Invent Mgmt

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    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, finished goods, work in progress

    supplies and other accessories. To maintain the continuity in the operations of businessenterprise, 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 ofthese 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 instock to meet the needs of production and sales while at the same time, the investment in them is

    to kept at a reasonable level.


    Research methodology is the way to systematically solve the research problem.

    Objective of research study is Analysis of inventory of Delta Ltd. Analyzing of inventory, wedetermining 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 reorderpoint, safety stock levels, minimum & maximum levels of inventory. Working hypothesis of theobjective is that inventories are the stock piles of goods .The all organization on their

    inventories. JOL 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 rawmaterial, work in progress inventory, 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 inventories

    and other important data.

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    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 tomnage 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 aconsiderable 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 companys profitability.


    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 includes raw materials, work-in-progress and stores etc. In the form of materials or suppliesto be consumed in the production process or in the rendering of services. In brief, Inventory is

    unconsumed or unsold goods purchased or manufactured.


    Inventories are stock of the product a company is manufacturing for sale andcomponents 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 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.


    These inventories are semi manufactured products. They represent products that need more work

    before they become finished products for sales.

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    Finished goods inventories are those completely manufactured products whichare 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 theproduction and consumption 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 materialand 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.


    It includes office and plant cleaning materials like soap, brooms, oil, fuel, light, bulbs etc. Thesematerials 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.


    Inventories constitute the principal item in the working capital of the majority of trading andindustrial companies. In inventory, we include raw materials, finished goods, work-in-progress,

    supplies and other accessories. To maintain the continuity in the operations of businessenterprise, a minimum stock of inventory required. However, the physical control of inventory isthe 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 ofworking 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 be kept at a reasonable level.


    The term inventory management is used in two ways- unit control and value control. Productionand purchase officials use this word in term unit control whereas in accounting this word is used

    in term of value control. As investment in inventory represents in many cases, one of the largest

    asset items of business enterprises particularly those engaged in manufacturing, wholesale tradeand retail trade. Sometimes the cost of material used in production surpasses the wages and

    production overheads. Hence, the proper management and control of capital invested in the

    inventory should be the prime responsibility of accounting department because resourcesinvested in inventory are not earning a return for the company. Rather, on the other hand, they

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    are costing the firm money both in terns of capital costs being incurred and loss of opportunity

    income that is being foregone.


    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 oftheir orders.

    (6)Highlighting slow moving and obsolete items of materials.

    (7) Designing poorer organization for inventory management: Clear cut

    accountability should nbe fixed at various levels of organization.

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    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. Thedetermination of maximum and minimum

    level of stock attempt in this direction.


    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



    Inventory in

    Hand place



    Net order issue receive tender

    Quantity tenders quotation evaluations

    Inventory cycle

    3. Anticipation Inventories.

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    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.


    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 thematerials 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


    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.


    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



    (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.

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    (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 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

    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.


    For an efficient and successful inventory control there are certain important

    conditions that are a 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

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    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 controlsuccessful and efficient one, it is also essential to provide the adequate storage

    facilities. Sufficient storage area and proper handling facilities should be


    (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 involvedin 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.

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    (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.


    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 in stock.

    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 is

    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.

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    (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.

    (9) Other factors: Price control, rationing, change in taxation and export policy of

    governments etc. also influence investment in inventories.



    In managing inventories, the firms 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.

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    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


    (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


    (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 Minimumlead 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

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    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-orderperiod.

    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 capacityproduction 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

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    purchase manager has to trace out the best suppliers, after that only he places the


    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:


    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


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


    (ii) Re-order point = Rate of usage x Maximum Lead Time.


    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.


    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 specialarrangements 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:

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    Danger level = Average Consumption x Maximum Re-order period for

    Emergency Purchase


    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 includecosts 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

    firms 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

    Ordering Costs 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 wouldthus 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

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    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 thefollowing data for a firm.

    Estimated annual requirements, A 1,200 units

    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 - (100+0)/2 = 50units)

    Average value - 50 * Rs 50 = 2, 500Many other possibilities can be worked out in the same manner.






    stock 400



    0 2 4 6 8 10 15


    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 = (Annual requirement * Per order cost)

    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

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


    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 willincrease, 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* quantity required * ordering cost

    Carrying cost

    EOQ = 2AO


    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 costsincrease 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

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    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 firms

    operating profit

    is maximized at point Q*.

