Invent Mgmt

8/8/2019 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 METHODOGY

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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INTRODUCTION OF THE TOPIC

INTRODUCTION

Inventories constitute the most significant part of current assets of a large majority of companies

in India. On an average, inventories are approximately 60% of current assets in public limited

companies in India. Because of the large size of inventories maintained by firms, a considerable

amount of feuds is required to be committed to them. It is therefore, absolutely imperative 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.

MEANING OF INVENTORY:-

Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In

accounting language it may mean stock of finished goods only. In a manufacturing concern, it

may 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.

NATURE OF INVENTORIES:-

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:-

Raw materials are those inputs that are converted into finished product though the manufacturing

process. Raw materials inventories are those units which have been purchased and stored for

future productions.

WORK IN PROGRESS:-

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

before they become finished products for sales.


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FINISHED GOODS:-

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.

SUPPLIES:

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.

MANAGEMENT OF INVENTORY

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.

CONCEPT OF INVENTORY MANAGEMENT

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.

OBJECTIVES OF INVENTORY MANAGEMENT

The basic managerial objectives of inventory control are two-fold; first, the avoidance over-investment or under-investment in inventories; and second, to provide the right quantity of

standard raw material to the production department at the right time. In brief, the objectives of

inventory control may be summarized as follows:

A. Operating Objectives:

(1) Ensuring Availability of Materials: There should be a continuous availability

of all types of raw materials in the factory so that the production may not be help

up wants of any material. A minimum quantity of each material should be held in

store to permit production to move on schedule.

(2) Avoidance of Abnormal Wastage: There should be minimum possible

wastage of materials while these are being stored in the godowns or used in the

factory by the workers. Wastage should be allowed up to a certain level known as

normal wastage. To avoid any abnormal wastage, strict control over the inventory

should be exercised. Leakage, theft, embezzlements of raw material and spoilage

of material due to rust, bust should be avoided.

(3) Promotion of Manufacturing Efficiency: If the right type of raw material is

available to the manufacturing departments at the right time, their manufacturing

efficiency is also increased. Their motivation level rises and morale is improved.

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

materials should be made continuously available to the management so that they

can do planning for procurement of raw material. It maintains the inventories at the

optimum level keeping in view the operational requirements. It also avoids the out

of stock danger.

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

maintained to match reasonable demand of the customers for prompt execution 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.

TYPES OF INVENTORY

1. Movement Inventories :-

Movement inventories are also called transit or pipeline inventories. Their

existence owes to the fact that transportation time is involved in transferring

substantial amount of resources.

2.Buffer inventories:-

In Buffer inventories are held to protect against the uncertainties of demand

and supply. An organization generally knows the average demand for various

items that it needs. Prod. deptt. issue store inspect receive supplier

Supplies

Demand

Inventory in

Hand place

OrdersPurchase

dept.

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.

CONTROL OF MATERIALS :

Rigid control over materials are necessary not only to guard against theft, but also

to minimize waste and misuse from causes such as excessive inventories, over

issue, deterioration, spoilage, and obsolescence. There are certain prerequisites to

an effective control system for materials:

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

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

3.Purchases of materials will be made at most favorable prices;

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

individual.

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

reference to the purchase and issues procedures, inventory systems, and inventory

control techniques.

IMPORTANCE OF INVENTORY CONTROL:

The importance or necessity of inventory control is well explained in the terms of

the objects of inventory control, which are obtained through it. A proper inventory

control lowers down the cost of production and improves profitability of

enterprise.

ADVANTAGES OF INVENTORY CONTROL:

(1) Reduction in investment in inventory.

(2) Proper and efficient use of raw materials.(3) No bottleneck in production.

(4) Improvement in production and sales.

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

(6) Ordering cost can be reduced if a firm places a few large orders in place of

numerous small orders.


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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.

ESSENTIALS OF INVENTORY CONTROL SYSTEM

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

organized.

(6)Adequate Reports and Records: Inventory control requires the maintenance of

adequate inventory record and reports. Various inventory records must contain

information to meet the needs of purchasing, production, sales and financial staff.

