid polyvinyl acetate and
leading positions in acetyls and other specialty chemicals. These include pharm
aceuticals and life science chemicals, performance chemicals, organic intermedia
tes, agri products and a range of other specialty chemicals.
It was incorporated in the year 1978 under the companies Act, 1956. The company
is a part of Jubilant Corporation, which also includes Jubilant Enpro, Dominos, J
ubilant Biosys. The manufacturing facilities located at Gajraula in J.P.NAGAR Di
strict, U.P. The company estabilished an Research and Development Group in the y
ear 1982 and Research and Development was recognized by the Department of Scienc
e and Technology. The groups have developed a number of products, which have bee
n commercialized over a period of time. The various group of the Research and De
velopment carryout research in the field of Polymers and Adhesives, Organic chemi
cals, Biotechnology and Environment. The company differentiates itself in its man
ufacturing approach which is based on the use of a renewable resource as the mai
n feed stock, the conserve energy requirement and a complete recycling and reuse
of the final wastage at the plant. The main feed stock for jubilant s product l
ine is Molasses, a renewable bio-mass, occurs as a by product in the sugar mill
from which industrial alcohol is produced from the process of fermentationand di
stillation. This makes the manufacturing approach inheretantly eco=efficient. In
dustrial alcohol is further proccessed to produced a series of value added chemi
cals.
Jubilant Organosys Limited has historically, been a producer and leading manufac
turer of acetyls in India for more than two decades. Jubilant Organosys also enj
oy a global position in these products. Jubilant Organosys derive our strengths
in this business from our molasses based production process. Jubilant Organosys
use renewable biomass (molasses), as feedstock for manufacturing acetyls. Jubila
nt Organosys, therefore, are not impact by the cost cycle that affects the indus
try worldwide.
Globally Jubilant Organosys are the; *Largest Alcohol Distillery Outside Brazil.
*Largest Acetic Acid Manufacturer From Renewable\Green Resources. *6th Largest
in Acetaldehyde. *8th Largest in Ethyle Acetate. *9th Largest in Acetic Anhydrid
e.
Jubilant Organosys owns distilleries at Gajraula and Nira. These are strategic t
o the business as they are located in two largest sugar belts of India ( U.P. &
MAHARASHTRA ). Company has long term contracts with sugar mills to meet alcohol
requirements while providing easy access to feed stock. Jubilant Organosys Limit
ed is an integrated pharmaceutical industry player with a wide range of products
and services for global life sciences companies. Company is one of the largest
Custom Research and Manufacturing Services (CRAMS) and Drug Services Companies i
n India. Jubilant Organosys have presence across the pharmaceuticals value chain
right from drug, discovery, medicinal chemistry and clinical research services
to custom research and manufacturing services for advance intermediaries and fin
e chemicals, Active Pharmaceutical Ingredients and Dosage Forms.
Jubilant Organosys Limited has a strong international presence having internatio
nal subsidiaries in USA, BELGIUM and CHINA. Jubilant Pharmaceutical, Inc is a fu
ll service clinical research organisation providing clinical research, clinical
data management, biostatics, QA/regulatory and contract staffing servicing.Our p
roducts are sold across the globe in more than 50 countries. Jubilant Organosys
Limited is a collaborative, innovative provider of products and services to the
global life sciences industry, striving to accelerate the process of pharmaceuti
cal drug
approval. Jubilant Organosys also enjoy leadership in Industrial products and Pr
eformance Polymers products in India. It is headquarted in NOIDA, with net sales
of - US $ 337 million in FY06 and more than 3300 employees.
OUR VISION
OUR PROMI SE
OUR VALUES
We will carefully select, train and develop our people to be creative, empower t
hem to take decisions, so that they respond to all customers with agility, confi
dence and teamwork
We stretch ourselves to be cost effective and efficient in all aspects of our op
erations and focus on flawless delivery to create and provide the best value to
our customers
By sharing our knowledge and learning from each other and from the markets we se
rve, we will continue to surprise our customers with innovative solutions
With utmost care for the environment and safety, we will always strive to excel
in the quality of our processes, our products and our services
HISTORY
HISTORY
2005 Acquires Target Research Associates, Inc., renamed Clinsys Inc.; a US based
Clinical Research Organisation (CRO) Acquires Trinity Laboratories, Inc. and it
s wholly owned subsidiary, Trigen Laboratories, Inc., renamed Jubilant Pharmaceu
ticals, Inc., a generic pharmaceutical company in USA having a US FDA approved f
ormulations manufacturing facility Enters Clinsys Clinical Research Ltd. busines
s by setting up wholly owned subsidiary Jubilant Clinsys Ltd. 2004 Sets up medic
inal chemistry services business through wholly owned subsidiary Jubilant Chemsy
s Ltd. Enters formulations and regulatory affairs businesses by acquiring Pharma
ceuticals Services Incorporated, N.V. and PSI Supply N.V., the pharmaceutical co
mpanies in Europe. 2003 Sets up a new state-of-the-art Research & Development Ce
ntre in Noida, near New Delhi equipped with all latest scientific instruments. 2
002 Acquires the Active Pharmaceutical Ingredients business
2001
New corporate identity: Jubilant Organosys Ltd. reflecting changed corporate and
business profile 2000 Enters the Bio / chemo informatics arena by setting up Ju
bilant Biosys Ltd. 1998 Enters high value-added Pyridine derivates. Commissions
Pyridine HBR and Cyano Pyridine plants. Forms marketing subsidiary in the USA. A
cquires acetyl plant in western India. 1997 Commissions first Multi-purpose fine
chemicals plant. Plant for food polymer commissioned. 1995 Gets ISO 9001 certif
ication. 1990 Commissions Pyridine & Picoline plant. 1988 Launches its first bra
nded product: Vamicol, an adhesive product. 1987
Introduces new products in Performance Chemicals segments: Poly vinyl acetate em
ulsion for paint, textile, paper & packaging and woodworking industry. 1985 Rese
arch & Development center gets recognition from Government of India. 1983 Commer
cial production of Vinyl Acetate Monomer (VAM). 1981 Initial Public Offering. Li
sting on leading stock exchanges of India.
1978 Incorporated as Vam Organic Chemicals Ltd.
BOARD OF DIRECTOR S
Board Of Directors Shyam S Bhartia Chairman & Managing Director
Hari S Bhartia
Co-Chairman & Managing Director
na
Executive Director & President Life S N Singh
.