    Minimum total


    Carrying cost

    Costs ordering cost

    Q* order size (Q)

    Economic order quantityOptimum productions run:

    The use of the EOQ approach can be extended to production runs to determine the


    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


    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

    determiningthe 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

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    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


    points of time the demand may exceed the anticipated level. In other words, a


    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 ofinventory. 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


    against a possible shortage of inventory. Safety stock may, thus, be defined as


    additional inventory to serve as safety margin/buffer/cushion to meet


    increase in usage resulting form 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


    max. inventory

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    average usage


    avg. inventory----------------------------------------------------

    re-order point-----------------------------------------------------


    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


    The classification of spares under three categories is an important decision. A


    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


    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


    ordering level.

    (iv) The ordering cost per order and holding cost per unit are constant.

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    EOQ and Total Inventory Cost: At EOQ level total inventory cost is minimum.


    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 +


    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


    at fist 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 thelowest.


    Perpetual inventory system implies maintenance of up-to-date stock records and in


    broad sense it covers both continuous stock taking as well as up-to-date recording


    books. According to Weldon, It may be defined as a method of recording stores


    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


    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 stocktakingis avoided. Hence, interim and final financial accounts can be prepared with



    2. Arrangement of proper verification: In this system a

    detailed and more reliable checking of the store is exercised because of the

    continuous and

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    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.



    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 firms investment. Some


    items, although not expensive, turnover slowly and therefore, they require a high


    investment. The firm should classify them into A.B.C category items. Category A


    include more expensive items (in cost of product) with high investment and it will


    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


    The A items require intensive inventory control and most sophisticated inventory


    techniques should be applied to these items.

    The B items can be controlled using less sophisticated technique, and their level

    can be

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    viewed less frequently than A items.

    The C items can receive the minimum attention: they will probably be ordered in


    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


    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


    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-orderingstrategy.

    (3) Stock records.

    (4) Priority treatment to different


    (5) Determination of safety stock


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    (6) Stores layout.

    (7) Value analysis.

    (2) Just-in-time (JIT) System:

    Japanese firms popularized thejust-in-time (JIT) system in the

    world. In a JIT system material or the manufactured components and part arrive to


    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 materialor

    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 madeof the

    materials on hands at the end of the period to arrive at the closing/ending materials


    The cost of materials for the period is determined as shown in Exhibit:

    Cost of Materials Issued

    Materials inventory-opening

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    + 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 havebeen sold.

    There is no system and accounting period, and they can be discovered only at the



    One important technique of inventory control is to use inventory turn over ratios.


    ratios are calculated to asses 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



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


    GoodsAverage Age of inventory of inventory Turnover in Days = Days during the


    Inventory Turnover Ratio

    (ii) Average inventory to total cost of production = (Average Inventory/ total

    cost of

    production) x 100

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    (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


    decisions regarding inventory control. The ratios provide a tough indication of


    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


    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 InventoryManagement.


    Inventory represents a large investment by manufacturing concern: therefore, great

    emphasis must be placed on its efficient management. Though, the operative


    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


    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


    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


    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




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    A primary issue in accounting for inventories is the determination of the value at


    inventories are carried in the financial statements until the related revenues are


    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



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


    (c) Shares, debentures and other financial instruments held as stock-in-trade.

    (d) Producers inventories of livestock, agricultural and forest products and mineraloils, 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.


    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,


    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 workin-

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    progress being produced, by the enterprise and include materials, maintenance


    consumables and loose tools awaiting use in the production process. Inventories do


    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


    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 PurchaseThe 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


    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


    constant regardless of the volume of production, such as depreciation and

    maintenance of

    factory buildings and the cost of factory management and administration. Variableproduction 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

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    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


    under normal circumstances, taking into account the loss of capacity resulting from


    maintenance. The actual level of production may be used if it approximates normal


    The amount of fixed production overheads allocated to each unit of production is


    increased as a consequence of low production or idle plant. Unallocated overheads


    recognized as an expense in the period in which they are incurred. In periods of


    high production, the amount of fixed production overheads allocated to each unitof

    production is decreased so that inventories are not measured above cost. Variable


    overheads are assigned to each unit of production on the basis of the actual use of


    production facilities.

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


    This is the case, for example, when joint products are produced or when there is a


    product and a by- product. When the costs of conversion of each product are not


    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.

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    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


    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 toexclude certain costs and recognize them as expenses in the period in which they


    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


    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


    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 aspecific 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

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    costs is inappropriate since, in such circumstances, an enterprise could obtain


    effects on the net profit or loss for the period by selecting a particular method of


    the items that remain in inventories.

