report on inventory

8/7/2019 Report on Inventory

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INVENTORY

INTRODUCTION

Originates From

The word inventory was first recorded in 1601. The French term inventaire, or "detailedlist of goods," dates back to 1415.

Definition

Inventory is itemized catalog or list of tangible goods or property, or the intangibleattributes or qualities.

or

Inventory is a detailed, itemized list, report, or record of things in one's possession,especially a periodic survey of all goods and materials in stock.

or

Inventory is a list for goods and materials, or those goods and materials themselves, heldavailable in stock by a business. It is also used for a list of the contents of a householdand for a list for testamentary purposes of the possessions of someone who has died. Inaccounting inventory is considered an asset.

Explanation

Inventory is defined as a stock or store of goods. These goods are maintained on hand ator near a business's location so that the firm may meet demand and fulfill its reason forexistence. If the firm is a retail establishment, a customer may look elsewhere to have hisor her needs satisfied if the firm does not have the required item in stock when thecustomer arrives. If the firm is a manufacturer, it must maintain some inventory of rawmaterials and work-in-process in order to keep the factory running. In addition, it mustmaintain some supply of finished goods in order to meet demand.

Sometimes, a firm may keep larger inventory than is necessary to meet demand and keepthe factory running under current conditions of demand. If the firm exists in a volatileenvironment where demand is dynamic (i.e., rises and falls quickly), an on-hand

inventory could be maintained as a buffer against unexpected changes in demand. Thisbuffer inventory also can serve to protect the firm if a supplier fails to deliver at therequired time, or if the supplier's quality is found to be substandard upon inspection,either of which would otherwise leave the firm without the necessary raw materials.Other reasons for maintaining an unnecessarily large inventory include buying to takeadvantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering morein advance of an impending price increase.


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Related Terminologies

Inventoryappears in the definitions of the following terms:

lot

cycle count

level load

standard price variance

accounting concepts

lagging indicators

rate of turnover

material requirements planning (MRP/MRP-I)

floating asset

distributed network model


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USAGE CRITERIA

Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the

foods to be canned, empty cans and their lids (or coils of steel or aluminum forconstructing those components), labels, and anything else (solder, glue, ...) that will formpart of a finished can. The firm's work in process includes those materials from the timeof release to the work floor until they become complete and ready for sale to wholesale orretail customers. This may be vats of prepared food, filled cans not yet labelled or sub-assemblies of food components. It may also include finished cans that are not yetpackaged into cartons or pallets. Its finished good inventory consists of all the filled andlabelled cans of food in its warehouse that it has manufactured and wishes to sell to fooddistributors (wholesalers), to grocery stores (retailers), and even perhaps to consumersthrough arrangements like factory stores and outlet centers.

Logistics or Distribution

The logistics chain includes the owners (wholesalers and retailers), manufacturers' agents,and transportation channels that an item passes through between initial manufacture andfinal purchase by a consumer. At each stage, goods belong (as assets) to the seller untilthe buyer accepts them. Distribution includes four components:

1. Manufacturers' Agents

Distributors who hold and transport a consignment of finished goods for manufacturerswithout ever owning it. Accountants refer to manufacturers' agents' inventory as

"matriel" in order to differentiate it from goods for sale.

2. Transportation

The movement of goods between owners, or between locations of a given owner. Theseller owns goods in transit until the buyer accepts them. Sellers or buyers may transportgoods but most transportation providers act as the agent of the owner of the goods.

3. Wholesaling

Distributors who buy goods from manufacturers and other suppliers (farmers, fishermen,

etc.) for re-sale work in the wholesale industry. A wholesaler's inventory consists of allthe products in its warehouse that it has purchased from manufacturers or other suppliers.A produce-wholesaler (or distributor) may buy from distributors in other parts of theworld or from local farmers. Food distributors wish to sell their inventory to grocerystores, other distributors, or possibly to consumers.


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4. Retailing

A retailer's inventory of goods for sale consists of all the products on its shelves that ithas purchased from manufacturers or wholesalers. The store attempts to sell its inventory(soup, bolts, sweaters, or other goods) to consumers.

It is a key observation in the "Lean Manufacturing" that it is often the case that more than90% of a product's life prior to end user sale is spent in distribution of one form oranother. On the assumption that the time is not itself valuable to the customer this addsenormously to the working capital tied up in the business as well as the complexity of thesupply chain. Reduction and elimination of these inventory 'wait' states is a key conceptin Lean.

Accounting Perspectives

1. Accounting for Inventory

Each country has its own rules about accounting for inventory that fit with their financialreporting rules.

So for example, organizations in the U.S. define inventory to suit their needs within USGenerally Accepted Accounting Practices (GAAP), the rules defined by the FinancialAccounting Standards Board (FASB) (and others) and enforced by the U.S. Securitiesand Exchange Commission (SEC) and other federal and state agencies. Other countriesoften have similar arrangements but with their own GAAP and national agencies instead.

It is intentional that financial accounting uses standards that allow the public to comparefirms' performance, cost accounting functions internally to an organization andpotentially with much greater flexibility. A discussion of inventory from standard andTheory of Constraints-based (throughput) cost accounting perspective follows someexamples and a discussion of inventory from a financial accounting perspective.

The internal costing/valuation of inventory can be complex. Whereas in the past mostenterprises ran simple one process factories, this is quite probably in the minority in the21st century. Where 'one process' factories exist then there is a market for the goodscreated which establishes an independent market value for the good. Today with multi-stage process companies there is much inventory that would once have been finishedgoods which is now held as 'work-in-process' (WIP). This needs to be valued in theaccounts but the valuation is a management decision since there is no market for thepartially finished product. This somewhat arbitrary 'valuation' of WIP combined with theallocation of overheads to it has led to some unintended and undesirable results.

2. Financial Accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset onthe balance sheet, but it also ties up money that could serve for other purposes and


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requires additional expense for its protection. Inventory may also cause significant taxexpenses, depending on particular countries' laws regarding depreciation of inventory, asin Thor Power Tool Company v. Commissioner.

Inventory appears as a current asset on an organization's balance sheet because the

organization can, in principle, turn it into cash by selling it. Some organizations holdlarger inventories than their operations require in order to inflate their apparent assetvalue and their perceived profitability.

In addition to the money tied up by acquiring inventory, inventory also brings associatedcosts for warehouse space, for utilities, and for insurance to cover staff to handle andprotect it, fire and other disasters, obsolescence, shrinkage (theft and errors), and others.Such holding costs can mount up: between a third and a half of its acquisition value peryear.

