The inventory includes the following :
Stock of raw materials: It means that the value of the raw materials stored for the purpose of production in the storage yard. The stock of raw materials can be classified normally into two categories viz opening stock and closing stock of raw Working Capital Management materials.
Stock of work in progress: During the production process, the firm usually stores
the semi finished goods which are neither a raw materials nor finished goods. Thepurpose of the storage of work in progress in order to shorten the time duration to manufacture the finished goods. The value of the semi finished / work in progress stored in the storage house may be classified into two categories viz opening stock and closing stock. The finalizing the value of the stock of the work in progress is inevitable process in transfer pricing. The value of the work in progress normally expressed in two different ways viz on the basis of prime cost and works cost.
Stock of finished goods: This is the stage at which the goods are readily available for selling in the market. The value of the stock of the goods is computed on the basis of cost of production.
Why inventory is to be controlled ?
The ultimate purpose of controlling the inventory arises only due to the conflicting and
heterogeneous objectives of the various functional departments of the organizations. How inventory influences the various department of the organization ?
Normally, the inventory influences on the following departments viz Production Purchase,
Finance and Sales department How it influences the various departments at a time
On/of the Production department: The manager production frequently insists the organisation to maintain the continuous and uninterrupted supply to have smooth flow production. This requires the production manager to build ample stock of raw materials. This is routed through the purchase requisition by the manager production to the purchase manager.
Major Benefits of Inventory Control
It leads to effective utilization of funds only through an appropriate investment on
It facilitates to obtain the economic supply of raw materials
It possess the firm comfortably to meet the needs and wants of the consumers in
It neither allows the firm to undergo the practices of overstocking nor understocking.
It leads to effectiveness in the material handing which reduces the wastage, pilferage
and so on.
Before discussing the methods of inventory control, every one must obviously understand
the organization of the stores department. The stores department is the only department
which applies all the techniques of inventory control.
The organization of the inventory control are various in dimensions . The organization of
differs from one industry to another industry, one firm to another within the same industry,
from one nature to another, from volume to another. They are as follows:
a) Centralised stores
b) Decentralised stores
c) Central and Sub stores
Centralised Stores
Under this type, the materials are received by and issued at one central place by the
department to the requirements of the other functional departments. The following diagram will facilitate to understand the organisation structure of the centralized stores of the manufacturing department. The materials are continuously received by the stores dept. through the purchase department and the received material are distributed to the various assisting departments.
Decentralised Stores
Under this method, the separate stores are maintained by the departments on their own as well as run by the exclusive store keeper. It ensures the smooth flow material to the tune of requirements and reduces the time involved in the transit of materials from the stores to the respective departments. The following diagram will facilitate to have an insight on the organization of the stores.
Central stores and Sub stores
This is a method which attempts to discard the bottlenecks of the above mentioned as well as brings forth unique organization of stores. Under this method, each department is given separate sub store which is within easier access and shorter in distance to supply the material requirements through the store keeper. The sub store keeper should have to make requisition to central stores where all the materials are centrally procured and supplied then and there to the tune of the individual departments.
The role of the store keeper is most inevitable in controlling the stores. While controlling the stores, the store keeper should neither disturb the production process nor undergo the practices of overstocking. By earmarking the above enlisted objectives, every store keeper is led by the various methods of inventory valuation in addition to various methods of requisitioning of material.
Reordering Level
This is the level at which the firm should go for fresh purchase requisition of material
through the store keeper to meet the requirements. The reordering level which takes
into consideration of minimum level of consumption of raw material during the course of
production process as well as the amount material required by the firm during period of
purchase and goods in transit immediately after the order.
Minimum Level/Safety level
The firm should at always maintain minimum amount of material in its hands to facilitate
the flow of production process as unaffected .due to short fall in the quantum of materials.