    13. The cost of inventories, other than those dealt with in paragraph 11, should be


    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 indetermining 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


    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


    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


    during the period. The average may be calculated on a periodic basis or as each


    shipment is received, depending upon the circumstances of the enterprise.

    15. Techniques for the measurement of the cost of inventories, such as the standardcost

    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

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    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


    occurring after the balance sheet date to the extent that such events confirm the


    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 arefor 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


    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

    replacementcost 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,

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    and The total carrying amount of inventories and its classification appropriate to



    24. Information about the carrying amounts held in different classifications of


    and the extent of the changes in these assets is useful to financial statement users.


    classifications of inventories are raw materials and components, work in progress,


    goods, stores, spares and loose tools.





    In analysis of inventory of JOL, We collect the data by the different sources. Wecollect the

    primary and secondary data.

    SECONDARY DATA The secondary data are those data the already in presence


    specific purpose we use the secondary data about inventory to looks old records of


    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 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



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    Profit & Loss Account

    Particulars FY 2006 FY 2005 FY 2004 FY 2003 FY 2002

    Gross Sales 16242.9 12737.0 9 456.7 7853.9 6598.2

    Excise 1189.4 1034.3 864.7 719.5 649.4

    Net Sales 15053.5 11702.7 8592.0 7134.4 5948.8


    Sales 9102.1 7501.0 6304.7 5161.1 4766.3


    Sales 5951.4 4201.7 2287.3 1973.3 1182.5

    Other Income 196.9 166.4 99.5 39.3 44.1

    Total Income 15250.4 11869.1 8691.5 7173.7 5992.9


    Cost of

    materials 8158.9 6177.7 4443.7 3649.1 3118.5

    Manufacturin 1597.0 1394.4 1171.0 929.6 841.4g expenses


    general and



    3127.1 2054.0 1426.7 1313.3 1153.3


    Expenditure 12883.0 9626.1 7041.4 5892.0 5113.2

    PBIDTA 2367.4 2243.0 1650.1 1281.7 879.7

    Depreciation 513.4 381.4 326.2 237.5 255.8

    PBIT 1854.0 1861.6 1323.9 1044.2 623.9

    Interest 172.7 220.4 357.6 402.5 411.1

    PBDT 2194.7 2022.6 1292.5 879.2 468.6

    PBT 1681.3 1641.2 966.3 641.7 212.8

    Tax 392.4 431.6 179.0 160.6 -19.4

    PAT 1288.9 1209.6 787.3 481.1 232.2

    Share of

    Profit / (Loss)

    in Associate0.00 0.00 -8.9 -0.3 0.00


    Interest 7.8 -17.7 4.0 0.00 0.00

    PAT after

    share of

    profit / loss

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    in associate

    and minority


    1296.7 1191.9 782.4 480.8 232.2

    Cash Flow

    FINANCE -CONSOLIDATED CASH FLOW - Jubilant Organ. (Curr:

    Rs in Million)

    2006.3 200503 200403 200303

    Cash Flow Summary

    Cash and Cash

    Equivalents at Beginning

    of the year

    375.74 227.50 106.27 101.47

    Net Cash from Operating

    Activities 141.82 1116.70 843.14 436.00Net Cash Used in

    Investing Activities 4607.43 -







    Net Cash Used in

    Financing Activities 5438.34 1477.90 60.37 691.60

    Net Inc/(Dec) in Cash and

    Cash Equivalent 0.00 148.60 4.35 0.00

    Cash and Cash

    Equivalents at End of the


    1364.9 375.70 227.45 106.27

    Financial Ratios

    Ratio FY







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    Debt : Equity Ratio 0.87 0.74 2.01 2.79 3.09

    Current Ratio 2.33 1.79 2.31 2.40 2.51

    Working Capital Days 90 61 80 85 84


    Assets 0.90 1.21 1.21 1.16 1.23

    Inventory 4.83 6.04 6.54 5.28 5.77

    Debtors 6.07 6.63 6.05 8.75 7.74

    Interest Cover Ratio 10.74 8.45 3.70 2.59 1.52

    Earning Before Interest

    Tax and Depreciation

    Margin (%)

    15.73 19.17 19.21 17.97 14.79

    Profit Before Interest andTax Margin (%) 12.32 15.91 15.41 14.64 10.49

    Profit Before Depreciation

    and Tax Margin (%) 14.58 17.28 15.04 12.32 7.88

    Net Profit (after minority

    interest) Margin (%) 8.56 10.34 9.16 6.74 3.90

    Return on Capital

    Employed (%) 15.17 24.56 22.14 20.61 27.59

    Return on Net Worth (%) 19.38 33.87 43.99 37.18 17.63







    Inventory turn over ratio =

    Average inventory

    The sales of JOL in year 2007 is 720 million & its investment on inventory is 126

    million .