Businesses that stock too little inventory cannot take advantage of large orders from

customers if they cannot deliver. The conflicting objectives of cost control and customerservice often pit an organization's financial and operating managers against its sales andmarketing departments. Sales people, in particular, often receive sales commissionpayments, so unavailable goods may reduce their potential personal income. This conflictcan be minimised by reducing production time to being near or less than customerexpected delivery time. This effort, known as "Lean production" will significantly reduceworking capital tied up in inventory and reduce manufacturing costs (See the ToyotaProduction System)

Cost Accounting Perspectives

1. FIFO vs. LIFO Accounting

When a dealer sells goods from inventory, the value of the inventory is reduced by thecost of goods sold (CoG sold). This is simple where the CoG has not varied across thoseheld in stock; but where it has, then an agreed method must be derived to evaluate it. Forcommodity items that one cannot track individually, accountants must choose a methodthat fits the nature of the sale. Two popular methods which normally exist are: FIFO andLIFO accounting (first in - first out, last in - first out). FIFO regards the first unit thatarrived in inventory as the first one sold. LIFO considers the last unit arriving ininventory as the first one sold. Which method an accountant selects can have a significanteffect on net income and book value and, in turn, on taxation. Using LIFO accounting forinventory, a company generally reports lower net income and lower book value, due tothe effects of inflation. This generally results in lower taxation. Due to LIFO's potentialto skew inventory value, UK GAAP and IAS have effectively banned LIFO inventoryaccounting.


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2. Standard Cost Accounting

Standard cost accounting uses ratios called efficiencies that compare the labour andmaterials actually used to produce a good with those that the same goods would haverequired under "standard" conditions. As long as similar actual and standard conditions

obtain, few problems arise. Unfortunately, standard cost accounting methods developedabout 100 years ago, when labor comprised the most important cost in manufacturedgoods. Standard methods continue to emphasize labor efficiency even though thatresource now constitutes a (very) small part of cost in most cases.

Standard cost accounting can hurt managers, workers, and firms in several ways. Forexample, a policy decision to increase inventory can harm a manufacturing managers'performance evaluation. Increasing inventory requires increased production, whichmeans that processes must operate at higher rates. When (not if) something goes wrong,the process takes longer and uses more than the standard labor time. The managerappears responsible for the excess, even though s/he has no control over the production

requirement or the problem.

In adverse economic times, firms use the same efficiencies to downsize, rightsize, orotherwise reduce their labor force. Workers laid off under those circumstances have evenless control over excess inventory and cost efficiencies than their managers.

Many financial and cost accountants have agreed for many years on the desirability ofreplacing standard cost accounting. They have not, however, found a successor.

3. Theory of Constraints Cost Accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the cost-accounting problems in what he calls the "cost world". He offers a substitute, calledthroughput accounting, that uses throughput (money for goods sold to customers) in placeof output (goods produced that may sell or may boost inventory) and considers labor as afixed rather than as a variable cost. He defines inventory simply as everything theorganization owns that it plans to sell, including buildings, machinery, and many otherthings in addition to the categories listed here. Throughput accounting recognizes onlyone class of variable costs: the trully variable costs like materials and components thatvary directly with the quantity produced.

Finished goods inventories remain balance-sheet assets, but labor efficiency ratios nolonger evaluate managers and workers. Instead of an incentive to reduce labor cost,throughput accounting focuses attention on the relationships between throughput(revenue or income) on one hand and controllable operating expenses and changes ininventory on the other. Those relationships direct attention to the constraints orbottlenecks that prevent the system from producing more throughput, rather than topeople - who have little or no control over their situations.


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National Accounts

Inventories also play an important role in national accounts and the analysis of thebusiness cycle. Some short-term macroeconomic fluctuations are attributed to theinventory cycle.

Distressed Inventory

Also known as distressed or expired stock, distressed inventory is inventory whosepotential to be sold at a normal cost has or will soon pass. In certain industries it couldalso mean that the stock is or will soon be impossible to sell. Examples of distressedinventory include products that have reached its expiry date, or has reached a date inadvance of expiry at which the planned market will no longer purchase it (e.g. 3 monthsleft to expiry), clothing that is defective or out of fashion, and old newspapers ormagazines. It also includes computer or consumer-electronic equipment that isobsolescent or discontinued and whose manufacturer is unable to support it. One current

example of distressed inventory is the VHS format.

Inventory Credit

Inventory credit refers to the use of stock, or inventory, as collateral to raise finance.Where banks may be reluctant to accept traditional collateral, for example in developingcountries where land title may be lacking, inventory credit is a potentially important wayof overcoming financing constraints. This is not a new concept; archaeological evidencesuggests that it was practiced in Ancient Rome. Obtaining finance against stocks of awide range of products held in a bonded warehouse is common in much of the world. Itis, for example, used with parmesan cheese in Italy. Inventory credit on the basis ofstored agricultural produce is widely used in Latin American countries and in some Asiancountries. A precondition for such credit is that banks must be confident that the storedproduct will be available if they need to call on the collateral; this implies the existence ofa reliable network of certified warehouses. Banks also face problems in valuing theinventory. The possibility of sudden falls in commodity prices means that they areusually reluctant to lend more than about 60% of the value of the inventory at the time ofthe loan.


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TYPES

Generally, inventory types can be grouped into;

1. Raw Materials

Raw materials are inventory items that are used in the manufacturer's conversion processto produce components, subassemblies, or finished products. These inventory items maybe commodities or extracted materials that the firm or its subsidiary has produced orextracted. They also may be objects or elements that the firm has purchased from outsidethe organization. Even if the item is partially assembled or is considered a finished goodto the supplier, the purchaser may classify it as a raw material if his or her firm had noinput into its production. Typically, raw materials are commodities such as ore, grain,minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However,items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and evenengines may be regarded as raw materials if they are purchased from outside the firm.

The bill-of-materials file in a material requirements planning system (MRP) or amanufacturing resource planning (MRP II) system utilizes a tool known as a productstructure tree to clarify the relationship among its inventory items and provide a basis forfilling out, or "exploding," the master production schedule. Consider an example of arolling cart. This cart consists of a top that is pressed from a sheet of steel, a frameformed from four steel bars, and a leg assembly consisting of four legs, rolled from sheetsteel, each with a caster attached.

2. Work-In-Process

Work-in-process (WIP) is made up of all the materials, parts (components), assemblies,and subassemblies that are being processed or are waiting to be processed within thesystem. This generally includes all materialfrom raw material that has been releasedfor initial processing up to material that has been completely processed and is awaitingfinal inspection and acceptance before inclusion in finished goods.