The typical information required

about any class of inventory may be relating to quantity on hand, location,

quantities in transit, unit cost, code for each item of inventory, reorder point, safety

level etc. Statements forms and inventory records should be so designed that the

clerical cost of maintaining these records must be kept a minimum.

(7)Intelligent and Experienced Personnel: An important requirement of

successful inventory control system is the appointment of qualified and

experienced staff in purchase and stores department. Mere establishment of

procedures and the maintenance of records would not give the desired results as

there is no substitute for sincere and devoted as well as

experienced hands. Hence, the whole inventory control structure should be manned

with trained, qualified, experienced and devoted employees.

(8)Coordination: There must be proper coordination of all departments 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.

FACTORS AFFECTING STOCK INVESTMENT LEVEL

These factors can be put in two categories: General and Specific.

General Factors: These factors include those factors, which affect directly or

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

(1) Nature of Business(2) Size and scale of Business

(3) Expected Sales Volumes

(4) Price Level Changes

(5) Availability of Funds

(6) Management view Point

Specific Factors: These factors are directly related with investment 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.

TECHNIQUES OF INVENTORY CONTROL

TECHNIQUES OF INVENTORY CONTROL

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

factors:

(1) Amount of capital available for maintaining stores.

(2) Godown space available.

(3) Rate of consumption of the material.

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

(5) Length and technical nature of the production process.(6) Possibility of loss in stores by deterioration, evaporation etc.

There are certain stores, which deteriorate in quality if they are stored

for longer period.

(7) Cost of maintaining stores.

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

increase in prices in the coming period, a comparatively large maximum stock

level will be fixed. On the other hand, if there is the possibility of decrease in price

in the near future, stocks are kept at a much reduced level.

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

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

periods.

(10)Restrictions imposed by the government or local authority in regard to

materials which there are inherent risks, e.g. fire and explosion.

(11)Risk of obsolescence, i.e., possibility of change in fashion and habit which will

necessitate change in requirements of materials.

The following formula may be applied to calculate the maximum stock:

(1) Maximum Stock = Minimum Inventory + Lot size

(2) Maximum Stock = Reorder Level - Minimum consumption during 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

order.

Delivery, Lead or Procurement Time: The time taken from the date of placing

the order to the date of delivery by the suppliers is called procurement time. The

maximum, minimum and average procurement time should also be determined.

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

normally not be allowed to fall.

Calculation of Re-order Point:

After taking into account the above facts re-order quantity is ascertained. For this

purpose, the following formula is applied:

Situation1:

When rate of usage and lead time are known with certainty;

Re-order point = Rate of usage x lead time.Situation2:

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

variable:

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

Time.

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

Situation3:

When rate of usage and lead time is known but variable and lead time is known

with certainty:

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

during lead time.

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

Situation4:

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

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

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

Danger Level

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

made only under specific instructions. The purchase officer will make 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

ECONOMIC ORDER QUANTITY TECHNIQUE

One of the major inventory management problems to be resolved is how much

inventory should be added when inventory is replenished. If the firm is buying raw

materials, it has to decide lost in which it has to be purchased on replenishment. If

the firm is planning a production run, the issue is how much production to schedule

(or how much to make). These problems are called order quantity problems, and

the task of the firm is to determine the optimum or economic order quantity (or

economic lot size). Determining an optimum inventory level involves two type of

costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that

inventory level that minimize the total of ordering and carrying costs.

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

supplies) and includes the entire costs of acquiring raw materials. They 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

Obsolescence

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.

1200

1000

800

Q/2

600

stock 400

200

50

0 2 4 6 8 10 15

Time

Inventory level over time

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

tedious to calculate the EOQ. An easy way to determine EOQ is to use the order-

formula approach. Let us illustrate this approach.