Sciences
Executive Director - Chemicals
Executive Director - Manufacturing & Supply Chain Ajay Relan Abhay Havaldar Dire
ctor Director
Bodhishwar Rai Arabinda Ray
Director Director
PRESENCE ACROSS VALUE CHAIN
PRESENCE ACROSS VALUE CHAIN:
AWARD S
AWARDS
Jubilant s rapid progress across all corporate aspects has consistently been ack
nowledged by various industry bodies, government and non-government agencies in
the form of awards and certifications. Golden Peacock award for Innovation Manag
ement - 2003 Six-sigma Quality Award at the All India CII Convention -2004 The G
reentech Foundation Award for Environment Excellence The Energy Conservation Awa
rd (Chemical sector) from the Government of India for the Gajraula unit Best Man
aged Manufacturing Plant for Single super phosphate by FAI - 2003 Best HR Practi
ces Award by Centre for International Businesses - 2004 P C Acharya Award for De
velopment of Indigenous Technology by ICMA - 2004 Top 5 Best Managed Workforce i
n India - Hewitt Award The DSIR Award for Innovation in Chemicals & Allied Indus
tries
GUIDING PRINCIPALS OF JUBILANT ORGANOSYS LTD
GUIDING PRINCIPALS OF JUBILANT ORGANOSYS LTD
1. We will conduct ourselves or business with the highest standards of honesty,
integrity and professionalism. 2. We will recognize the positive contribution th
at individuals & our team members to produce business successfully. 3. We will e
ncourage a learning environment where people can constantly grow, develop & cont
ribute. 4. We will strive for excellence and seek continuous improve in everythi
ng. 5. We will respect all stockholders including employees, partners and suppli
ers & still them with a passion to deliver the highest quality goods services. 6
. We will foster initiative &creative by empowering individuals to attain well d
efined objectives.
STRUCTURE
OF
THE COMPANY
STRUCTRE OF THE COMPANY
Jubilant Organosys Ltd. act upon the rules & regul- ations of the Companies Act,
1948. The company have well defined structure .It have the following department
s:
1. HR/ Personnel department 2. Accounts departments 3. Purchase departments 4. S
tore department 5. Quality department 6. Shipping department 7. Sales & Excise d
epartment
ORGANISATIONAL CHART OF JOL
RESEARCH METHODOLOGY
RESEARCH METHODOGY
Research methodology is the way to systematically solve the research problem. Ob
jective of research study is Analysis of inventory of Jubilant Organosys Ltd. An
alyzing of inventory, we determining following inventories1. Raw materials inven
tory. 2. Work in progress inventory. 3. Finished goods inventory & 4. Supplies i
nventory. In this section of inventories, we should analyze the annual investmen
t in inventories, Valuation of inventory after closing balance of items in inven
tory. In this manner, we calculate reorder point, safety stock levels, minimum &
maximum levels of inventory. Working hypothesis of the objective is that invent
ories are the stock piles of goods .The all organization on their inventories. J
OL 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 sho
uld 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 inven
tory, finished goods inventory by the proper observation of datas of the company.
The particular method for data collecting used direct interview with assistants
and telephone interview with friends to known about annual investment of invento
ries and other important data.
INTRODUCTION OF THE TOPIC
INTRODUCTION
Inventories constitute the most significant part of current assets of a large ma
jority of companies in India. On an average, inventories are approximately 60% o
f 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 mnage inventor
ies efficiently and efficiently in order to avoid unnecessary investment. A firm
neglecting the management of inventories will be jeopardizing its long run prof
itability and may fail ultimately. It is possible for fore a company to reduce i
ts levels of inventories to a considerable degree e.g. 10 to 20 percent, with ou
t any adverse effect on production and sales, by using simple inventory planning
and control techniques. The reduction in excessive inventory carries a favorabl
e impact on a companys profitability.
MEANING OF INVENTORY:Inventory is the physical stoke of goods maintained in an o
rganization for its smooth sunning. In accounting language it may mean stock of
finished goods only. In a manufacturing concern, it may includes raw materials,
work-in-progress and stores etc. In the form of materials or supplies to be cons
umed in the production process or in the rendering of services. In brief, Invent
ory is unconsumed or unsold goods purchased or manufactured.
NATURE OF INVENTORIES :-
Inventories are stock of the product a company is manufacturing for sale and com
ponents 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 pr
oduct though the manufacturing process. Raw materials inventories are those unit
s which have been purchased and stored for future productions.
WORK IN PROGRESS:These inventories are semi manufactured products. They represen
t products that need more work before they become finished products for sales.
FINISHED GOODS:Finished goods inventories are those completely manufactured prod
ucts which are ready for sale. Stock of raw materials and work in progress facil
itate production. While stock of finished goods is required for smooth marketing
operation. Thus, inventories serve as a link between the production and consump
tion of goods. The level 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 manufact
uring firms, there will be differences. Large heavy engineering
companies produce long production cycle products, therefore they carry large inv
entories. 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 maint
ain a fourth kind of inventory, supplies or stores and spares.
SUPPLIES:
It includes office and plant cleaning materials like soap, brooms, oil, fuel, li
ght, bulbs etc. These materials do not directly enter production, but are necess
ary 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.
MANAGEMENT OF INVENTORY
Inventories constitute the principal item in the working capital of the majority
of trading and industrial companies. In inventory, we include raw materials, fi
nished goods, work-in-progress, supplies and other accessories. To maintain the
continuity in the operations of business enterprise, a minimum stock of inventor
y required. However, the physical control of inventory is the operating responsi
bility 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 w
hich they comprise a substantial part of the current assets is a frequent proble
m in the management of working capital. Management of inventory is designed to r
egulate 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 in
vestment in them is to be kept at a reasonable level.
CONCEPT OF INVENTORY MANAGEMENT
The term inventory management is used in two ways- unit control and value contro
l. Production and purchase officials use this word in term unit control whereas
in accounting this word is used in term of value control. As investment in inven
tory represents in many cases, one of the largest asset items of business enterp
rises particularly those engaged in manufacturing, wholesale trade and retail tr
ade. Sometimes the cost of material used in production surpasses the wages and p
roduction overheads. Hence, the proper management
and control of capital invested in the inventory should be the prime responsibil
ity of accounting department because resources invested in inventory are not ear
ning a return for the company. Rather, on the other hand, they are costing the f
irm money both in terns of capital costs being incurred and loss of opportunity
income that is being foregone.