Any item that has a parent but is not a raw material is considered to be work-in-process.A glance at the rolling cart product structure tree example reveals that work-in-process inthis situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the legassembly and casters are labeled as subassemblies because the leg assembly consists oflegs and casters and the casters are assembled from wheels, ball bearings, axles, and

caster frames.

3. Finished Goods

A finished good is a completed part that is ready for a customer order. Therefore, finishedgoods inventory is the stock of completed products. These goods have been inspected andhave passed final inspection requirements so that they can be transferred out of work-in-process and into finished goods inventory. From this point, finished goods can be sold


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directly to their final user, sold to retailers, sold to wholesalers, sent to distributioncenters, or held in anticipation of a customer order.

Any item that does not have a parent can be classified as a finished good. By looking atthe rolling cart product structure tree example one can determine that the finished good in

this case is a cart.

Inventories can be further classified according to the purpose they serve. These typesinclude transit inventory, buffer inventory, anticipation inventory, decoupling inventory,cycle inventory, and MRO goods inventory. Some of these also are know by other names,such as speculative inventory, safety inventory, and seasonal inventory. We already havebriefly discussed some of the implications of a few of these inventory types, but will nowdiscuss each in more detail.

4. Transit Inventory

Transit inventories result from the need to transport items or material from one locationto another, and from the fact that there is some transportation time involved in gettingfrom one location to another. Sometimes this is referred to as pipeline inventory.Merchandise shipped by truck or rail can sometimes take days or even weeks to go froma regional warehouse to a retail facility. Some large firms, such as automobilemanufacturers, employ freight consolidators to pool their transit inventories coming fromvarious locations into one shipping source in order to take advantage of economies ofscale. Of course, this can greatly increase the transit time for these inventories, hence anincrease in the size of the inventory in transit.

5. Buffer Inventory

As previously stated, inventory is sometimes used to protect against the uncertainties ofsupply and demand, as well as unpredictable events such as poor delivery reliability orpoor quality of a supplier's products. These inventory cushions are often referred to assafety stock. Safety stock or buffer inventory is any amount held on hand that is over andabove that currently needed to meet demand. Generally, the higher the level of bufferinventory, the better the firm's customer service. This occurs because the firm suffersfewer "stock-outs" (when a customer's order cannot be immediately filled from existinginventory) and has less need to backorder the item, make the customer wait until the nextorder cycle, or even worse, cause the customer to leave empty-handed to find anothersupplier. Obviously, the better the customer service the greater the likelihood of customersatisfaction.

6. Anticipation Inventory

Oftentimes, firms will purchase and hold inventory that is in excess of their current needin anticipation of a possible future event. Such events may include a price increase, aseasonal increase in demand, or even an impending labor strike. This tactic is commonlyused by retailers, who routinely build up inventory months before the demand for their


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products will be unusually high (i.e., at Halloween, Christmas, or the back-to-schoolseason). For manufacturers, anticipation inventory allows them to build up inventorywhen demand is low (also keeping workers busy during slack times) so that whendemand picks up the increased inventory will be slowly depleted and the firm does nothave to react by increasing production time (along with the subsequent increase in hiring,

training, and other associated labor costs). Therefore, the firm has avoided both excessiveovertime due to increased demand and hiring costs due to increased demand. It also hasavoided layoff costs associated with production cut-backs, or worse, the idling or shuttingdown of facilities. This process is sometimes called "smoothing" because it smoothes thepeaks and valleys in demand, allowing the firm to maintain a constant level of output anda stable workforce.

7. Decoupling Inventory

Very rarely, if ever, will one see a production facility where every machine in the processproduces at exactly the same rate. In fact, one machine may process parts several times

faster than the machines in front of or behind it. Yet, if one walks through the plant itmay seem that all machines are running smoothly at the same time. It also could bepossible that while passing through the plant, one notices several machines are underrepair or are undergoing some form of preventive maintenance. Even so, this does notseem to interrupt the flow of work-in-process through the system. The reason for this isthe existence of an inventory of parts between machines, a decoupling inventory thatserves as a shock absorber, cushioning the system against production irregularities. Assuch it "decouples" or disengages the plant's dependence upon the sequentialrequirements of the system (i.e., one machine feeds parts to the next machine).

The more inventories a firm carries as a decoupling inventory between the various stagesin its manufacturing system (or even distribution system), the less coordination is neededto keep the system running smoothly. Naturally, logic would dictate that an infiniteamount of decoupling inventory would not keep the system running in peak form. Abalance can be reached that will allow the plant to run relatively smoothly withoutmaintaining an absurd level of inventory. The cost of efficiency must be weighed againstthe cost of carrying excess inventory so that there is an optimum balance betweeninventory level and coordination within the system.

8. Cycle Inventory

Those who are familiar with the concept of economic order quantity (EOQ) know that theEOQ is an attempt to balance inventory holding or carrying costs with the costs incurredfrom ordering or setting up machinery. When large quantities are ordered or produced,inventory holding costs are increased, but ordering/setup costs decrease. Conversely,when lot sizes decrease, inventory holding/carrying costs decrease, but the cost ofordering/setup increases since more orders/setups are required to meet demand. When thetwo costs are equal (holding/carrying costs and ordering/setup costs) the total cost (thesum of the two costs) is minimized. Cycle inventories, sometimes called lot-sizeinventories, result from this process. Usually, excess material is ordered and,


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consequently, held in inventory in an effort to reach this minimization point. Hence, cycleinventory results from ordering in batches or lot sizes rather than ordering materialstrictly as needed.

9. MRO Goods Inventory

Maintenance, repair, and operating supplies, or MRO goods, are items that are used tosupport and maintain the production process and its infrastructure. These goods areusually consumed as a result of the production process but are not directly a part of thefinished product. Examples of MRO goods include oils, lubricants, coolants, janitorialsupplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, andkey stock. Even office supplies such as staples, pens and pencils, copier paper, and tonerare considered part of MRO goods inventory.

10. Theoretical Inventory

In their bookManaging Business Process Flows: Principles of Operations Management,Anupindi, Chopra, Deshmukh, Van Mieghem, and Zemel discuss a final type ofinventory known as theoretical inventory. They describe theoretical inventory as theaverage inventory for a given throughput assuming that no WIP item had to wait in abuffer. This would obviously be an ideal situation where inflow, processing, and outflowrates were all equal at any point in time. Unless one has a single process system, therealways will be some inventory within the system. Theoretical inventory is a measure ofthis inventory (i.e., it represents the minimum inventory needed for goods to flow throughthe system without waiting). The authors formally define it as the minimum amount ofinventory necessary to maintain a process throughput of R, expressed as: TheoreticalInventory = Throughput Theoretical Flow Time I th = R Tth.