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

number of orders during the year multiplied by ordering cost per order. If a

represents total annual requirements and Q the order size, the number of orders

will be A/Q and total order costs will be:Total ordering cost = (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

2

The total inventory cost, then, is the sum of total carrying and ordering costs:

Total cost = Total carrying cost + Total order cost

TC = Qc + AO

2 Q

Equation (4) reveals that for a large order quantity, Q, the carrying cost 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

C

Graphic approach :

The economic order quantity can also be found out graphically. Figure illustrates

the EOQ

function. In the figure, costs-carrying, ordering and total- are plotted on vertical

axis and

horizontal axis is used to represent the order size. We note that total carrying 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

Cost

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

optimum

size of manufacture. Two costs involved are set-up costs and carrying costs. Set-up

costs include

costs on the following activities: preparing and processing the stock orders,

preparing drawings

and specifications, tooling machines set-up, handling machines, tools, equipment

and materials,

over time etc. Production runs but carrying costs will increase as large stocks of

manufactured

inventories will be held. The economic production size will be the one where the

total of set-up

and carrying costs is minimum.

Reorder Point:

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

quantity, yet

answer should be sought to be second problem, when to order. This is a problem of

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


18/43

replenishing inventory after the order has been placed. By certainty we mean that

usage and lead

time do not fluctuate. Under such a situation, reorder point is simply that inventory

level which

will be maintained for consumption during the lead time. That is:

Reorder point = Lead * Average usage

Safety stock:

The demand for inventory is likely to fluctuate from time to time. In particular, at

certain

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

discrepancy

between the assumed (anticipated/expected) and the actual usage rate of inventory

is likely to

occur in practice.

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

buffer/cushion

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

minimum

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

unanticipated

increase in usage resulting 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

costs.

max. inventory


19/43

average usage

EOQ

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

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

max.usage

safety stock -------------------------------------------------------

weeks lead time

re-order point under safety stock

VED Analysis: The VED analysis is used generally for spare parts. The

requirement and

urgency of spare parts is different from that of materials. A-B-C analysis may not

be properly

used for spare parts. The demand for spares depends upon the performance of the

plant and

machinery. Spare parts are classified as: Vital (V), Essential (E) and Desirable (D).The vital

spares are a must for running the concern smoothly and these must be stored

adequately. The

non-availability of vital spares will cause havoc in the concern. The E types of

spares are also

necessary but their stocks may be kept at low figures. The stocking of D types of

spares may be

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

spares can be

avoided.

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

wrong

classification of any spare will create difficulties for production department. The

classification of

spares should be left to the technical staff because they know the need, urgency

and use of these

spares.

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

(i) Total demand is known with certainty.(ii) The usage rate of material is steady.

(iii) Orders for replenishment on inventory are placed exactly when inventories

reach

ordering level.

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


20/43

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

Total

inventory cost is the sum of material purchase cost, ordering cost and carrying cost

As per the formula:

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

Total

Carrying Cost

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

Discount Offer and Economic Order Quantity:

Sometimes supplier offers different discounts on orders of large quantity. In such a

situation,

at 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 CONTROL TECHNIQUE

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

its

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

stores

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

balances

after every receipt and issue to facilitate regular checking and to obviate closing

down for

sock-taking. The basic object of this system is to make available details about the

quantity

and value of stock of each item at all times. The system thus provides a rigid

control over

stock of each item of store can regularly be verified with the stock records in the

bin cards

kept in the stores and stores ledger maintained in cost office.

Advantages of Perpetual Inventory system:

1. Saving in time: The long and costly work of stocktakingis avoided. Hence, interim and final financial accounts can be prepared with

greater

convenience.

2. Arrangement of proper verification: In this system a

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

continuous and


21/43

random checking.

3. Verification of Errors: Errors are easily located and

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

4. Double control: Due to separate records in Bin card and

stores ledger, double control is maintained.

5. Optimum size of material: Overstocking and under

stocking can be avoided because perpetual inventory system covers verification of

stock with

regards to maximum, minimum and other levels.

6. Lack of misuse of Material: Under this system, effective

control on issue of material is possible, thus misuse of material can be avoided.

7. Moral Check on Stores staff: Due to continuous

checking, this system serves as a moral check on the stores staff. They are

discouraged from

committing dishonesty.8. Loss of stock due to obsolescence: It is detected at an

early stage and so timely action can be taken to prevent recurrence.

THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF

CONTROL

Most manufacturing firms find themselves confronted with virtually thousands of

different inventory items. Most of these items are relatively inexpensive, while

other items

are quite expensive and account for a large portion of the firms investment. Some

inventory

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

average

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

will

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

require

more intensive control.

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

The C group will consist of a large number of items of inventory accounting for

smallinvestment.

The A items require intensive inventory control and most sophisticated inventory

control

techniques should be applied to these items.

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

can be


22/43

viewed less frequently than A items.

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

large

quantities in order to obtain them at the lowest price.

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

applied. Certain

items of inventory may be inexpensive but may be critical to the product in process

and

cannot be easily obtained. Therefore, they may require special attention.

These types of items must be treated as A class items even though, using the

broad

framework, they would be B or C class items.

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

degree of

inventory control efforts required to expand each item of inventory.The following points should be kept in mind for ABC analysis:

(1) Where items can be substituted

for each other, they should be preferably treated as one item.

(2) More emphasis should be given

to the value of consumption and not to price per unit of the item.

(3) All the items consumed by an

organization should be considered together for classifying as A, B or C instead of

taking item as

spare, raw materials, semi-finished and finished items and then classifying as A, B

and C.

There can be more then three classes and the period of consumption need not

necessarily be

one year

Application of ABC Analysis:

ABC analysis can be effectively used in Material Management.

The various stages where it can be applied are:

(1) Information of items which

require higher degree of control.

(2) To evolve useful re-orderingstrategy.

(3) Stock records.

(4) Priority treatment to different

items.

(5) Determination of safety stock

items.


23/43

(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

the

manufacturing sites or stores just few hours before they are put to use. The delivery

of material is

synchronized with the manufacturing cycle and speed. JIT system eliminates the

necessity of

carrying large inventories, and thus, saves carrying and other related costs of

manufacturer. The

system requires perfect understanding and coordination between the manufacturer

and supplier

in terms of the timing of delivery and quality of the material. Poor quality 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

inventory.

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

Cost of Materials Issued

Materials inventory-opening


24/43

+ 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

end.

INVENTORY TURNOVER RATE TECHNIQUE

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

These

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

Raw

material.

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

Finished

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

period/

Inventory Turnover Ratio

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

cost of

production) x 100


25/43

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

Stores/Average Inventory

(iv) Inventory Performance Index = (Actual Material Turnover Ratio/ Standard

Material Turnover Ratio) x 100

These ratios provide a broad framework for the control and provide the basis for

future

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

when

Inventory levels are going to be high. Even if it appears from the ratio that the

levels are too

high there might be a perfectly good reason why the level of Inventory is being

maintained.

The ratios also indicate the situation and trend. However, the limitation of ratios

should be

kept in mind. They are not an end themselves, but only tools of sound InventoryManagement.

FINANCIAL MANAGERS ROLE IN INVENTORY MANAGEMENT

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

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

responsibility

for Inventory management lies with the inventory manager, the financial manager

must also

be concerned with all types of inventories- raw materials, work-in-progress and

finished

goods. He must monitor Inventory levels and see that only an optimum amount is

invested in

Inventory. He should be familiar with the Inventory control techniques and ensure

that

Inventory is managed well.

He should try to resolve the conflicting view points of all the departments in order

to have

efficient inventory management. He has to act as a careful inspector levels. He

should

introduce the policies which reduce the lead time, regulate usage and thus,minimize safety

stock. All these techniques of Inventory management lead to the goal of wealth

maximization.

VALUATION OF INVENTORIES

OBJECTIVE:


26/43

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

which

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

recognized.

This statement deals with the determination of such value, including the

ascertainment of

cost of inventories and any write-down thereof to net realizable value.

1. This statement should be applied in accounting for inventories other than:

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

service

contracts.

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

providers.

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

(d) 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.