OBJECTIVES OF INVENTORY MANAGEMENT
The basic managerial objectives of inventory control are two-fold; first, the av
oidance over-investment or under-investment in inventories; and second, to provi
de the right quantity of standard raw material to the production department at t
he right time. In brief, the objectives of inventory control may be summarized a
s 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 h
elp 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 mat
erial 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 manufacturin
g efficiency is also increased. Their motivation level rises and morale is impro
ved.
(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 plan
ning for procurement of raw material. It maintains the inventories at the optimu
m level keeping in view the operational requirements. It also avoids the out of
stock danger. (5) Better Service to Customers: Sufficient stock of finished good
s must be maintained to match reasonable demand of the customers for prompt exec
ution of their orders. (6)Highlighting slow moving and obsolete items of materia
ls. (7) Designing poorer organization for inventory management: Clear cut accoun
tability 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 pur
chasing through quantity and taking advantage to favorable markets. (2) Reasonab
le Price: While purchasing materials, it is to be seen that right quality of mat
erial is purchased at reasonably low price. Quality is not to be sacrificed at t
he cost of lower price. The material purchased should be of the quality alone wh
ich is needed.
(3)
Optimum Investing and Efficient Use of capital: The basic aim of inventory contr
ol
from the financial point of view is the optimum level of investment in inventori
es. 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 ma
ximum 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 invol
ved in transferring substantial amount of resources.
2.Buffer inventories:In Buffer inventories are held to protect against the uncer
tainties of demand and supply. An organization generally knows the average deman
d for various items that it needs. Prod.deptt. issue store inspect receive suppl
ier Supplies Demand Inventory in Hand place
Orders Purchase dept. Net order Quantity issue tenders receive tender quotation e
valuations
Inventory cycle
3. Anticipation Inventories. Anticipation inventories are held for the reason th
at 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, ove
r issue, deterioration, spoilage, and obsolescence. There are certain prerequisi
tes to an effective control system for materials: 1.Materials of the desired qua
ntity will be available when needed; 2.Materials will be purchased only when a n
eed 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 o
f 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 con
trol of materials, as an element of cost of production, is illustrated with refe
rence to the purchase and issues procedures, inventory systems, and inventory co
ntrol 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 inv
entory control lowers down the cost of production and improves profitability of
enterprise.
ADVANTAGES OF INVENTORY CONTROL:
(1) (2) (3) (4) (5) Reduction in investment in inventory. Proper and efficient u
se of raw materials. No bottleneck in production. Improvement in production and
sales. 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 num
erous 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, intr
oduction 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 o
r improper storage conditions.
(c)
Obsolescence: This may due to change in customers 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 t
he 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.
ESSENTIALS OF INVENTORY CONTROL SYSTEM
For an efficient and successful inventory control there are certain important co
nditions that are a follows: (1) Classification and Identification of inventorie
s: 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 mus
t be assigned a particular code number and it must be classified in suitable gro
up 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 eli
mination of excess types and sizes of items. Simplification leads to reduction i
n 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 an
d 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 carr
ying costs. This quantity should be fixed beforehand.
(5)Adequate storage Facilities: To make the system of inventory control successf
ul and efficient one, it is also essential to provide the adequate storage facil
ities. Sufficient storage area and proper handling facilities should be organize
d. (6)Adequate Reports and Records: Inventory control requires the maintenance o
f adequate inventory record and reports. Various inventory records must contain
information to meet the needs of purchasing, production, sales and financial sta
ff. The typical information required about any class of inventory may be relatin
g to quantity on hand, location, quantities in transit, unit cost, code for each
item of inventory, reorder point, safety level etc. Statements forms and invent
ory records should be so designed that the clerical cost of maintaining these re
cords must be kept a minimum. (7)Intelligent and Experienced Personnel: An impor
tant requirement of successful inventory control system is the appointment of qu
alified and experienced staff in purchase and stores department. Mere establishm
ent of procedures and the maintenance of records would not give the desired resu
lts 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: Th
ere must be proper coordination of all departments involved in the process of in
ventory control, such as purchase, finance, receiving, approving, storage and ac
counting departments. These all departments have different outlook and objects i
n inventory management but financial manager has to coordinate them all. (9)Budg
eting: An efficient budgeting system is also required. Preparation of budgets co
ncerning materials, supplies and equipment to ensure economy in purchasing and u
se of material is also necessary.
(10)Internal Check: Operating of a system of internal check is also vital in inv
entory management so that all transactions involving material supplies and equip
ment purchase are properly approved and automatically checked.
FACTORS AFFECTING STOCK INVESTMENT LEVEL
These factors can be put in two categories: General and Specific. General Factor
s: These factors include those factors, which affect directly or indirectly leve
l of investment in any asset. These are as follows:
(1) (2) (3) (4) (5)
Nature of Business Size and scale of Business Expected Sales Volumes Price Level
Changes Availability of Funds
(6)
Management view Point
Specific Factors: These factors are directly related with investment in stock. F
ollowing 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 d
uring season. Usually, raw materials are available at cheaper rates during is pr
oduction 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 ma
terial 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 t
hen 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 require
d because durable goods can be stored for a long period. On the other hand, peri
shable 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 req
uired.
(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, hig
her 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, les
ser investment would be required. In the absence of such loan facility, higher i
nvestment 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 requ
ired. On the contrary, if the prices of raw materials are expected to go down in
future, then comparatively lesser investment would be required.
(9)
Other factors: Price control, rationing, change in taxation and export policy of
governments etc. also influence investment in inventories.
TECHNIQUES OF INVENTORY CONTROL
TECHNIQUES OF INVENTORY CONTROL
In managing inventories, the firms objective should be in consonance with the wea
lth maximization principle. To achieve this, the firm should determine the optim
um level of investment in inventory. To deal with the problems of inventory mana
gement effectively, it becomes necessary to be conversant with the different tec
hniques of inventory control. Although the concepts involved in inventory manage
ment are production-oriented and are not strictly financial it is important that
the financial manager understand them since they have certain built-in financia
l costs. The different techniques of inventory control may be summarized as foll
ows:
(1)
Inventory level Technique
The main objective of stock control is to determine and maintain the optimum lev
el of stock so that there is neither shortage of any material nor unnecessary in
vestment in inventory. For this purpose, determination of maximum and minimum li
mits 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 ens
ure that unnecessary working capital is not blocked in stores. The quantity is f
ixed keeping in view the disadvantages of overstocking.
