inventory management report

Inventory ManagementJUGIEL CALDERA VILLONES

Chapter Overview

BUSINESS

CASH

INVENTORY

RECIEVABLE

What is Inventory Management?• In business, the inventory may be defined as

the goods held for sale in the ordinary course of business or the goods that are used to manufacture goods to be sold. Inventories usually make up a large part of the total current assets of a company.

• The proper reporting and accounting of inventory increase the usefulness of financial statements for potential and actual investors. Merchandising and manufacturing companies maintain and report inventories differently.

• The objective of inventory management is to strike a balance between inventory investment and customer service.

Forms of Business Ogranization1. Sole Proprietorship• Owned by one person only.• Owner is called “PROPRIETOR” or

“PROPRIETRESS”2. Partnership• Owned by two or more persons• Owner is called “PARTNERS”

3. Corporation• Owned by five or more persons• Owner is called “CORPORATOR”• Stock Corporation• Owner is called “Stockholder”

• Non-Stock Corporation• Member

Types of Business Ogranization1. Service Concern• Those that render services to earn income.• Inventory account will only be for the supplies.

• Buy and record it thier books of accounts• Post correspondingly in thier stock card

2. Trading Concern• Income is generated through selling merchandise.• Inventory accounts

• Supplies• Same as Control mechanism as the service concern.

• Merchandise Inventory• Those items that the company purchased and intended for sale to its

customers• Costing of inventory accounts for financial reporting (Cost of every

merchandise)• FIFO method of inventory costing against LIFO

• Reasons: two generations of consumers• Those who can afford to buy regardless of the price• Those who cannot afford to buy the new arrivals and will wait

for the sale items.

Types of Business Ogranization3. Service Concern• Those that convert raw materials into finished

products.• Inventory accounts• Raw materials inventory• Materials purchased and use for production.

• Work in process inventory• Partially finished products at the end of the

month• Finished goods inventory• Finished products and ready to be sold.

Role in Managing Inventory

GOODS AVAILABLE FOR SALE

BEGINNING INVENTORY

ENDING INVENTORY(BALANCE SHEET)

PURCHASES

COST OF GOODS SOLD

(INCOME STATEMENT

Why do we have to manage inventory?

1. Under-Stocking• Missed deliveries• Lost sales• Unsatisfied customers• Production bottlenecks and worst, work stoppage

2. Overstocking• Holding cost might be too high• Funds could have been used for a more productive

venture thus improving operating performance

Major concerns1. Timing of order2. Size of Order

How to effectively manage inventory?1. A system to keep track of the inventory on hand and

on order2. Reliable forecast of demands3. Knowledge of lead time4. Resonable estimates of inventory holding cost,

ordering cost and shortage cost5. Classification system for inventory items

Beginning Inventoryis the recorded cost of inventory in a company's accounting records at the start of an accounting period. The beginning inventory is the recorded cost of inventory at the end of the immediately preceding accounting period, which then carries forward into the start of the next accounting period.

• Merchandise, raw materials and supplies are enough until the next delivery

• Estimate of the lead time (based oncompany’s past experience)• traffic condition• Supplier’s culture• Distance of suppliers warehouse to the company

warehouse.

Purchases refers to a business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.The Supplier

• Accredited supplier selected by a committee or the audit committee• To protect interest of the company• Quality of merchandise, supplies or raw materials must comes first

with the least price or beneficial to the company.

The Freight Charges• is a price at which a certain cargo is delivered from one point to

another. The price depends on the form of the cargo, the mode of transport (truck, ship, train, aircraft), the weight of the cargo, and the distance to the delivery destination.

• F.O.B. destination• FOB is only used in non-containerized Sea Freight and stands for

"Free On Board".• Merchandise will be delivered from the seller’s warehouse to the

buyer’s warehouse free of charge.• Ownership of the merchandise will only be part of the buyers

inventory if the delivery of the merchandise will be made successful.

Purchases • F.O.B. Shipping point

• Supplier will deliver the merchandise inventory from the supplier’s warehouse to the shipping point only (Pier or Airport).

• Ownership of the merchandise for supplier to buyer, happens when the supplier delivers the merchandise to the shipping point.

• Problems with the number of counting days the merchandise can be sold• Solution:

• The sales force must be smart enough to start selling even if the merchandise has not arrived yet.