DEFINITIONS

The following terms are used in this statement with the meanings specified:

Inventories are assets:

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

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

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

or in the rendering of services.1. Inventories encompass goods purchased and held for resale, for example,

merchandise

purchased by a retailer and held for resale, computer software held for resale, or

land and

other property held for resale. Inventories also encompass finished goods

produced, or workin-


27/43

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

supplies,

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

not

include machinery spares which can be used only in connection with an item of

fixed asset

and whose use is expected to be irregular; such machinery spares are accounted for

in

accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.

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

3. Cost of Inventories

The cost of inventories should comprise all costs of purchase, costs of conversion

and other

costs incurred in bringing the inventories to their present location and condition.

4. Costs of 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

purchase.

5. Costs of Conversion

The costs of conversion of inventories include costs directly related to the units of

production, such as direct labour. They also include a systematic allocation of

fixed and

variable production overheads that are incurred in converting materials into

finished goods.

Fixed production overheads are those indirect costs of production that remain

relatively

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

maintenance of

factory buildings and the cost of factory management and administration. 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


28/43

conversion is on based on the normal capacity of the production facilities. Normal

capacity is

the production expected to be achieved on an average over a number of periods or

seasons

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

planned

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

capacity.

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

not

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

are

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

abnormally

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

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

production

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

the

production facilities.

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

simultaneously.

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

main

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

separately

identifiable, they are allocated between the products on a rational and consistent

basis. The

allocation may be based, for example, on the relative sales value of each product

either at the

stage in the production process when the products become separately identifiable,

or at the

completion of production. Most by- products as well as scrap or waste materials,by their

nature, are immaterial. When this is the case, they are often measured at net

realizable value

and this value is deducted from the cost of the main product. As a result, the

carrying amount

of the main product is not materially different from its cost.


29/43

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

are incurred

in bringing the inventories to their present location and condition. For example, it

may be

appropriate to include overheads other than production overheads or the costs of

designing

product for specific customers in the cost of inventories.

9. Interest and other borrowing costs are usually considered as not relating to

bringing the

inventories to their present location and condition and are, therefore, usually not

included in

the cost of inventories.

10. Exclusions from the cost of Inventories

In determining the cost of inventories in accordance with paragraph 3. It is

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

are

incurred. Examples of such costs are;

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

2. Storage costs, unless those costs are necessary in the production process prior to

a further

production stage.

3. Administrative overheads that do not contribute to bringing the inventories to

their

present location and condition, and

4. Selling and distribution costs.

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

goods or

services produced and segregated for specific projects should be assigned by

specific

identification of their individual costs.

12. Specific identification of cost means that specific costs are attributed to identify

items of

inventory. This is an appropriate treatment for items that are segregated for 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


30/43

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

predetermined

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

ascertaining

the items that remain in inventories.

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

assigned

by using the first-in, first-out (FIFO), or weighted average cost formula. The

formula used

should reflect the fairest possible approximation to the cost incurred in bringing the

items of

inventory to their present location and condition.

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

than those for

which specific identification of individual costs is appropriate. The formula used 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

produced

first are consumed or sold first, and consequently the items remaining in inventory

at the end

of the period are those most recently purchased or produced. Under the weighted

average

costs formula, the cost of each item is determined from the weighted average of the

cost of

similar items at the beginning of a period and the cost of similar items purchased or

produced

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

additional

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

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


31/43


32/43

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

available at the

time the estimates are made as to the amount the inventories are expected to

realize. These

estimates take into consideration fluctuations of price or cost directly relating to

events

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

conditions

existing at the balance sheet date.

20. Estimates or net realizable value also take into consideration the purpose for

which the

inventory is held. For example, the net realizable value of the quantity of inventory

held to

satisfy firm sales or service contracts is based on the contract price. If the sales

contracts 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

principles

enunciated in Accounting Standard (A.S) 4, contingencies and events occurring

after the

balance sheet date.

21. Materials and other supplies held for use in the production of inventories are

not written

down below cost if the finished products in which they will be incorporated are

expected to

be sold at or above cost. However, when there has been a decline in the price of

materials and

it is estimated that the cost of the finished products will exceed net realizable

value, the

materials are written down to net realizable value. In such circumstances, the

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,


33/43

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

the

enterprise.