The disadvantages of overstocking are:
1. 2. 3. 4. 5. Capital is blocked up unnecessarily in stores so there will be lo
ss of interest. More godown space is needed so more rent will have to be paid. T
here are chances of deterioration in quality because large stocks will require m
ore time for use is the factory. There is the possibility of loss due to obsoles
cence. 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 availab
le. (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. T
here are certain stores, which deteriorate in quality if they are for longer per
iod. (7) Cost of maintaining stores. stored
(8) Likely fluctuation in prices. For instance, if there is a possibility of a s
ubstantial increase in prices in the coming period, a comparatively large maximu
m stock level will be fixed. On the other hand, if there is the possibility of d
ecrease 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 onl
y during specific periods of year. So these have to be stocked heavily during th
ese periods. (10)Restrictions imposed by the government or local authority in re
gard to materials which there are inherent risks, e.g. fire and explosion. (11)R
isk 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 Lev
el - 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 usag
e rate and delivery period. The main purpose of this level is to ensure that pro
duction 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 fixatio
n of this level:
(a) (b)
(c)
Lead time i.e. time lag between intending and receiving the material.
Rate of consumption of the material during the lead time.
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 nor
mal usage and normal lead time is not known then average usage will be treated a
s 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 sto
rekeeper should initiate the purchase requisition for fresh supply of material.
This level is fixed somewhere between maximum and minimum level is such a way th
at the difference of quantity of the material between the reordering level and t
he 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 considerati
on 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 pr
oduction in most
unfavorable business conditions.
(iii)
Normal or average Usage Rate: It implies quantity of material required at capaci
ty
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 i
n 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 no
rmally
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 va
riable:
(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 wi
th certainty:
(i)
during lead time.
Re-order point = Minimum Inventory + Average usage
(ii)
Situation4:
Re-order point = Maximum Usage rate x Lead time.
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 a
rrangements to procure
the materials reaching at their danger levels so that the production may not sto
p due to shortage of materials. It is determined as follows: Danger level = Aver
age Consumption x Maximum Re-order period for Emergency Purchase
ECONOMIC ORDER QUANTITY TECHNIQUE
One of the major inventory management problems to be resolved is how much invent
ory should be added when inventory is replenished. If the firm is buying raw mat
erials, 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 sc
hedule (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 typ
e of costs: (a) ordering costs and (b) carrying costs: The economic order quanti
ty is that inventory level that minimize the total of ordering and carrying cost
s.
Ordering costs: the term ordering costs is used in case of raw materials (or sup
plies) and includes the entire costs of acquiring raw materials. They include co
sts incurred in the following activities: requisitioning, purchase ordering, tra
nsporting, receiving, inspecting and storing (store placement). Ordering costs i
ncrease in proportion to the number of order placed. Ordering costs increase wit
h the number of order; thus the more frequently inventory is acquired, the highe
r the firms ordering costs. Ordering costs decrease with increasing size of inven
tory.
Carrying costs: Costs incurred for maintaining a given level of inventory are ca
lled carrying costs. They include storage, insurance, taxes, deterioration and o
bsolescence. The storage costs comprise cost of storage space (warehousing cost)
, stores handing costs and clerical and staff service costs (administrative cost
s).
Table: Ordering and Carrying Costs
Ordering Costs (1)Requisitioning (2)Order placing (3) Transportation (5) Clerica
l and staff Carrying Costs (1) Warehousing (2) Handling (3) Clerical and staff (
5) Deterioration Obsolescence Carrying costs vary with inventory size. The econo
mic size of inventory would thus depend on trade-off between carrying costs and
ordering costs.
(4) Receiving inspecting and storing (4) Insurance
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 to
tal costs of ordering and holding are the minimum. We can follow three approache
s-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 resolv
e the order
quantity problem can be illustrated with the help of a simple example. Let us as
sume the following data for a firm. Estimated annual requirements, A Purchasing
cost (per order), (Rs) Ordering cost (per order), (Rs.) Carrying cost per unit,
(Re) 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 A
verage inventory - (100+0)/2 = 50units) Average value - 50 * Rs 50 = 2, 500 Many
other possibilities can be worked out in the same manner. 1200 1000 800 Q/2 600
stock 200 50 0 2 4 6 Time Inventory level over time 8 10 15 400 1,200 units 50
37.50 1
Order- formula approach: The trial error, or analytical, approach is somewhat te
dious to calculate the EOQ. An easy way to determine EOQ is to use the order-for
mula approach. Let us illustrate this approach. Suppose the ordering cost per or
der, O, is fixed. The total order costs will be number of orders during be: the
year multiplied by ordering cost per order. If a represents total annual require
ments and Q the order size, the number of orders will be A/Q and total order cos
ts will
Total ordering cost = (Annual requirement * Per order cost) Order size TOC = AO/
Q Let us further assume the carrying cost per unit, c, is constant The total ca
rrying 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 av
erage inventory will be.
Average inventory = order size = 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 orde
ring 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. Th
us, the total cost function represents a trade-off between the carrying costs an
d ordering costs for determining the EOQ. To obtain the formula for EOQ, Equatio
n (4)is differentiated with respect to Q and setting the derivative equal to zer
o, we obtain:
Economic order quantity = 2* quantity required * ordering cost Carrying cost EOQ
= 2AO C
Graphic approach:
The economic order quantity can also be found out graphically. Figure illustrate
s the EOQ function. In the figure, costs-carrying, ordering and total- are plott
ed 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, o
n an average, a larger inventory level will be maintained, and ordering costs de
cline 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 beha
ve differently with order size. The total costs decline in the first instance, b
ut they start rising when the decrease in average ordering cost is more than off
set by the increase in carrying costs. The economic order quantity occurs at the
point Q* where the total cost is minimum. Thus, the firms operating profit is ma
ximized at point Q*.