• CIF (Cost, Insurance, Freight) • Buyer will pay the lump sum amount of goods, insurance and

freight charges.• CF – Cost of goods sold and freight charges. Buyer will pay the

lump sum amount of goods and freight charges.• FAS (free alongside

• Seller bears all the expenses and risks involved in delivering the goods to the dock next to or alongside.

• Buyer will shoulder the expenses the cost of loading and shipment as the buyer takes possession of the goods when the carrier takes possession of the goods.

• Ex-Ship• The seller bears all the expenses and risks until the goods are

unloaded at the time title and risks loss shall pass to the buyer.

Total Goods Available for sale• Total goods for sale is your beginning inventory plus your net

purchases.• Too much goods in the warehouse might result in over investment.

Over investment can result to looses on the part of the company because it that investment in the company could have been invested in other productive activity.

• Must be well coordinated with the marketing department’s capabilities to dispose the inventory since it is the part of the company’s account receivables.

• Analysis of your total goods for sale you also have to see to your accounts receivable on probability of uncollected accounts.

REIL CORPORATION Comparative Statements of Financial Position

December 31, 2015 and 2014

2015 2014

Assets

Current Assets

Cash & Cash Equivalent

106,789 102,375

Trade & Other Receivables

327,611 277,467

Inventory 334,863 297,654

Prepaid Expenses 101,565 114,813

Total Current Assets

870,828 792,309

Non Current Assets

Property, Plant & Equipment

135,754 166,481

Intangibles 7,500 7,500

Total Noncurrent Assets

143,254 173,981

Total Assets 1,014,082 966,290

Liabilities and Shareholder’s Equity

Current Liabilities

Trade & Other Liabilities 238,000 208,703

Unearned Revenues 107,508 82,456

Notes Payable – current 45,000 45,000

Total Current Liabilities 390,508 336,159

Non-Current Liabilities

Notes Payable –non current 208,422 105,000Total Liabilities 598,930 589,659Shareholders’ Equity

Preference share, P100 par 105,000 105,000

Ordinary Shares, P1 par 15,000 15,000

Premium on Ordinary Shares 135,000 135,000

Total paid-in-capital 255,000 255,000

Retained Earnings 160,152 121,631

Total Shareholders’ Equity 415,152 376,631

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY 1,014,082 966,290

2015 2014

Sales 3,007,887 2,732,712

Less: Cost of good sold 2,208,520 1,964,865

Gross Profit 799,367 767,847

Less: Selling Expenses 372,000 345,000

Administrative Expenses 207,000 213,000

Total Operating Expenses 579,000 558,000

Operating Income 220,367 209,847

Less: Interest Income 41,860 43,905

Net Income before taxes 278,507 165,942

Less: Income taxes 62,477 58,080

Net Income after taxes 116,030 107,862

Company Income increased by 7.04%

REIL CORPORATION Comparative Statements of Financial Position

December 31, 2015 and 2014

Merchandise Turnover• Cost of Good Sold, Average Merchandise Inventory• The number of times average inventory was disposed of during the

accounting period. It also signifies the over or under investment of the firm in their inventories

Cost of goods Sold - The direct costs attributable to the production of the goods sold by a company.

Average Merchandise Inventory - The average is found by adding the beginning cost inventory for each month plus the ending cost inventory for the last month in the period.

Inventory Turnover - is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the Cost of goods sold divided by the

average inventory.Example:

Cost of goods Sold - 2,208,520

÷ Ave. Merchandise Inventory - (334,863 + 297,654) / 2 = 316,259 Inventory Turnover 6.98 or 7 times.

* Riel Corporation is able to dispose of their inventory 6.98 times or 7 times a year

Number of days in inventory• 365 days or 360 days/ Inventory turnover• Indicates the number of days by which inventories are used or sold. • Implies the firm’s efficiency in consuming inventories.

Example: Number of Days in a year - 365 days

÷ Inventory turnover - 7 times No. of Days in inventory 52.14 or 52 days

• Riel corporation is able to sell their products in about 52 days.• If products of Riel Corporation is considered as fast moving merchandise then the sales person

or sales representative are slow movers.

Questions to answer why there is a slow movement of merchandise?

1. Is our Merchandise Competitive?2. Is our Merchandise Substandard?3. Is Our Location Strategic?4. Are we giving competitive remuneration to our sales persons?5. Are we giving the right training to our sales persons?6. Are we hiring to right persons for the position?

