I NVENTORY - In company accounts, inventory usually refers to the value of stocks, as distinct from fixed assets. An inventory would include items which are held for sale in the ordinary course of business or which are in the process of production for the purpose of sale, or which are to be used in the production of goods or services which will be for sale.

NATURE OF INVENTORY- In manufacturing concern, it may includes raw materials, work in progress etc.Inventory includes the following things:

RAW MATERIAL- Raw material form a major input into the organization. The quantity of raw materials required will be determined by the rate of consumption and time required for replenishing the supplies.

WORK- IN- PROGRESS-The work in progress is that stage of stocks which are in between raw material and finished goods. The greater the time taken in manufacturing, the more will be the amount of work in progress.

CONSUMABLE GOODS- These are the materials which are needed to smoothen the process of production.

FINISHED GOODS- These are the goods which are ready for the consumers. The purpose of maintaining inventory is to ensure proper supply of goods to customers.

PURPOSE OF HOLDING INVENTORIES- Generally speaking, there are tree main motives of holding inventories:

The Transaction Motive – Which facilitates continous production and timely execution of sales orders.

The Precautionary Motive- Which necessitates the holding of inventories for meeting unpredictable changes in demand & supply.

The Speculative Motive- which includes to keep inventories for taking advantage of price fluctuations, saving in re-ordering costs & quantity discounts etc.

INVENTORY MANAGEMENT

The inventory management is done to keep the stocks in such a way that neither there is a over-stocking nor under-stocking. the over stocking will mean a reduction of liquidity and starving of other production process; under stocking, on the other hand, will result in stoppage of work. The investments in inventories should be kept in limit.

OBJECTIVES OF INVENTORY MANAGEMENT

To ensure proper supply of materials spares & finished goods so that production should not suffer at any time & the consumer demand should also be met.

To avoid both over-stocking & under stocking of inventory.

To keep material cost under control so that they contribute in reducing cost of production and overall costs.

To minimize losses through wastage & damages.

To ensure right quality of goods at reasonable prices. Suitable quality standards will ensure proper quality of stock.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

Effective Inventory Management requires an effective control system. The following are the important tools & techniques of inventory management & control:

1. Determination of stock levels – An efficient inventory management requires that a firm should maintain an optimum level of inventory where costs are minimum & at the same time there is no stock-out which may result in loss or stoppage of production.

2. Determination of safety stocks- The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for materials may fluctuate and delivery may also be delayed in such situation firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of concern. In order to protect against the stock out arising out of usage fluctuations, firm usually maintains some margin of safety or safety stocks.

3. Ordering system of inventory- The basic problem is to decide the re-order point. This point indicates when an order should be placed. The re order point is determine with the help of these things: a) average consumption rate, b) duration of lead time, c) economic order quantity.

4. Economic order quantity- A decision about how much to order has a great significance in inventory management. Economic order quantity is the size of lot to be purchased which is economically viable. This is the quantity of materials which can be purchased at minimum costs.

5. Inventory turnover ratio- Inventory turn over ratios is calculated to indicate whether inventories have been used efficiently or not.

Inventory turnover ratio = cost of goods sold/Average

Inventory at cost

VALUATION OF INVENTORIES

The value of materials has a direct bearing on the income of a concern, so it is necessary that a method of pricing materials should be such that it gives a realistic value of stock. The following methods for pricing materials issue are generally used:

1. First in first out (FIFO) method- In first in first out method the materials received first are issued first. The materials are issued in chronological order. The recently received materials remain in stock. Whenever a requisition for material issue is presented to store keeper he will use the price of first lot then, of second & then of third.

2. Last in First out (LIFO) - In Last in first out method the last received materials are issued first. Last in first out method is suitable during rising prices because goods will be issued from the latest received lots which are closely related to current market prices. The current cost will also be matched to current income.

3. Average cost method- In Average cost method of pricing all materials in stock are so mixed that a price based on all lots is formed. Average cost may be of two types:

(a) Simple average cost: In this method the prices of all lots in stock are averaged and then materials are issued on that average price, for ex,three lots of materials are in stock and prices per unit of these lots are Rs,2, Rs3 & Rs4 of first, second & third respectively; then the prices will be :

(2+3+4)/3 = Rs 3. Though this is a simple method of pricing but particularly this method does not give good results.

(B) Weighted Average Method- In this method the total cost of all materials is divided by total of number of items in stock. The price calculated in this

way will be used for issue of materials up to the time a fresh purchase has not been made. After a purchase, the quantity will be added to the earlier balance quantity and material cost will be added to the earlier cost. A fresh price is calculated by dividing the changed total cost by the number of units in stock after the purchase. A new price is calculated where ever a fresh purchase is made.

4. Base Stock Method- In this method some quantity of material is assumed to be necessary for keeping the concern going. The quantity is not issued unless otherwise there is an emergency. This material which is not issued as is kept in stock is known as base stock. The earlier material received are kept as a base and are valued at the price on which they were acquired.

5. Standard Price Method- The price of materials is predetermined or

estimated in this method. The standard price is based on market conditions, usage rate, handling facilities, storage facilities etc. The materials are priced at standard price irrespective of price paid for various purchases.

6. Market Price Method- In this method the prices charged to the production are not cost incurred on the materials but the latest market prices. The market prices may either be replacement prices or realisable prices. The replacement prices are used for the materials which are kept in stock for use in production and realisable prices are used for the goods kept for resale.