In this equation, theoretical flow time equals the sum of all activity times (not wait time)required to process one unit. Therefore, WIP will equal theoretical inventory wheneveractual process flow time equals theoretical flow time.

Inventory exists in various categories as a result of its position in the production process(raw material, work-in-process, and finished goods) and according to the function itserves within the system (transit inventory, buffer inventory, anticipation inventory,decoupling inventory, cycle inventory, and MRO goods inventory). As such, the purposeof each seems to be that of maintaining a high level of customer service or part of anattempt to minimize overall costs.


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CATEGORIES

The 32 total categories are given below in alphabetical order;

1. Average Costing

2. C-VARWIP3. CONWIP4. Carrying Cost5. Cost of Goods Available for Sale6. Cost of Goods Sold7. Cougar Mountain Software8. Decomposition9. Ending Inventory10. FIFO and LIFO Accounting11. Finished Good12. GMROII

13. Inventory Turnover Ratio14. Just in Case15. Just-In-Time (Business)16. LIFO (Computing)17. LIFO order18. Lower of Cost or Market19. Net Realizable Value20. New Old Stock21. Order Fulfillment22. Periodic Inventory23. Perpetual Inventory

24. Phantom Inventory25. Reorder Point26. Safety Stock27. Specific Identification28. Stock and Flow29. Stock Demands30. Stock Forecast31. Stock Mix32. Stock Obsolescence


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1. Average Costing

Under the average-cost method, it is assumed that the cost of inventory is based on theaverage cost of the goods available for sale during the period. Average cost is computedby dividing the total cost of goods available for sale by the total units available for sale.

This gives a weighted-average unit cost that is applied to the units in the endinginventory.

Average-Cost Method Illustration

Date Transaction Number of Items Unit Cost Total Cost

June 1 Beginning Inventory 50 1.00 50.00

June 6 Purchased 50 1.10 55.00

June 13 Purchased 150 1.20 180.00

June 20 Purchased 100 1.30 130.00

June 25 Purchased 150 1.40 210.00

Totals 500 625.00

Average Unit cost: $625/500 = $1.25

Ending inventory: 220 units @ $1.25 = $275

Cost of Goods Available for Sale $625

Less June 30 Inventory $275

Cost of Goods Sold $350

The average-cost method tends to level out the effects of cost increases and decreasesbecause the cost for the ending inventory calculated under the method is influenced by allthe prices paid during the year and by the beginning inventory price. The criticism forthis method is that the more recent costs are more relevant for income measurement and

decision-making.

2. C-VARWIP

Production control systems can be classified as pull and push systems (Spearman et al.1990). In a push system, the production order is scheduled, froma demand forecast, andthe material is pushed into the production line. In a pull system no part is allowed to enterthe start of each product assembly process without demand from the process thatconsumes its outputs. Thus production is triggered by pull from the end of productionline.

There currently exist three basic topologies for pull production control system, namelyKANBAN, CONWIP (Constant Work In Process) or single cell KANBAN, and BaseStock but these have not taken into account the circular nature of systems (Vildosola2002).

Circular - VARiable Work in Process (C-VARWIP) is the synthesis to both Push (firstgeneration) and Pull (second generation) production control systems when the system istaken as unitary, when whole-system analysis is performed.


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Of primary relevance to systems engineering is the problem of telos or purpose, C-VARWIP gives purpose to observed behavior in push production control systems as wellas pull production control systems.

3. CONWIP

Production control systems can be classified as pull and push systems (Spearman et al.1990). In a push system, the production order is scheduled and the material is pushed intothe production line. In a pull system, the start of each product assembly process istriggered by the completion of another at the end of production line. One variant of a pullsystem is the CONstant Work in Process (CONWIP) system (Spearman et al. 1990)which is known for its ease of implementation.

CONWIP is a kind of single-stage kanban system and is also a hybrid push-pull system.While Kanban systems maintain tighter control of system WIP through the individual

cards at each workstation, CONWIP systems are easier to implement and adjust, sinceonly one set of system cards is used to manage system WIP. CONWIP uses cards tocontrol the number of WIPs. For example, no part is allowed to enter the system withouta card (authority). After a finished part is completed at the last workstation, a card istransferred to the first workstation and a new part is pushed into the sequential processroute. In their paper, Spearman et al. (1990) used a simulation to make a comparisonamong the CONWIP, kanban and push systems, and found that CONWIP systems canachieve a lower WIP level than kanban systems.

Card Control Policy in CONWIP System

In CONWIP system, card is shared to all kinds of products. However, Duenyas (1994)proposed a dedicated card control policy in CONWIP and he stated that this policy couldperform as multiple chain closed queuing network.

4. Carrying cost

In marketing, carrying cost refers to the total cost of holding inventory. This includeswarehousing costs such as rent, utilities and salaries, financial costs such as opportunitycost, and inventory costs related to perishibility, shrinkage and insurance.

When there are no transaction costs for shipment, carrying costs are minimized when noexcess inventory is held at all, as in a Just In Time production system.

Excess inventory can be held for one of three reasons. Cycle stock is held based on there-order point, and defines the inventory that must be held for production, sale orconsumption during the time between re-order and delivery. Safety stock is held toaccount for variability, either upstream in supplier lead time, or downstream in customerdemand. Psychic stock is held by consumer retailers to provide consumers with aperception of plenty.


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5. Cost of Goods Available for Sale

Cost of Goods Available for Sale is the maximum amount of goods, or inventory, that acompany can possibly sell during this fiscal year. It have the formula:

Beginning Inventory (at the start of this year)+ Purchases (within this year)+ Production(within this year)= Cost of Goods Available for Sale

Notice that purchases and production might not be the same throughout the year, sincepurchase cost and production cost might vary during the year. But at the end, the totalcost of purchases and production are added to beginning inventory cost to give Cost ofGoods Available for Sale.

6. Cost of Goods Sold

In financial accounting, cost of goods sold (COGS) or cost of sales includes the direct

costs attributable to the production of the goods sold by a company. This amount includesthe materials cost used in creating the goods along with the direct labor costs used toproduce the good. It excludes indirect expenses such as distribution costs and sales forcecosts. COGS appears on the income statement and can be deducted from revenue tocalculate a company's gross margin.

COGS is the costs that go into creating the products that a company sells; therefore, theonly costs included in the measure are those that are directly tied to the production of theproducts. For example, the COGS for an automaker would include the material costs forthe parts that go into making the car along with the labor costs used to put the cartogether. The cost of sending the cars to dealerships and the cost of the labor used to sellthe car would be excluded.

The accounts included in the COGS calculation will differ from one type of business toanother.