Minimum total Cost
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 co
sts. Set-up costs include costs on the following activities: preparing and proce
ssing the stock orders, preparing drawings and specifications, tooling machines
set-up, handling machines, tools, equipment and materials, over time etc. Produc
tion runs but carrying costs will increase as large stocks of manufactured inven
tories will be held. The economic production size will be the one where the tota
l 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 shoul
d be sought to be second problem, when to order. This is a problem of determinin
g 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 und
er 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 tha
t 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 dema
nd for inventory is likely to fluctuate from time to time. In particular, at cer
tain points of time the demand may exceed the anticipated level. In other words,
a discrepancy between the assumed (anticipated/expected) and the actual usage r
ate of inventory is likely to occur in practice. The effect of increased usage a
nd/or slower delivery would be shortage of inventory. That is, the firm would di
srupt production schedule and alienate the customers. The firm would, therefore,
be will advised to keep a sufficient safety margin by having additional invento
ry to guard against stock-out situation. Such stocks are called safety stocks. T
his would act as a buffer/cushion against a possible shortage of inventory. Safe
ty stock may, thus, be defined as minimum additional inventory to serve as safet
y margin/buffer/cushion to meet unanticipated increase in usage resulting form u
nusually high demand and/or uncontrollable late receipt of incoming inventory.
The carrying costs are the costs associated with the maintenance of inventory. S
ince the firm is required to maintain additional inventory, in excess of the nor
mal usage, additional carrying costs are involved. The stock-out and carrying co
sts are counterbalancing. The larger the safety stock, the larger the carrying c
osts and vice versa. Conversely, the larger the safety stock, the smaller the st
ock-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 requiremen
t 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 th
e 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 v
ital spares will cause havoc in the concern. The E types of spares are also nece
ssary but their stocks may be kept at low figures. The stocking of D types of sp
ares may be avoided at times. If the lead time of these spares is less, then sto
cking of these spares can be avoided. The classification of spares under three c
ategories is an important decision. A wrong classification of any spare will cre
ate difficulties for production department. The classification of spares should
be left to the technical staff because they know the need, urgency and use of th
ese spares.
Assumptions: In applying EOQ formula, it is assumed that:
(i) (ii) (iii) Total demand is known with certainty. The usage rate of material
is steady. Orders for replenishment on inventory are placed exactly when invento
ries reach
ordering level. (iv) The ordering cost per order and holding cost per unit are c
onstant.
EOQ and Total Inventory Cost: At EOQ level total inventory cost is minimum. Tota
l inventory cost is the sum of material purchase cost, ordering cost and carryin
g cost As per the formula: Total Inventory Cost (TIC) = Material Purchase Cost +
Total Carrying Cost = (R x P) + (R/Po x Cp) + (Qo/2 x Ch) Discount Offer and Ec
onomic Order Quantity: Sometimes supplier offers different discounts on orders o
f large quantity. In such a situation, at fist we should calculate EOQ and find
out TIC without considering discount offer. Then Ordering Cost + Total
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 mainten
ance of up-to-date stock records and in its broad sense it covers both continuou
s 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-ta
king. The basic object of this system is to make available details about the quan
tity and value of stock of each item at all times. The system thus provides a ri
gid 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 i
n cost office.
Advantages of Perpetual Inventory system:
1.
convenience.
Saving in time: The long and costly work of stocktaking
is avoided. Hence, interim and final financial accounts can be prepared with gre
ater
2.
random checking.
Arrangement of proper verification: In this system a
detailed and more reliable checking of the store is exercised because of the con
tinuous and
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 o
f 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.
committing dishonesty.
Moral Check on Stores staff: Due to continuous
checking, this system serves as a moral check on the stores staff. They are disc
ouraged from
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 firm
s find themselves confronted with virtually thousands of different inventory ite
ms. Most of these items are relatively inexpensive, while other items are quite
expensive and account for a large portion of the firms investment. Some inventory
items, although not expensive, turnover slowly and therefore, they require a hig
h average investment. The firm should classify them into A.B.C category items. C
ategory A will include more expensive items (in cost of product) with high inves
tment 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 la
rge number of items of inventory accounting for small investment. The A items requ
ire intensive inventory control and most sophisticated inventory control techniq
ues should be applied to these items. The B items can be controlled using less sop
histicated 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 la
rge quantities in order to obtain them at the lowest price. Though the ABC techn
ique 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 c
annot 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 r
equired to expand each item of inventory.
The following points should be kept in mind for ABC analysis: (1) for each other
, they should be preferably treated as one item. (2) (3) More emphasis should be
given All the items consumed by an to the value of consumption and not to price
per unit of the item. organization should be considered together for classifyin
g 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 Where it
ems can be substituted
Application of ABC Analysis: ABC analysis can be effectively used in Material Ma
nagement. The various stages where it can be applied are: (1) require higher deg
ree of control. Information of items which
(2) strategy. (3) (4) items. (5) items. (6) (7)
To
evolve
useful
re-ordering
Stock records. Priority treatment to different Determination of safety stock Sto
res layout. Value analysis.
(2) 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 an
d part arrive to the manufacturing sites or stores just few hours before they ar
e put to use. The delivery of material is synchronized with the manufacturing cy
cle and speed. JIT system eliminates the necessity of carrying large inventories
, and thus, saves carrying and other related costs of manufacturer. The system r
equires perfect understanding and coordination between the manufacturer and supp
lier in terms of the timing of delivery and quality of the material. Poor qualit
y material or complements could halt the production. The JIT inventory system co
mplements 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 satis
factory 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 Pu
rchase of Raw Materials Account. The opening/beginning inventory, if any, is rec
orded in a separate Materials Inventory- Opening Account. The materials availabl
e for use during a period equal purchases plus opening inventory. A physical cou
nt is made of the materials on hands at the end of the period to arrive at the c
losing/ending materials inventory. The cost of materials for the period is deter
mined as shown in Exhibit:
Cost of Materials Issued
Materials inventory-opening + Purchases = Materials available for use - Material
s 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 mate
rials on hand. This physical inventory is usually taken near the end of the acco
unting 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 p
hysical count is made of the quantity of goods on hand, nor the value of the inv
entory 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 discov
ered only at the end.