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

inventories

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

Common

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

finished

goods, stores, spares and loose tools.

DATA

COLLECTIO

N

DATA COLLECTION

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

for

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

the

company .For the daily information about the items We show the MRN, ledger

register and

daily issue slip of materials the purchase register and other documentary evidence

used for

the findings.

In the analysis of inventory the secondary data are not sufficient .then We collect

primary

data.

PRIMARY DATA

Primary data are those data that are originated very first time or

fresh data .with the help of primary data formulated the research objectives.

Primary data

are the accurate attainable reliable and useful data.1. Inventory control techniques used by the company

2. Inventory systems as perpetual and periodic systems.

3. Stock levels etc.

4. Companies website

FINANCIAL

STATEMENTS


34/43

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

Domestic

Sales 9102.1 7501.0 6304.7 5161.1 4766.3

International

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

Expenditure

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

Selling,

general and

administrative

expenses

3127.1 2054.0 1426.7 1313.3 1153.3

Total

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

Minority

Interest 7.8 -17.7 4.0 0.00 0.00

PAT after

share of

profit / loss


35/43

in associate

and minority

interest

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 -

2595.00

-

786.68

-

1122.8

0

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

year

1364.9 375.70 227.45 106.27

Financial Ratios

Ratio FY

2006FY

2005

FY

2004

FY

2003


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FY

2002

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

TURNOVER RATIOS

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

DATA ANALYSIS

AND

INTERPRETATIO

N

INVENTORY TURN OVER RATIOTotal

sales

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


37/43

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-


Investment on inventories = 110 million

Turn over ratio = 620/ 110

= 5.63

Inventory turn ratio in year 2004


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

Years

VALUE UNDER FIFO METHOD -

645

670

720615

Date Qty Cost Value Qty Cost Value Qty Cost Value

Jan

1 1000

0

2.10 21000


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9 1000 2.21 2210 1100

0

- 23210

12 2000 2.10 4200 9000 - 19010

27 1000 2.31 2310 1000

0

- 21320

Feb

10 4000 2.10 8400 6000 - 12920

16 2000 2.41 4820 8000 - 17740

March

3 2000 2.41 4820 1000

0

- 22560

17 4000 2.10 8400 6000 - 1416029 4000 2.29 9160 1000

0

- 23320

Apr

4 2000 2.14 4280 1200

0

- 27600

18 4000 @ 9340 6000

0

- 18260

23 2000 2.04 4080 1000

0

- 22340

May

12 1000 2.40 2400 9000 - 19940

24 3000 2.00 6000 1200

0

- 25940

Jun10 1000 2.40 2400 1100

0

- 23540

30 2000 2.02 4040 1300

0

- 27580


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Total 1900

0

2.19 4170

0

1600

0

- 3514

0

Where @ is 1000 2.21 2210

1000 2.31 2310

2000 2.41 4820

Total 4000 - 9340

Interpretation -

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

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

received

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

February

16 ,2000 units at rs 2.41. the 1000 each issued on May 12 and June 10 are 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

receipts.

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.

The

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

DETERMINATION OF STOCK LEVELS

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

Quantity

= 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 .

PROBLEMS

AND

SUGGESTIO

NS

PROBLEMS FACED BY THE ORGANITION

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

department.

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

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

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

company.

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.

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

employeescould not left the organization.

CONCLUSIO

N

CONCLUSION

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

progress

and finished goods. Inventories facilitate smooth production and sales operation

(transaction

motive), to guard against the risk of unpredictable changes in usage rate and

delivery time

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

motive ).

Inventories represent investment of a 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

inventory

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

inventories.

BIBLIOGRAPHY

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

Invent Mgmt

Documents

Transcript of Invent Mgmt

Invent CHE 100

INVENT CLUB

Invent AFRL

Opportunity of the Century! Distance Educationethixglobal.com/mku.pdf · Financial Mgmt. / Marketing Mgmt. HR Mgmt./International Business Mgmt./ Tourism & Hotel Mgmt/ Hospital Mgmt./Operations

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