Merchandise Inventory, end.

• Merchandise that was left unsold ate the end of the year as reflected in the balance sheet.• It must be reported to the BIR 30 days after the end of the company’s accounting period.

Merchandise owned by the businessenterprise and are for sale:

Merchandise not owned by the business enterprise but in its physical possession• Goods on consignment – another company will display its product for sale in another

company.• Freight and handling charges on such consigned goods will be part of the cost of the

consigned goods.• Sold goods will be reported and the consignor will receive sales commission.

Purchase Commitment• Obligations of the company to procure merchandise inventory in the future which are

already fixed by a contract considering the price and quantity.• A purchase commitment is a firm commitment to acquire goods or services from a

supplier. Companies enter into purchase commitments in order to lock in a particular price, and sometimes also to lock in the production capacity of a supplier, which can be used as a defensive tool to keep competitors from using the production capacity.

• Documented with a purchase order containing the number of items and price.

Cost of Goods Sold1. Merchandise Inventory, Beginning – inventory at the end

of the last accounting period. All the merchandise left from the last accounting peroid.

2. Purchases - business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise

3. Freight in –freight charges recognized by the company resulting from the freight agreement of FOB Shipping point.

4. Purchase Discount – discount availed of by the company by paying early.

5. Purchase Returns and Allowance – account for purchases returned to the supplier.

2015 2014

Sales 3,007,887 2,732,712

Less: Cost of good sold 2,208,520 1,964,865

Gross Profit 799,367 767,847

Less: Selling Expenses 372,000 345,000

Administrative Expenses 207,000 213,000

Total Operating Expenses 579,000 558,000

Operating Income 220,367 209,847

Less: Interest Income 41,860 43,905

Net Income before taxes 278,507 165,942

Less: Income taxes 62,477 58,080

Net Income after taxes 116,030 107,862

Sales 3,007,887 - 100%Cost of sales 2,208,520 - 73%Gross 799,367 - 23%

• Every P1 sale is P0.73. • So the higher the cost, the lower the gross income

How to control the cost of sales• Monitor the price of your merchandise see if it fits your budget• Monitor the quality of the merchandise that you’ve got.

Who handles the Inventory?

1. Purchaser - staff that procures the quality inventory2. Warehouseman – staff that receives merchandise and safekeeping.

- issues merchandise to the store if needed.3. Stock Deck Clerk – an accounting clerk, who records the receipt and

issuances made by the warehousemen - recording is on per item using a subsidiary ledger of the

bookeeper’s control.4. Bookkeeper – records the purchases made by the purchaser as recevied by

the warehousemen.- recording is per supplier with no details (details are on the

Stock Card)

5. Auditor - staff that checks the inventory in the warehouse its documents that support the purchases, books where transaction were recorded and summarized in the financial statements

Documents and Forms Evidence to Inventory

1. Stock Card

1/12


2. Materials Receiving Report (MRR)


3. Materials Issuance Slip (MIS)


4. Purchase Order- Used and serves as an authority of the purchaser to purchase Merchandise based on the canvass sheet.


4. Canvass Sheet –survey of the prices of the merchandise which the company would like to purchase.


4. Bin Card – Maintenance card placed where the merchandise was placed.

How are these inventory cost? FIFO – (First-In-First-Out)

– Preferred method by the Accounting Standard Council.

Application of FIFO Jan 5 - Ordered 100 cans of quart of paint

from Quebec Hardware Jan 10 - Received the order from Quebec

Hardware Jan 12 - Issued 80 cans of quart size to the

Factory Jan 13 - ordered 50 cans of quart size paint

from High Hardware Jan 15 - Received the Order from High


factory

1/12

40

30

35

How are these inventory cost? LIFO – (Last-In-First-Out) – Used because of the changed of behavior of the consuming public.