    Then inventory turn over ratio = 720/126= 5.71

    JOL used Rs. 6 million worth inventory for operation. It could generates additional

    sales, sales

    Sales = 6 million * 5.71

    = 34.26 million

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    If JOL increases investment more on their inventories , then company increases

    their sales.

    Inventory turn in year 2006-

    Total sales in 2006 = 670 million

    Investment on inventories = 118 million

    Turn over ratio = 670/118

    = 5.67

    Inventory turn over in year 2005-

    Total 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 on inventories = 100 millionTurn over ratio = 615 / 100

    = 6.15

    Investment of inventories & sales on wards 2004-

    year Investment on

    inventories in million

    total sales in million

    2004 100 615

    2005 110 620

    2006 118 670

    2007 126 720

    Jubilant Organosys Ltd. increases investment on their inventories.

    Every year, then total sales increases year by year.

    Sales EMBED Excel.Chart.8 \s

    2004 2005 2006 2007






    Date Qty Cost Value Qty Cost Value Qty Cost Value


    1 1000


    2.10 21000

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    9 1000 2.21 2210 1100


    - 23210

    12 2000 2.10 4200 9000 - 19010

    27 1000 2.31 2310 1000


    - 21320


    10 4000 2.10 8400 6000 - 12920

    16 2000 2.41 4820 8000 - 17740


    3 2000 2.41 4820 1000


    - 22560

    17 4000 2.10 8400 6000 - 1416029 4000 2.29 9160 1000


    - 23320


    4 2000 2.14 4280 1200


    - 27600

    18 4000 @ 9340 6000


    - 18260

    23 2000 2.04 4080 1000


    - 22340


    12 1000 2.40 2400 9000 - 19940

    24 3000 2.00 6000 1200


    - 25940

    Jun10 1000 2.40 2400 1100


    - 23540

    30 2000 2.02 4040 1300


    - 27580

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    Total 1900


    2.19 4170




    - 3514


    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

    inventoryconsumed 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 this opening

    inventory rate rs

    2.10 . the April 18 issue or consignment of 4000 units is costed on the basis of first


    of the year . January 9 ,1000 units at rs 2.21, January 27 1000 units at rs 2.31 , and


    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 . therefore the cost of the 13000 inventory

    on June 30

    is composed of the received of March

    29 April 4 and 23 ,May 24 and June 30 and the value is the sum of the cost of these


    Valuation under perpetual inventory system-

    Date Receipts Issues BalanceQ 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

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    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.


    value of inventory under perpetual system is more than periodic system.


    Data of concentrate at JOL 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 daysRe-order quantity = 878 units

    Normal re-order period = 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

    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 + of Re-ordering


    = 267 units + * 878 units

    = 267 units + 439 units

    = 706 unitsInterpretation 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.

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    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 78050 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 .






    JOL faces the following problems-

    1. Jubilant Organosys Ltd. faces the problem of competition.

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


    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 have no record of wastage items. It is not good for operating profitof the


    5. In organization store assistants have no proper knowledge about engineering

    goods &

    raw materials.

    6. There is no proper staff in HR/ Personnel department for listening grievances of

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    employees. So employees get rid of the organization without any notice. It is not

    good for

    any organization.



    1. The organizations give proper knowledge & training for unskilled employees

    about their


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


    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

    employeescould not left the organization.




    The goal of the wealth maximization is affected by the efficiency with which

    inventory is

    managed. Inventories constitutes about 60% of current assets of companies in

    India. The

    manufacturing companies hold inventories in the form of raw materials , work in


    and finished goods. Inventories facilitate smooth production and sales operation


    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 firms 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

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    firm should minimize the total cost ( carrying plus ordering cost ).The firm follows


    control techniques as A-B-C technique EOQ & JIT techniques for better holding



    1. Advanced Accountancy

    Ninth Edition

    S N Maheshwari , S K Maheshwari

    Vikas Publishing House Pvt. Ltd.

    2. Financial Management

    Ninth Edition

    I M Pandey

    Vikas Publishing House Pvt. Ltd

    3. Management Accounting

    Third EditionM Y Khan, P K Jain

    Tata Mc-Graw Hill Publishing Company Ltd.

    4. Purchase , Sales Boucher & Other Documents of the Company

    Moon Beverage Ltd. Sahibabad