The following points are most important in designing the minimum level of stock:
l Lead time should be predominantly considered to determine the time lag in between
the materials ordered and received. The firm should find out the practical difficulty
of the vendor in supplying the material for the determination for minimum level of
l Amount of consumption of the material during the lead time
Minimum stock level=Reordering level- (Normal level consumption × Normal Reorder
Minimum level = Reorder level + (Average level of consumption × Average Reorder
Average and normal level of consumption are synonymous with each other. If normal or
average consumption is not given, the formula is as follows
Maximum Level
This is the level at which the firm holds maximum quantity of materials as stock during
the process. The ultimate aim of fixing the level of maximum level is that to avoid the
overstocking. If the stock level of the firm exceeds the maximum level already fixed is
known as overstocking level of the firm, more than the requirement.
Why over stocking is considered not advisable ?
l It leads to excessive investment on inventory more than the requirement
l It leads to unnecessary wastage of the materials due to excessive stock
l The excessive storage of materials may certainly affect the price of the product
Maximum stock level= Reordering level+ Reordering quantity - (Minimum consumption
× Minimum Reordering period)
Danger level
At this level, the firm should not further issue any materials to the various functional
departments .At the danger level, the purchase department is vested with greater
responsibility to immediately arrange the supply of raw materials in order to maintain the
flow of production as uninterrupted.
The consumption level of the materials is getting varied from one time period to another.
During the specified period , there may be maximum consumption and minimum
consumption, which should be averaged to find the mid point in between the two, in
order to either fulfill the minimum consumption or maximum consumption to the extent
possible. Why the maximum reorder period is taken into consideration?
The purpose of considering is that the greater period taken by the supplier to supply the
required materials
Danger Level= Average consumption × Maximum reorder period
Economic Ordering Quantity
The ordering of materials usually tagged with three different component of costs viz:
Acquisition cost of materials
Ordering cost of materials
Carrying cost of materials
The ordering quantity of materials may be either larger or meager in volume, which
carries its own advantages and disadvantages.
If the quantity ordered is larger in volume, the following are some of the important
The bulk purchase order reduces the ordering cost of the materials. The greater
the size of the order which leads to reduce the number of the orders in procuring
the materials.
Quantity discounts: The discount can be classified into two categories viz Trade
discount and Cash discount .
Concept of Receivables Management
The receivables are normally arising out of the credit sales of the firm.
What is meant by the accounts receivable?
It is an asset owed to the firm by the buyer out of the credit sales with the terms and
conditions of repayment on an agreed time period.
Meaning of the receivables management: The receivables out of the credit sales
crunch the availability of the resources to meet the day today requirements. The acute
competition requires the firm to sustain among the other competitors through more volume
of credit sales and in the intention of retaining the existing customers. This requires the
firm to sell more through credit sales only in order to encourage the buyers to grab the
opportunities unlike the other competitors they offer in the market.
Objectives of Accounts Receivables
i) Achieving the growth in the volume of sales
ii) Increasing the volume of profits
iii) Meeting the acute competition
Cost of Maintaining the Accounts Receivables
Capital cost: Due to in sufficient amount of working capital with reference to more
volume of credit sales which drastically affects the existence of the working capital of
the firm. The firm may be required to borrow which may lead to pay certain amount of
interest on the borrowings . The interest which is paid by the firm due to the borrowings
in order to meet the shortage of working capital is known as capital cost of receivables.
Administrative cost: Cost of maintaining the receivables.
Collection cost: Whatever the cost incurred for the collection of the receivables are
known as collection cost.
Defaulting cost: This may arise due to defaulters and the cost is in other words as cost
of bad debts and so on.
The following committees were especially appointed for the purpose to administer the
working capital
i) Dheja Committee Report 1969
ii) Tandon Committee Report 1975
iii) Chore Committee Report 1980
iv) Marathe Committee Report 1984
The various committee report implications are the following:
23.10.1 Dheja Committee Report 1969
"The study carried out on the credit need of the industry and trade and how that needs
inflated and such trends were checked" by the under the chairmanship of Dheja
i) General tendency was found among the firms to avail the bank credit more than
their requirements
ii) Another tendency was among them that the short term credit was generally made
use of by thee for the acquisition of the long term assets
iii) The lending through cash credit should be done on the basis of security in order to
assess the financial position of the firm

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