The cost of goods attributed to a company's products is expensed as the company sellsthese goods. There are several ways to calculate COGS but one of the basic ways is tostart with the beginning inventory for the period and add the total amount of purchasesmade during the period, and then deducting the ending inventory. This calculation givesthe total amount of inventory (the cost of this inventory) sold by the company during theperiod. Therefore, if a company starts with $10 million in inventory, makes $2m inpurchases and ends the period with $9m in inventory, the company's cost of goods for theperiod would be $3m ($10m + $2m - $9m).

Subtracting the cost of goods soldfrom the amount billed when selling the goods (salesrevenue) produces the gross profit on the goods.


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The net income, what most people understand as the business' income or profit, isdetermined by subtracting the cost of goods soldand the indirect expenses from the salesrevenue.

7. Cougar Mountain Software

Cougar Mountain Software is a privately-held company based in Boise, Idaho thatmarkets accounting software, retail software and business software to small to mid-sizedcompanies. They are a Microsoft Certified Partner and work with other third-partycompanies such as Aatrix, Applianz, Business Objects, DonorPerfect, GiveX, andSeagull Scientific to provide customers with low-cost accounting software.

8. Decomposition

Decomposition refers to the process by which tissues of dead organisms break down intosimpler forms of matter. Such a breakdown of dead organisms is essential for new growth

and development of living organisms because it recycles the finite chemical constituentsand frees up the limited physical space in the biome. Bodies of living organisms begin todecompose shortly after death. It is a cascade of processes that go through distinct phases.It may be categorized in two stages by the types of end products. The first stage is limitedto the production of vapors. The second stage is characterized by the formation of liquidmaterials; flesh or plant matter begin to decompose. The science which studies suchdecomposition generally is called taphonomy from the Greek word taphos - which meansgrave. Besides the two stages mentioned above, historically the progression ofdecomposition of the flesh of dead organisms has been viewed also as four phases:(1) fresh (autolysis),(2) bloat (putrefaction),(3) decay (putrefaction and carnivores)and(4) dry (diagenesis).

9. Ending Inventory

Ending inventory is the amount of inventory a company have in stock at the end of thisfiscal year. It is closely related with Ending Inventory Cost, which is the amount ofmoney spent to get these goods in stock. It should be calculated at the Lower of Cost orMarket.

10. FIFO and LIFO Accounting

FIFO and LIFO accounting methods are means of managing inventory and financialmatters involving the money a company ties up within inventory of produced goods, rawmaterials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaningthat the oldest inventory items are recorded as sold first. LIFO stands for last-in, first-out,meaning that the most recently purchased items are recorded as sold first. Since the


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1970s, U.S. companies have tended to use LIFO, which reduces their income taxes intimes of inflation.

FIFO Accounting

FIFO accounting is a common method for recording the value of inventory. It isappropriate where there are many different batches of similar products. The methodpresumes that the next item to be shipped will be the oldest of that type in the warehouse.In practice, this usually reflects the underlying commercial substance of the transaction,since many companies rotate their inventory (especially of perishable goods). This is stillnot in contrast to LIFO because FIFO and LIFO are cost flow assumptions not productflow assumptions.

In an economy of rising prices (during inflation), it is common for beginning companiesto use FIFO for reporting the value of merchandise to bolster their balance sheet. As theolder and cheaper goods are sold, the newer and more expensive goods remain as assets

on the company's books. Having the higher valued inventory and the lower cost of goodssold on the company's financial statements may increase the chances of getting a loan.However, as it prospers the company may switch to LIFO to reduce the amount of taxesit pays to the government.

LIFO Accounting

LIFO is an acronym for "last in, first out." (Sometimes the term FILO ("first in, last out")is used synonymously.) In LIFO accounting, a historical method of recording the value ofinventory, a firm records the last units purchased as the first units sold. LIFO accountingis in contrast to the method FIFO accounting covered below.

Since prices generally rise over time because of inflation, this method records the sale ofthe most expensive inventory first and thereby decreases profit and reduces taxes.However, this method rarely reflects the physical flow of indistinguishable items.

LIFO valuation is permitted in the belief that an ongoing business does not realize aneconomic profit solely from inflation. When prices are increasing, they must replaceinventory currently being sold with higher priced goods. LIFO better matches currentcost against current revenue. It also defers paying taxes on phantom income arising solelyfrom inflation. LIFO is attractive to business in that it delays a major detrimental effect ofinflation, namely higher taxes. However, in a very long run, both methods converge.

Last in first out (LIFO) is not acceptable in the IFRS.

11. Finished good

Finished goods are goods that have completed the manufacturing process but have not yetbeen sold or distributed to the end user.


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12. GMROII

Gross Margin Return on Inventory Investment (GMROII) is a ratio in microeconomicsthat describes a seller's income on every dollar spent on inventory. It is one way todetermine how valuable the seller's inventory is, and describes the relationship between

total sales, total profit from total sales, and the amount of resources invested in theinventory sold. A seller will aim for a high GMROII. Since the inventory is a verywidely-ranging factor in a seller's investment, it is important for the seller to know howmuch she might expect to gain from it. The GMROII answers the question "for eachdollar at cost, how many dollars of gross profit will I generate in one year?" GMROII istraditionally calculated by using one year's gross profit against the average of 12 or 13units of inventory at cost. A rule of thumb is that a GMROII of at least 3.2 is thebreakeven for a business.

13. Inventory Turnover Ratio

Inventory turnover ratio is one of the Accounting Liquidity ratios, a financial ratio. Thisratio measures the number of times, on average, the inventory is sold during the period.Its purpose is to measure the liquidity of the inventory. A popular variant of the Inventoryturnover ratio is to convert it into an average days to sell the inventory in terms of days.Remember that the Inventory turnover ratio is figured as "turnover times" and the averagedays to sell the inventory is in "days".

Inventory turnover ratio = Cost of goods sold / Averageinventory

Average days to sell the inventory = 365 / Inventory TurnoverRatio

14. Just In Case

Traditional manufacturing is sometimes referred to as Just-In-Case (JIC) manufacturingby Manufacturing engineers (see Society of Manufacturing Engineers). In JIC,manufacturers need to maintain large inventories of supplies, parts, warehousingresources, and extra workers to meet production contingencies. These contingencies,more common in less industrialized countries, can be poor transportation, poor qualitycontrol, other suppliers production problems, and environmental. This can lead toinefficiencies because a manufacturer has to have excess inventory and backups of"fragile" stages of production which can get out of sync and cause delays for other

manufacturers.