INVENTORY TURNOVER RATE TECHNIQUE
One important technique of inventory control is to use inventory turn over ratio
s. These ratios are calculated to asses the efficiency in use of inventories. Fo
llowing 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 Tu
rnover 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)
Goods
Finished Goods Turnover Ratio = Cost of Goods Sold/ Average Stock of Finished
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 o
f production) x 100
(iii)
Slow Moving Stores to Total Inventory = Average Cost of Slow Moving Stores/Avera
ge 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 indica
tion 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 th
e 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 n
ot an end themselves, but only tools of sound Inventory Management.
FINANCIAL MANAGERS ROLE IN INVENTORY MANAGEMENT Inventory represents a large inve
stment by manufacturing concern: therefore, great emphasis must be placed on its
efficient management. Though, the operative responsibility for Inventory manage
ment lies with the inventory manager, the financial manager must also be concern
ed with all types of inventories- raw materials, work-in-progress and finished g
oods. He must monitor Inventory levels and see that only an optimum amount is in
vested 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 o
rder to have efficient inventory management. He has to act as a careful inspecto
r levels. He should introduce the policies which reduce the lead time, regulate
usage and thus, minimize safety stock. All these techniques of Inventory managem
ent 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 val
ue, including the ascertainment of cost of inventories and any write-down thereo
f 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 rel
ated service contracts. (b) Work-in-progress arising in the ordinary course of b
usiness of service providers. (c) Shares, debentures and other financial instrum
ents held as stock-in-trade. (d) Producers inventories of livestock, agricultural
and forest products and mineral oils, ores and gases to the extent that they ar
e 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 harve
sted or mineral oils, ores and gases have been extracted and sale is assured und
er a forward contract or a
government guarantee or when a homogenous market exists and there is a negligibl
e 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 spe
cified: Inventories are assets: (a) Held for sale in the ordinary course of busi
ness. (b) (c) In the process of production for such sale, or In the form of mate
rials or supplies to be consumed in the production process
or in the rendering of services. 1. Inventories encompass goods purchased and he
ld for resale, for example, merchandise purchased by a retailer and held for res
ale, computer software held for resale, or land and other property held for resa
le. Inventories also encompass finished goods produced, or workin-progress being
produced, by the enterprise and include materials, maintenance supplies, consum
ables 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 f
ixed asset and whose use is expected to be irregular; such machinery spares are
accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fix
ed Assets.
2. Inventories should be valued at lower of cost net realizable value. 3. Cost o
f Inventories The cost of inventories should comprise all costs of purchase, cos
ts of conversion and other costs incurred in bringing the inventories to their p
resent location and condition.
4. Costs of Purchase The costs of purchase consist of the purchase price includi
ng duties and taxes (other than those subsequently recoverable by the enterprise
from the taxing authorities), freight, inwards and other expenditure directly a
ttributable to the acquisition. Trade discounts, rebates, duty drawbacks and oth
er similar items are deducted in determining the costs of purchase.
5. Costs of Conversion The costs of conversion of inventories include costs dire
ctly related to the units of production, such as direct labour. They also includ
e a systematic allocation of fixed and variable production overheads that are in
curred in converting materials into finished goods. Fixed production overheads a
re those indirect costs of production that remain relatively constant regardless
of the volume of production, such as depreciation and maintenance of factory bu
ildings and the cost of factory management and administration. Variable producti
on overheads are those indirect costs of production that vary directly, or nearl
y with the volume of production such as indirect materials and indirect labour.
6. The allocation of fixed production overheads for purpose of their inclusion i
n the costs of conversion is on based on the normal capacity of the production f
acilities. Normal capacity is the production expected to be achieved on an avera
ge over a number of periods or seasons under normal circumstances, taking into a
ccount the loss of capacity resulting from planned maintenance. The actual level
of production may be used if it approximates normal capacity. The amount of fix
ed production overheads allocated to each unit of production is not increased as
a consequence of low production or idle plant. Unallocated overheads are recogn
ized as an expense in the period in which they are incurred. In periods of abnor
mally
high production, the amount of fixed production overheads allocated to each unit
of production is decreased so that inventories are not measured above cost. Var
iable 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 resu
lt 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 id
entifiable, 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 be
come separately identifiable, or at the completion of production. Most by- produ
cts as well as scrap or waste materials, by their nature, are immaterial. When t
his 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 cond
ition. For example, it may be appropriate to include overheads other than produc
tion overheads or the costs of designing product for specific customers in the c
ost 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, theref
ore, usually not included in the cost of inventories. 10. Exclusions from the co
st of Inventories In determining the cost of inventories in accordance with para
graph 3. It is appropriate to exclude certain costs and recognize them as expens
es 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. S
torage costs, unless those costs are necessary in the production process prior t
o a further production stage. 3. Administrative overheads that do not contribute
to bringing the inventories to their present location and condition, and 4. Sel
ling 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 assig
ned by specific identification of their individual costs. 12. Specific identific
ation of cost means that specific costs are attributed to identify items of inve
ntory. This is an appropriate treatment for items that are segregated for a spec
ific project, regardless of whether they have been purchased or produced. Howeve
r, when there are large numbers of items of inventory which are ordinarily inter
changeable, specific identification of costs is inappropriate since, in such cir
cumstances, an enterprise could obtain predetermined effects on the net profit o
r 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 f
ormula used
should reflect the fairest possible approximation to the cost incurred in bringi
ng the items of inventory to their present location and condition.
14. A variety of cost formulas is used to determine the cost of inventories othe
r than those for which specific identification of individual costs is appropriat
e. 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 f
ormula assumes that the items of inventory which were purchased or produced firs
t 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 th
e weighted average costs formula, the cost of each item is determined from the w
eighted average of the cost of similar items at the beginning of a period and th
e 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, d
epending upon the circumstances of the enterprise.
15. Techniques for the measurement of the cost of inventories, such as the stand
ard 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 utilizati
on. They are regularly reviewed and if necessary, revised in the light of curren
t conditions. 16. The retail method is often used in the retail trade for measur
ing inventories of large
numbers of rapidly changing items that have similar margins and for which is imp
racticable to use other costing methods. The cost of the inventory is determined
by reducing from the sales value of the inventory the appropriate percentage gr
oss margin. The percentage used takes into consideration inventory which has bee
n marked down to below its original selling price. An average percentage for eac
h retail department is often used.