Application of LIFO Jan 5 - Ordered 100 cans of quart of paint





Hardware Jan 16 - Issued 30 cans of quart size paint to the

factory

30

20

10 30 900 20 30 600 20 35 700

How are these inventory cost? Weighted Average – getting the average cost of the materials

received and for those cost will be the basis for those issued

Application of Weighted Average Jan 5 - Ordered 100 cans of quart of paint






factory

30

20

10 30 33.57

1,007.10 20 30 600 40 33.57 1,342.90

70 33.57 2,350

For Example:Quantity Amount

Jan 12 20 P 600Add: Jan 15 receipt 50 1,750

70 P 2,350So, P2,350/70 = P 33.57

The balance on Jan. 16 Jan. 12 Balance 70 P2,350Add: Jan 15 Receipt 30 1,007.10Difference 40 P 1,342.90

What will be the accounting treatment for returns & allowances

1. Internal Returns – returns coming from the factory

For Example Jan 5 - Ordered 100 cans of quart of paint




from High Hardware Jan 14 - Returned 5 quarts to the factory Jan 15 - Received the Order from High


factory

No intervening issues based upon the price of the merchandise


1. Internal Returns – returns coming from the factory

For Example Jan 5 - Ordered 100 cans of quart of paint






factory Jan 17 - Returned 5 quarts to the factory

Note: With intervening issues as to the difference of unit cost from the issuance of returns , then the return will be treated as a new purchases and will oocupy a different inventory order


1. Purchase returns – Returning merchandise or materials to the supplier

For Example Jan 5 - Ordered 100 cans of quart

of paint from Quebec Hardware

Jan 10 - Received the order from Quebec Hardware

Jan 12 - Issued 80 cans of quart size to the Factory

Jan 13 - ordered 50 cans of quart size paint from High Hardware

Jan 15 - Received the Order from High Hardware

Jan 16 - Issued 30 cans of quart size paint to the factory

Jan 17 - Returned 5 quarts to the supplierNote:

The Purchase return was shown in the issuance column and therefore will reduce the inventory of the said item.

Quantitative models for Planning and Control

1. Forecast the demand for the next month2. Determine the lead time3. Plan usage of the lead time4. Establish quantity on hand5. Place units on order6. Safety stock requirement

Raw materials are not just purchased any time, it is being planned. The following factors must be considered:

The Economic Order Quantity (EOQ)- economical order of raw materials that the company can make.

Factors that will affect the most economical purchases:1. Annual Procurement Units – requirements of the company in terms of units for

a specific raw materials. Analysis of the past year data.

2. Cost per Order – the cost incurred if the company will purchase raw materials. Driven by the number of orders placed during the year but not the size of the order.

For examplea. Clerical cost of Orderingb. Handling and Transportation charges

3. Cost per unit of materials - unit price of the raw materials.For example

a. Unit price at gross (Without discount)b. The unit price at net (With discount)

4. Carrying cost – incurred by the company for maintaining inventory in the warehouse.

For example:A. Storage cost, Property taxes, Insurance and interest on the funds invested in the

inventories.Formula for computing EOQ will be:

E = 2QP C

where E = Economic Order QuantityQ= Represents the annual quantity usedP = Cost of placing an orderC= Annual carrying cost

√

For example:A. Assuming that Milano Company have the following information relating to the purchasing of raw materials:

Q = 5,000 P=P10.00/Order C= P0.80

E = 2(5,000) (10) 0.80

= 100,000 0.80

= 125,000

E = 353.55 or 354 units

√√√

EOQEconomic Order

Quantity

ReOrder Point (ROP)* When to place order to initiate production upon the depleted stocks

I. Constant Usage during Lead Time - based on the premise that raw materials are used evenly or uniformly throughout the period.

Variables:a. EOQ – Most economical orderb. Lead Time – time the order was placed up to the time the order will be

received.c. Ave. Daily or weekly usage (ADU) – average usage of raw materials based on

thier past experience.The Formula

ROP = (LT) (ADU)For Example:

Assuming that the average daily usage of our above mentioned example in EOQ is 15 units and the lead time is 2 weeks. The Reorder Point will be: ROP = (2) (15)

ROP = 30 units

2 weeks lead time

1st block 2nd block 3rd blockEOQ 350 units

Reorder point 30 units

II. Variable Usage during Lead TimeOne method for determining the correct reorder point for inventory items or

the lead time for producing a given item.For example:

Assuming that the average daily usage of our above mentioned example in EOQ is 15 units and the lead time is 2 weeks and a safety stock of 20 units.

The Reorder point therefore will be:

ROP = (LT) (ADU) + SS= (2) (15) + 20= 30 + 20 = 50 units

2 weeks lead time

1st block 2nd block 3rd blockEOQ 350 units

Reorder point 30 units

Allowance for variability of use of raw materials

Safety stocks 20 units

Thank you! Jill Nightraid

“Being properly prepared is one of the biggest assets in business.”

-Keeth Smart