15. Just-In-Time (Business)

Just-in-time (JIT) is an inventory strategy implemented to improve the return oninvestment of a business by reducing in-process inventory and its associated carryingcosts. In order to achieve JIT the process must have signals of what is going on elsewherewithin the process. This means that the process is often driven by a series of signals,


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which can be Kanban (Kanban), that tell production processes when to make the nextpart. Kanban are usually 'tickets' but can be simple visual signals, such as the presence orabsence of a part on a shelf. When implemented correctly, JIT can lead to dramaticimprovements in a manufacturing organization's return on investment, quality, andefficiency.

Quick communication of the consumption of old stock which triggers new stock to beordered is key to JIT and inventory reduction. This saves warehouse space and costs.However since stock levels are determined by historical demand, any sudden demandrises above the historical average demand, the firm will deplete inventory faster thanusual and cause customer service issues. Some have suggested that recycling Kanbanfaster can also help flex the system by as much as 10-30%. In recent years manufacturershave touted a trailing 13 week average as a better predictor for JIT planning than mostforecastors could provide.

16. LIFO (Computing)

LIFO is an acronym which stands forlast in, first out. In computer science and queueingtheory this refers to the way items stored in some types of data structures are processed.By definition, in a LIFO structured linear list, elements can be added or taken off fromonly one end, called the "top". A LIFO structure can be illustrated with the example of anarrow, crowded elevator with a small door. When the elevator reaches its destination,the last people to get on have to be the first to get off.

Definition

The term in computing generally refers to the abstract principles of list processing andtemporary storage, particularly when there is a need to access the data in limited amounts,and in a certain order. LIFO is most used in cases where the last data added to thestructure must be the first data to be removed or evaluated. A useful analogy is of theoffice worker: a person can only handle one page at a time, so the top piece of paperadded to a pile is the first off; parallel to limitations such as data bus width and the factthat one can only manipulate a single binary data address in a computer at a time. Theabstract LIFO mechanism, when applied to computing inevitably devolves to the realdata structures implemented as stacks whose eponymous relation to the "stack of paper","stack of plates" should be obvious. Other names for the device are "Push down list" and"piles" The term FILO ("first in, last out") can be used synonymously, as the termemphasizes that early additions to the list need to wait until they rise to the LIFOstructure "top" to be accessed. The difference between a generalized list, an array, queue,or stack, is defined by the rules enforced and used to access the mechanism. In any event,a LIFO structure is accessed in opposite order to a queue: "There are certain frequentsituations in computer science when one wants to restrict insertions and deletions so thatthey can only take place at the beginning or end of the list, not in the middle. Two of thedata structures useful in such situations are stacks and queues.


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Use

Stack structures in computing are extremely fundamental and important. It is fair to say

that without the ability to organize data by order rearrangement, including links toexecutable code, computers would not be the flexible tools they are today, and existsolely as expensive special purpose calculators like the ENIAC of World War II havinglimited abilities and scope of application.

In such data orderings, the stack is used as a dynamic memory element wherein anabstract concepta machine dependent Stack frame is used to contain copies of datarecords or parts thereofbe they actual memory addresses of a data element (Seeparameters pass-by-reference), or a copy of the data (pass-by-value). In list processing,the most common need is sorting (alphabetically, greatest to smallest, etcetera.) where themachine is limited to comparing only two elements at a time, out of a list that likely holds

millions of members. Various strategies (computer algorithms) exist which optimizeparticular types of data sorting, but in implementation all will resort to a sub-program andor sub-routines that generally call themselves or a part of their code recursively in eachcall adding to the list temporarily reordered in stack frames. It is for this reason, stacksand recursion are usually introduced in parallel in data structures coursesthey aremutually interdependent.

It is through the flexibility of this access to data by stack-frames with their data re-groupings (in abstract a LIFO organized block of data which seems only to allow datasome improvement on ordering flexibility) that sub-programs and sub-routines receivetheir input, do the task they are optimized to perform, and pass information back to theprogram segment currently in charge. The stack frame in actual cases includes theaddress of the next instruction of the calling program segment, which ordinarily then doessomething with the data "answer" processed by the subroutines or subprogram. In arecursive call, this is generally an instruction to check the next list element versus thereturned "answer" (e.g. largest of the last two compared), until the list is exhausted.

Consequently, in real world implementations of the LIFO abstraction, the number ofstack frames varies extremely often, each sized by the needs of the data elements thatneed manipulated. This can be likened to a LIFO pile of booklets or brochures, ratherthan a thin sheet of paper.

17. LIFO

LIFO is an acronym that stands for "last in, first out" and may refer to:

LIFO (computing)

FIFO and LIFO accounting

Life Orientations Training


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18. Lower of Cost or Market

Lower of Cost or Market (LCM) is an approach to valuing and reporting inventory.

Normally ending inventory is stated at historical cost (what was paid to obtain it) butthere are times when the original cost of the ending inventory is greater than the cost ofreplacement thus the inventory has lost value. If the inventory has decreased in valuebelow historical cost then its carrying value is reduced and reported on the balance sheet.The criterion for reporting this is the lesser of the value of the original cost or the marketvalue. Any loss resulting from the decline in the value of inventory is charged to Cost ofGoods Sold (COGS) if non-material, or Loss on the reduction of inventory to LCM ifmaterial.

19. Net Realizable Value

Net realisable value (NRV) is a method of evaluating an asset's worth when held ininventory, in the field of accounting. NRV is part of the Generally Accepted AccountingPrinciples that apply to valuing inventory, so as to not overstate or understate the value ofinventory goods. Net realisable value is generally equal to the selling price of theinventory goods less the selling costs (completion and disposal). In formula:

Inventory Sales Value - Estimated Cost of Completion and Disposal = Net RealisableValue Companies need to record the cost of their Ending Inventory at the lower of costand NRV, to ensure that their inventory and income statement are not overstated. Forexample at a company's year end, if an unfinished good that already cost $25 is expectedto sell for $100 to a customer, but it will take an additional $20 to complete and $10 toadvertise to the customer, its NRV will be $100-$20-$10=$70. In this year's incomestatement, since the cost of the good ($25) is less than its NRV ($70), the cost of the goodwill get recorded as the cost of inventory. In next year's income statement after the goodwas sold, this company will record a revenue of $100, Cost of Goods Sold of $25, andCost of Completion and Disposal of $20+$10=$30. This leads to a profit of $100-$25-$30=$45 on this transaction.

Suppose we changed the example so that it costs $60 to advertise to the customer. Nowthe good's NRV will be $100-$20-$60=$20. In this year's income statement, since theNRV ($20) is less than the cost of the good ($25), the NRV will get recorded as the Costof Ending Inventory. To do so, an inventory write down of $25-$20=$5 is done, andhence a decrease of $5 in this year's income statement. In the next year's incomestatement after the good was sold, this company will record a revenue of $100, Cost ofGoods Sold of $20, and Cost of Completion and Disposal of $20+$60=$80. This leads tothe company breaking even on this transaction ($100-$20-$80=$0).