17. The cost of inventories may not be recoverable if those inventories are dama
ged, if they have become wholly or partially obsolete, or if their selling price
s have declined. The cost of inventories may also not be recoverable if the esti
mated costs of completion or the estimated costs necessary to make the sale have
increased. The practice of writing down inventories below cost to net realizabl
e 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 ite
ms in that product line. It is not appropriate to write down inventories based o
n a classification of inventory, for example, finished goods, or all the invento
ries in a particular business segment.
19. Estimates of net realizable value are based on the most reliable evidence av
ailable at the time the estimates are made as to the amount the inventories are
expected to realize. These estimates take into consideration fluctuations of pri
ce 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 shee
t date. 20. Estimates or net realizable value also take into consideration the p
urpose 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 ba
sed on the contract price. If the sales contracts are
for less than the inventory quantities held, the net realizable value of the exc
ess 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 w
ith 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 sol
d at or above cost. However, when there has been a decline in the price of mater
ials 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 suc
h 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 v
alue as at each balance sheet date. 22. Disclosure. The financial statements sho
uld disclose: The accounting policies adopted in measuring inventories, includin
g the cost formula used, and The total carrying amount of inventories and its cl
assification appropriate to the enterprise. 24. Information about the carrying a
mounts held in different classifications of inventories
and the extent of the changes in these assets is useful to financial statement u
sers. Common classifications of inventories are raw materials and components, wo
rk in progress, finished goods, stores, spares and loose tools.
DATA COLLECTIO N
DATA COLLECTION In analysis of inventory of JOL, We collect the data by the diff
erent sources. We collect the primary and secondary data. SECONDARY DATA The sec
ondary 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, ledge
r register and daily issue slip of materials the purchase register and other doc
umentary evidence used for the findings. In the analysis of inventory the second
ary 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. ar
e the accurate attainable reliable and useful data. 1. Inventory control techniq
ues used by the company 2. Inventory systems as perpetual and periodic systems.
3. Stock levels etc. 4. Companies website Primary data
FINANCIAL
STATEMENTS
Profit & Loss Account Particulars Gross Sales Excise Net Sales Domestic Sales In
ternational Sales Other Income Total Income Expenditure Cost of materials Manufa
cturin FY 2006 16242.9 1189.4 15053.5 9102.1 5951.4 196.9 15250.4 FY 2005 12737.
0 1034.3 11702.7 7501.0 4201.7 166.4 11869.1 FY 2004 9456.7 864.7 8592.0 6304.7
2287.3 99.5 8691.5 FY 2003 7853.9 719.5 7134.4 5161.1 1973.3 39.3 7173.7 FY 2002
6598.2 649.4 5948.8 4766.3 1182.5 44.1 5992.9
8158.9 1597.0
6177.7 1394.4
4443.7 1171.0
3649.1 929.6
3118.5 841.4
g expenses Selling, general and administrative expenses Total Expenditure PBIDTA
Depreciation PBIT Interest PBDT PBT Tax PAT Share of Profit / (Loss) in Associa
te Minority Interest PAT after share of profit / loss in associate and minority
interest
3127.1 12883.0 2367.4 513.4 1854.0 172.7 2194.7 1681.3 392.4 1288.9 0.00 7.8
2054.0 9626.1 2243.0 381.4 1861.6 220.4 2022.6 1641.2 431.6 1209.6 0.00 -17.7
1426.7 7041.4 1650.1 326.2 1323.9 357.6 1292.5 966.3 179.0 787.3 -8.9 4.0
1313.3 5892.0 1281.7 237.5 1044.2 402.5 879.2 641.7 160.6 481.1 -0.3 0.00
1153.3 5113.2 879.7 255.8 623.9 411.1 468.6 212.8 -19.4 232.2 0.00 0.00
1296.7
1191.9
782.4
480.8
232.2
Cash Flow FINANCE -CONSOLIDATED CASH FLOW - Jubilant Organ. (Curr: Rs in Million
) 2006.3 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Ne
t Cash from Operating Activities Net Cash Used in Investing Activities Net Cash
Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and
Cash Equivalents at End of the year 375.74 141.82 4607.43 5438.34 0.00 1364.9 22
7.50 1116.70 2595.00 1477.90 148.60 375.70 106.27 843.14 786.68 60.37 4.35 227.4
5 101.47 436.00 1122.8 0 691.60 0.00 106.27 200503 200403 200303
Financial Ratios Ratio Debt : Equity Ratio Current Ratio Working Capital Days TU
RNOVER RATIOS Assets Inventory Debtors Interest Cover Ratio Earning Before Inter
est Tax and Depreciation Margin (%) Profit Before Interest and Tax Margin (%) Pr
ofit Before Depreciation and Tax Margin (%) Net Profit (after minority interest)
Margin (%) Return on Capital Employed (%) Return on Net Worth (%) FY 2006 0.87
2.33 90 0.90 4.83 6.07 10.74 15.73 12.32 14.58 8.56 15.17 19.38 FY 2005 0.74 1.7
9 61 1.21 6.04 6.63 8.45 19.17 15.91 17.28 10.34 24.56 33.87 FY 2004 2.01 2.31 8
0 1.21 6.54 6.05 3.70 19.21 15.41 15.04 9.16 22.14 43.99 FY 2003 2.79 2.40 85 1.
16 5.28 8.75 2.59 17.97 14.64 12.32 6.74 20.61 37.18 FY 2002 3.09 2.51 84 1.23 5
.77 7.74 1.52 14.79 10.49 7.88 3.90 27.59 17.63
DATA ANALYSIS AND INTERPRETATIO N
INVENTORY TURN OVER RATIO-
Total sales Inventory turn over ratio = Average inventory
The sales of JOL in year 2007 is 720 million & its investment on inventory is 12
6 million . Then inventory turn over ratio = 720/126 = 5.71 JOL used Rs. 6 milli
on worth inventory for operation. It could generates additional sales, sales Sal
es = 6 million * 5.71 = 34.26 million
If JOL increases investment more on their inventories , then company increases t
heir sales.
