INVENTORY

MANAGEMENT
 INVENTORY :

• The assets that are:-

– Held for sale in the ordinary course of business; or
– In the process of production for such a sale; or
– In the form of materials or supplies to be
consumed in the production process; or
– In the rendering of services.
• Relevance : Trading concern & Manufacturing
unit.
• Loose tools v/s spares.
 TYPES OF
INVENTORY…

Work in
process

Vendors Raw Work in Finished Customers

Materials process goods
Work in
process
 …….TYPES OF INVENTORY

• Raw Materials – Basic inputs that are converted into finished product
throughthemanufacturing process.
• Work-in-progress – Semi-manufactured products that need some
moreworkbeforetheybecome finishedgoodsfor sale.
• Finished Goods– Completelymanufactured productsreadyfor sale.
• Supplies – Office and plant cleaning materials that do not directly enter
production but are necessary for production process and do not involve
significantinvestments.
 INVENTORY MGT

 The act or manner of managing, handling, directing or controlling the flow of

inventory.
 NEED :-
• Demand related:-
– Meet unexpected demands.
– Smooth seasonal or cyclical demands.
• Pricing related:-
– Hedge against price increases.
– Take advantage of quantity discounts.
• Process and supply surprises related:-
– Internal – upsets in parts of or our own processes.
– External – delays in incoming goods.
 OBJECTIVES: INVENTORY MGT

• To maintain an optimum size of inventory for efficient and smooth production and sales
operations.

• To maintain a minimum investment in inventories to maximize the profitability.

• Effort should be made to place an order at the right time with right source to acquire
the right quantity at the right price and right quality.
 INVENTORY SYSTEMS

Factor Periodic Inventory System Perpetual Inventory System

BASIS OF ASCERTAINING INVENTORY BY ACTUAL PHYSICAL COUNT ON THE BASIS OF RECORDS

Calculation ofinventory Directly by applying Closing Inventory =opening

the method of inventory+ purchases – cost of
valuation of goodssold
inventories

Calculation of cost ofgoods Cost of goods sold =opening Directly calculated byapplying the
sold inventory +purchases – closing method of valuation of inventories
inventory

LostGoods Cost of goods sold includes Cost of closing inventory includes

cost of lost goods (if any) cost of lost goods (if any)
 METHODS OF VALUATION

An inventory valuation allows a company to provide a monetary

value for items that make up its inventory.

Methods:-
• First In First Out (FIFO) Method.

• Last In First Out (LIFO) Method.

• Weighted Average Cost/price Method .

 FIFOMETHOD

• Based on the assumption that the goods that are received first are issued first.
• For purpose of assigning costs and not exactly for purpose of physical flow of
goods.
• Goods sold, thus, consist of earliest lots and are valued at the price paid for
such lots.
• The ending inventory consists of latest lots and is valued at the price paid for
such lots.
• Balance sheet shows ending inventory costed as per approx market price.
 LIFOMETHOD

• Based on assumption that goods that are received last are issued first.
• Assumption made for purposes of assigning costs and not for actual physical flow of
goods.
• Flows of goods and costs may not coincide.
• Goods sold, thus, consist of the latest lots and are valued at the price paid for such
lots.
• The ending inventory consists of the earliest lots and is valued as such.
• Balance sheet has an inventory costed at old prices.
 WEIGHTED AVERAGE PRICE METHOD

• Based on the assumption that each issue of goods consists of a due proportion of
the earlier lots and is valued at weighted average price.

• Weighted average price is calculated by dividing the total cost of goods in stock by
the total quantity of goods in stock.

• This weighted price is used for pricing the issues until a new lot is received
when a new weighted average price would be calculated.

• This method evens out the effect of widely varying prices of different lots that
make up stocks.
 CLASSIFICATION OF INVENTORY

• ABCClassification(consumption)(25/80+15/15+70/05)
• XYZClassification(valuestored)(Hi,Med,Low)
• HML Classification(unit-valuestored) (Hi,Med,Low)
• VEDClassification(spareparts mainly) (Vital,Essential,Desirable)
• FSNClassification(consumption)(Fast, Slow, Non)
• SOSClassification(agriculture)(Seasonal,Non)
• SDFClassification(availability) (Scarce, Difficult, Easy)
• GOLFClassification (source of supply) Govt, Ordinarily
available, Local andForeign)