Inventory can be valued at either its historical cost or its market value. Because themarket value of an inventory is not always available, NRV is sometimes used as asubstitute for this value.


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20. New Old Stock

New Old Stock (abbreviated NOS) are old parts for obsolete equipment that have never

been sold at retail.

The term refers to merchandise being offered for sale which was manufactured long agobut that has never been used. Such merchandise may not be produced anymore, and thenew old stock may represent the only market source of a particular item at the presenttime.

Although not an officially recognized accounting term, it is in common use in the auctionand retail industries. For example, owners of antique vehicles seek NOS parts fromspecialized vendors that are needed to keep their automobiles, motorcycles, or trucksoperational or in factory-original condition. eBay uses the term on their auction website.

Another example is a business catering to vacuum tube enthusiasts that defines NOS as,any stocked item which is either

A: out of production;

B: discontinued from the current line of product;C: has been sitting on a stockroom or warehouse shelf for some time;

Or

D: any combination of the above.

While damage to the original packaging is common, damage to its contents is generallynot acceptable in determining if an item is NOS, as it should be presentable in the sameform as when new.

Some people refer to such merchandise as new obsolete stock to further indicate that theparts have not been manufactured for several years. This describes parts that are used inobsolete equipment or the like.

Other people refer to new original stock meaning that they are original equipment partsthat remained in inventory for a use that never came. Automobile dealers and partscompanies often sell such slow moving stock at a discount. Other specialty parts vendorsthen market these NOS parts that may either decline or increase in value depending ontheir type and desirability.

21. Order Fulfillment

Order fulfillment (in BE also: order fulfilment) is in the most general sense the completeprocess from point of sales inquiry to delivery of a product to the customer. SometimesOrder fulfillment is used to describe the more narrow act of distribution or the logisticsfunction, however, in the broader sense it refers to the way firms respond to customerorders.


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The first research towards defining order fulfillment strategies was published by Mather(1988) and his discussion of the P:D ratio, whereby P is defined as the production lead-time, i.e. how long it takes to manufacture a product, and D is the demand lead-time, i.e.how long customers are willing to wait for the order to be completed. Based on

comparing P and D, a firm has several basic strategic order fulfillment options:

Engineer-to-Order (ETO) - (D>>P) Here, the product is tested and geared tocustomer specifications; this approach is not very common for large constructionprojects and one-off products, such as Formula 1 cars. However, it is fairlycommon for muppets like you.

Build-to-Order (BTO); syn: Make-to-Order (MTO) - (D>P) Here, the product isbased on a standard design, but component production and manufacture of thefinal product is linked to the order placed by the final customer's specifications;this strategy is typical for high-end motor vehicles and aircraft.

Assemble-to-Order (ATO) - (D


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Order Changes - Changes to orders, if needed

Order Processing - Process step where the distribution center or warehouse isresponsible to fill order (receive and stock inventory, pick, pack and ship orders)

Shipment - The shipment and transportation of the goods

Delivery - The delivery of the goods to the consignee / customer

Invoicing / Billing - The presentment of the commercial invoice / bill to thecustomer

Settlement - The payment of the charges for goods / services / delivery

Returns - In case the goods are unacceptable / not required

The order fulfillment strategy also determines the de-coupling point in the supply chain(Olhager, 2003), which describes the point in the system where the "push" (or forecast-driven) and "pull" (or demand-driven see Demand chain management) elements of thesupply chain meet. The decoupling point always is an inventory buffer that is needed tocater for the discrepancy between the sales forecast and the actual demand (i.e. theforecast error). It has become increasing necessary to move the de-coupling point in thesupply chain to minimize the dependence on forecast and to maximize the reactionary ordemand-driven supply chain elements. This initiative in the distribution elements of thesupply chain corresponds to the Just-in-time initiatives pioneered by automobilemanufacturers in the 1970s.

The order fulfillment strategy has also strong implications on how firms customize theirproducts and deal with product variety (Pil and Holweg, 2004). Strategies that can used tomitigate the impact of product variety include modularity, option bundling, lateconfiguration, and build to order (BTO) strategies -- all of which are generally referred asmass customization strategies.

22. Periodic Inventory

Periodic inventory is a system of inventory in which updates are made on a periodicbasis. This differs from perpetual inventory systems, where updates are made as seen fit.

23. Perpetual Inventory

In business and accounting/accountancy, perpetual inventory or continuous inventorydescribes systems of inventory where information on inventory quantity and availabilityis updated on a continuous basis as a function of doing business. Generally this isaccomplished by connecting the inventory system with order entry and in retail the pointof sale system. In this case, book inventory would be exactly the same as, or almost thesame, as the real inventory.


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In earlier periods, non-continuous, or periodic inventory systems were more prevalent.Starting in the 1970's digital computers made possible the ability to implement aperpetual inventory system. This has been facilitated by bar coding and lately radiofrequency identification (RFID) labeling which allows computer systems to quickly read

and process inventory information as part of transaction processing.

Perpetual inventory systems can still be vulnerable to errors due to overstatements(phantom inventory) or understatements (missing inventory) that can occur as a result oftheft, breakage, scanning errors or untracked inventory movements, leading to systematicerrors in replenishment.

24. Phantom Inventory

Phantom inventory is a common expression for goods that an inventory accountingsystem considers to be on-hand at a storage location, but are not actually available. This

could be due to the items being moved without recording the change in the inventoryaccounting system, breakage, theft, data entry errors or deliberate fraud. The resultingdiscrepancy between the online inventory balance and physical availability can delayautomated reordering and lead to out-of-stock incidents. If not addressed, phantominventory can also result in broader accounting issues and restatements.

A number of techniques have been used to correct phantom inventory problems,including physical cycle counts, RFID tagging of items and statistical modeling ofphantom inventory conditions.

25. Reorder Point

The reorder point is the level of inventory when a fresh order should be made withsuppliers to bring the inventory up by the Economic order quantity (EOQ).

Continuous Review System

The reorder point for replenishment of stock occurs when the level of inventory dropsdown to zero. In view of instantaneous replenishment of stock the level of inventoryjumps to the original level from zero level.

In real life situations one never encounters a zero lead time. There is always a time lagfrom the date of placing an order for material and the date on which materials arereceived. As a result the reorder point is always higher than zero, and if the firm placesthe order when the inventory reaches the reorder point, the new goods will arrive beforethe firm runs out of goods to sell. The decision on how much stock to hold is generallyreferred to as the order point problem, that is, how low should the inventory be depletedbefore it is reordered.