Inventory turn in year 2006Total sales in 2006 = 670 million Investment on inven
tories = 118 million
Turn over ratio
= 670/118 = 5.67
Inventory turn over in year 2005Total sales in 2005 = 620 million Investment on
inventories = 110 million Turn over ratio = 620/ 110 = 5.63
Inventory turn ratio in year 2004 Total sales in 2004 = 615 million Investment o
n inventories = 100 million Turn over ratio = 615 / 100 = 6.15
Investment of inventories & sales on wards 2004-
year 2004 2005 2006 2007
Investment on inventories in million 100 110 118 126
total sales in million 615 620 670 720
Jubilant Organosys Ltd. increases investment on their inventories. Every year, t
hen total sales increases year by year.
720
Sales EMBED Excel.Chart.8 \s 645
670
615
2004
2005
2006 Years
2007
VALUE UNDER FIFO METHOD -
Date Jan 1 9 12 27 Feb 10 16 March 3 17 29 Apr 4 18 23 May 12 24 Jun 10 30 Total
Qty
Cost
Value
Qty
Cost
Value
Qty 1000 0 1100 0 9000 1000 0 6000 8000 1000 0 6000 1000 0 1200 0 6000 0 1000 0
9000 1200 0 1100 0 1300 0
Cost 2.10 -
Val
210
1000 1000
2.21 2.31
2210 2000 2310 4000 2.10 8400 2.10 4200
232
190 213
2000 2000 4000 2000
2.41 2.41 2.29 2.14
4820 4820 4000 9160 4280 4000 @ 9340 2.10 8400
129 177
225
141 233
276
182
2000
2.04
4080 1000 2.40 2400
223
3000
2.00
6000 1000 2.40 2400
199 259
235
2000 1900 0
2.02 2.19
4040 4170 0 1600 0 3514 0
275
Where @ is 1000 1000
2.21 2.31
2210 2310
Total
2000 4000
2.41 -
4820 9340
Interpretation The FIFO method of valuation of inventory is based on the assumpt
ion 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 c
harged to the cost of goods sold at this opening inventory rate rs 2.10 . the Ap
ril 18 issue or consignment of 4000 units is costed on the basis of first receiv
ed 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 costed on the basis of the 2000 units received on March 3 . therefo
re the cost of the 13000 inventory on June 30 is composed of the received of Mar
ch 29 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 systemDate 1Jan 6Jan 8Jan 9Jan 15Jan 25Jan 2
7Jan 31Jan Receipts Q R 1100 8.50 300 9 400 9.20 Issues Balance A Q R A Q A 200
1400 100 7 700 100 700 9350 1200 10050 200 8.50 1700 1000 8350 400 8.50 3400 600
4950 2700 900 7650 300 8.50 2550 300 240 300 9 2700 0 3680 700 6080
The value of inventory after 31 January is 6080 /rs
Interpretation :The value of inventory under periodic & perpetual inventory syst
em is different. The value of inventory under perpetual system is more than peri
odic system.
DETERMINATION OF STOCK LEVELS
Data of concentrate at JOL is as follows Maximum consumption Minimum consumption
Normal consumption Re-order period Re-order quantity Normal re-order period = 6
5 units per day = 55 units per day = 59 units per day = 10-15 days = 878 units =
12 days
Re-order level
= Maximum consumption * Maximum Re-order period
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 = (re-order level + re-order quantity ) ( min. consumpti
on order period)
Maximum stock level -
= ( 975 units + 878 units ) - (55 units * 15 days) = 1028 units Average stock le
vel = minimum stock level + of Re-ordering Quantity = 267 units + * 878 units =
267 units + 439 units = 706 units
Interpretation of result : 1. After calculation the re-order level of JOL is 975
units but the actual re-order quantity is 878 units. 2. The minimum stock level
of JOL is 267 units. 3. The maximum stock level of JOL is 1028 units. 4. The av
erage stock level must be 706 units.
Calculation of expected stock out cost Safety stock level 500 400 250 150 100 50
300 150 450 350 200 400 stock out(units) 0 100 250 6000 stock out prob. Of stoc
k cost(40/unit) out 0 4000 10000 0.01 0.02 0 0.01 100 120 160 240 180 180 280 24
0 780 580 expected stock out expt. cost 0 40 220 total SOC 0 40
16000 0.01 12000 0.02 6000 0.03 18000 0.01 14000 0.02 8000 0.03
50 0 500 400 250 100 50
2000 20000 0.01 16000 0.02 1000 4000 2000
0.04 200 320 0.03 0.04 0.10
80
300 160 200
1180
Expected stock out cost == stock out cost * probability of stock out .
PROBLEMS AND SUGGESTIO NS
PROBLEMS FACED BY THE ORGANITION JOL faces the following problems1. Jubilant Org
anosys 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 it
ems in store
department .It is not good when external auditing held in company. 4. Organizati
on have no record of wastage items. It is not company. 5. In organization store
assistants have no proper knowledge about engineering goods & good for operating
profit of the
raw materials.
6.
There is no proper staff in HR/ Personnel department for listening grievances of
employees. So employees get rid of the organization without any notice. It is no
t good for any organization.
SUGGESTIONS TO THE ORGANISATION: . 1. The organizations give proper knowledge &
training for unskilled employees about their work. 2. In store department items
should placed their proper sequence & acknowledgement. 3. There should be proper
record of wastage. It is good for the company. 4. Store manager give the proper
knowledge about engineering & raw materials. 5. Organization should have proper
staff in HR/Personnel department. 6. Personnel manager should listen grievances
of the employees personnel .So employees could not left the organization.
CONCLUSIO N
CONCLUSION
The goal of the wealth maximization is affected by the efficiency with which inv
entory is managed. Inventories constitutes about 60% of current assets of compan
ies in India. The manufacturing companies hold inventories in the form of raw ma
terials , work in progress and finished goods. Inventories facilitate smooth pro
duction and sales operation (transaction motive), to guard against the risk of u
npredictable changes in usage rate and delivery time ( precautionary motive ) ,
& to take advantage of price fluctuations (speculative motive ).
Inventories represent investment of a firms funds. The objectives of the inventor
y 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 & orderin
g 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 techn
iques for better holding inventories.
BIBLIOGRAPHY
1. Advanced Accountancy Ninth Edition S N Maheshwari , S K Maheshwari Vikas Publ
ishing House Pvt. Ltd.
2. Financial Management Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd
3. Management Accounting Third Edition M Y Khan, P K Jain Tata Mc-Graw Hill Publ
ishing Company Ltd.
4. Purchase , Sales Boucher & Other Documents of the Company Moon Beverage Ltd.
Sahibabad