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The two factors that determine the appropriate order point are the delivery time stockwhich is the Inventory needed during the lead time (i.e., the difference between the orderdate and the receipt of the inventory ordered) and the safety stock which is the minimumlevel of inventory that is held as a protection against shortages due to fluctuations indemand.

Therefore:

Reorder Point = Normal consumption during lead-time + Safety Stock

Several factors determine how much delivery time stock and safety stock should be held.In summary, the efficiency of a replenishment system affects how much delivery time isneeded. Since the delivery time stock is the expected inventory usage between orderingand receiving inventory, efficient replenishment of inventory would reduce the need fordelivery time stock. And the determination of level of safety stock involves a basic trade-off between the risk of stock-out, resulting in possible customer dissatisfaction and lost

sales, and the increased costs associated with carrying additional inventory.

Another method of calculating reorder level involves the calculation of usage rate perday, lead time which is the amount of time between placing an order and receiving thegoods and the safety stock level expressed in terms of several days' sales.

Reorder level = Average daily usage rate x lead-time in days.

From the above formula it can be easily deduced that an order for replenishment ofmaterials be made when the level of inventory is just adequate to meet the needs ofproduction during lead-time.

26. Safety Stock

Safety stock is a term used by inventory specialists to describe a level of stock that ismaintained below the cycle stock to buffer against stockouts. Safety Stock (also calledBuffer Stock) exists to counter uncertainties in supply and demand. Safety stock isdefined as extra units of inventory carried as protection against possible stockouts. Byhaving an adequate amount of safety stock on hand, a company can meet a sales demandwhich exceeds their sales forecast without altering their production plan. It is held whenan organization cannot accurately predict demand and/or lead time for the product. Itserves as an insurance against stockouts.

With a new product, safety stock can be utilized as a strategic tool until the company canjudge how accurate their forecast is after the first few years, especially when used with amaterial requirements planning worksheet. With a material requirements planning (MRP)worksheet a company can judge how much they will need to produce to meet theirforecasted sales demand without relying on safety stock. However, a common strategy isto try and reduce the level of safety stock to help keep inventory costs low once theproduct demand becomes more predictable. This can be extremely important for


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companies with a smaller financial cushion or those trying to run on lean manufacturing,which is aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramaticallyaffect their business. Too much safety stock can result in high holding costs of inventory.

In addition, products which are stored for too long a time can spoil, expire, or breakduring the warehousing process. Too little safety stock can result in lost sales and, thus, ahigher rate of customer turnover. As a result, finding the right balance between too muchand too little safety stock is essential.

Reasons for Safety Stock

Safety Stocks enable organizations to satisfy customer demand in the event of thesepossibilities;

Supplier may deliver their product late or not at all

The warehouse may be on strike

A number of items at the warehouse may be of poor quality and replacements arestill on order

A competitor may be sold out on a product, which is increasing the demand foryour products

Random demand (in reality, random events occur)

Machinery Breakdown

Unexpected increase in demand

...and more

27. Specific Identification

Specific Identification is a method of finding out ending inventory cost. It requires a verydetailed physical count, so that the company knows exactly how many of each goodsbrought on specfic dates remained at year end inventory. When this information is found,the amount of goods are multiplied by their purchase cost at their purchase date, to get anumber for the ending inventory cost.

On theory, this method is the best method, since it relates the ending inventory goodsdirectly to the specific price they were brought. However, this method allowsmanagement to easily manipulate ending inventory cost, since they can choose to reportthat the cheaper goods were sold first, hence increasing ending inventory cost and

lowering Cost of Goods Sold. This will increase the income. Alternatively, managementcan choose to report lower income, to reduce the taxes they needed to pay.

This method is also very hard to use on interchangeable goods. For example, it is hard torelate shipping and storage costs to a specific inventory item. These number will need tobe estimated, and hence reducing the specific identification 's benefit of being extremelyspecific.


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28. Stock and Flow

Economics, business, accounting, and related fields often distinguish between quantitieswhich are stocks and those which are flows. A stockvariable is measured at one specific

time, and represents a quantity existing at that point in time, which may have beenaccumulated in the past. A flow variable is measured over an interval of time. Therefore aflow would be measured per unit of time.

For example, U.S. nominal gross domestic product refers to a total number of dollarsspent during a specific time period, such as a year. Therefore it is a flow variable. Incontrast, the U.S. nominal capital stock is the total value, in dollars, of equipment,buildings, inventories, and other real assets in the U.S. economy. The diagram illustrateshow the stockof capital currently available is increased by the flow of new investmentand depleted by the flow of depreciation.

29. Stock Demands

Stock demands - the demand a customer has for a certain product or products. Thedemand is influenced by price, availability and position of the product in relation to theconsumer.

30. Stock Forecast

Stock Forecast - by evaluating current and past stock demands and stock levels accuratestock forecasting can be made to customer needs. Stock forecasting is integral tomanaging profitability in any organisation that deals with inventory.

31. Stock Mix

Stock mix - is the combination of products a company sells or manufactures. The stockmix is determined by the demand for certain products and the profitability of thoseproducts.


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32. Stock Obsolescence

Obsolete stock or stock obsolescence calculations are done by companies to determine

how much of their stock on hand is unlikely to be used in the future.

The financial value of stock obsolescence that is calculated can be entered into a generalledger system to create a "stock obsolescence provision" which can reduce the taxliability of a company. For this reason, a systematic and auditable approach to designinga stock obsolescence report should be used. Estimation of stock obsolescence without anytraceable calculations will probably not be acceptable to an auditor.

Typically, a stock obsolescence report uses the value of "stock on hand" as a startingpoint, and then reduces this value based on the potential that stock will be used up in thefuture. The higher the probability that stock will be used in the future, the more the on-

hand stock value can be reduced. Sometimes a historical usage of the item can alsoreduce the value, in this case, the more recently the item was used, the more the on-handvalue can be reduced.

The formulae that calculate how much the on-hand value can be reduced by may varyfrom company to company and are normally described in a general way in the GAAP(Generally Accepted Accounting Practices) for that company or country. For exampleone formula may be: "If there is any future usage of the item in the next 3 months thenreduce the value by 100%, if there is usage in the next 6 months then reduce by 50%, andif it is only going to be used in a year's time then reduce by 10%, if it has been used in thepast 6 months then reduce by 70%, if there has been usage in the past year then reduce by30%".

Some formulae may also take into account the volume used e.g.: reduce the on-handvalue by the percentage of product used in the past 6 months.

report on inventory

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