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    I Nventory - : The Transaction Motive

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    sshreyas
    Inventory refers to stocks held for sale or production, including raw materials, work in progress, and finished goods. The purpose of holding inventory is to facilitate continuous production and timely fulfillment of sales orders. Effective inventory management aims to maintain optimal stock levels and avoid overstocking or understocking. Key techniques include determining reorder points, economic order quantities, and safety stock levels to manage inventory costs and protect against stockouts.

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    I Nventory - : The Transaction Motive

    Uploaded by

    sshreyas
    38 views5 pages
    Inventory refers to stocks held for sale or production, including raw materials, work in progress, and finished goods. The purpose of holding inventory is to facilitate continuous production and timely fulfillment of sales orders. Effective inventory management aims to maintain optimal stock levels and avoid overstocking or understocking. Key techniques include determining reorder points, economic order quantities, and safety stock levels to manage inventory costs and protect against stockouts.

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    INVENTORY Managenent

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    INVENTORY Managenent

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    Inventory refers to stocks held for sale or production, including raw materials, work in progress, and finished goods. The purpose of holding inventory is to facilitate continuous production and timely fulfillment of sales orders. Effective inventory management aims to maintain optimal stock levels and avoid overstocking or understocking. Key techniques include determining reorder points, economic order quantities, and safety stock levels to manage inventory costs and protect against stockouts.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    38 views5 pages

    I Nventory - : The Transaction Motive

    Uploaded by

    sshreyas
    Inventory refers to stocks held for sale or production, including raw materials, work in progress, and finished goods. The purpose of holding inventory is to facilitate continuous production and timely fulfillment of sales orders. Effective inventory management aims to maintain optimal stock levels and avoid overstocking or understocking. Key techniques include determining reorder points, economic order quantities, and safety stock levels to manage inventory costs and protect against stockouts.

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    INVENTORY- 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 ma or input into the organi!ation. "he #uantity of raw materials re#uired will be determined by the rate of consumption and time re#uired for replenishing the supplies. WORK- IN- PROGRESS-"he work in progress is that stage of stocks which are in between raw material and finished goods. "he greater the time taken in manufacturing, the more will be the amount of work in progress. CONSUMABLE GOODS- "hese are the materials which are needed to smoothen the process of production. FINISHED GOODS- "hese are the goods which are ready for the consumers. "he purpose of maintaining inventory is to ensure proper supply of goods to customers.

    PURPOSE OF HOLDING INVENTORIES- $enerally speaking, there


    are tree main motives of holding inventories: The Transacti n M ti!e " %hich facilitates continous production and timely execution of sales orders. The Preca#ti nar$ M ti!e- %hich necessitates the holding of inventories for meeting unpredictable changes in demand & supply.

    The S%ec#&ati!e M ti!e- which includes to keep inventories for taking advantage of price fluctuations, saving in re-ordering costs & #uantity discounts etc.

    IN'ENTOR( MANAGEMENT The inventory management i !one to "ee# the to$" in %$h a &ay that neither there i a over- to$"ing nor %n!er- to$"ing' the over to$"ing &i(( mean a re!%$tion o) (i*%i!ity an! tarving o) other #ro!%$tion #ro$e + %n!er to$"ing, on the other han!, &i(( re %(t in to##age o) &or"' The inve tment in inventorie ho%(! -e "e#t in (imit'

    O./E0TIVES OF INVENTORY 1ANAGE1ENT


    "o ensure proper supply of materials spares & finished goods so that production should not suffer at any time & the consumer demand should also be met. "o avoid both over-stocking & under stocking of inventory. "o keep material cost under control so that they contribute in reducing cost of production and overall costs. "o minimi!e losses through wastage & damages. "o ensure right #uality of goods at reasonable prices. 'uitable #uality standards will ensure proper #uality of stock.

    TOOLS AND TE0HNI2UES OF INVENTORY 1ANAGE1ENT


    (ffective Inventory )anagement re#uires an effective control system. "he following are the important tools & techni#ues of inventory management & control:

    )* Deter+inati n , st c- &e!e&s " An efficient inventory management re#uires that a firm should maintain an optimum level of inventory where costs are minimum & at the same time there is no stockout which may result in loss or stoppage of production. .* Deter+inati n , sa,et$ st c-s- "he usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. "he demand for materials may fluctuate and delivery may also be delayed in such situation firm can face a problem of stock-out. "he 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. /* Or0erin1 s$ste+ , in!ent r$- "he basic problem is to decide the re-order point. "his point indicates when an order should be placed. "he re order point is determine with the help of these things: a* average consumption rate, b* duration of lead time, c* economic order #uantity. 2* Ec n +ic r0er 3#antit$- A decision about how much to order has a great significance in inventory management. (conomic order #uantity is the si!e of lot to be purchased which is economically viable. "his is the #uantity of materials which can be purchased at minimum costs. 4* In!ent r$ t#rn !er rati - 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

    'ALUATION OF IN'ENTORIES
    "he 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. "he following methods for pricing materials issue are generally used:

    )* First in ,irst #t 5FIFO6 +eth 0- In first in first out method the materials received first are issued first. "he materials are issued in chronological order. "he recently received materials remain in stock. %henever a re#uisition for material issue is presented to store keeper he will use the price of first lot then, of second & then of third.

    .* Last in First #t 5LIFO6 - In +ast in first out method the last received materials are issued first. +ast 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. "he current cost will also be matched to current income.

    3' A!era1e c st +eth 0- 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:

    5a6 Si+%&e a!era1e c st: 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,,, Rs- & Rs. of first, second & third respectively/ then the prices will be : 5.7/7268/ 9 Rs /* "hough this is a simple method of pricing but particularly this method does not give good results.

    4.5 6eighte! Average 1etho!- In this method the total cost of all materials
    is divided by total of number of items in stock. "he 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 #uantity will be added to the earlier balance #uantity 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.

    2* Base St c- Meth 0- In this method some #uantity of material is


    assumed to be necessary for keeping the concern going. "he #uantity is not issued unless otherwise there is an emergency. "his material which is not issued as is kept in stock is known as base stock. "he earlier material received are kept as a base and are valued at the price on which they were ac#uired.

    4* Stan0ar0 Price Meth 0- "he price of materials is predetermined or


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

    :* Mar-et Price Meth 0- In this method the prices charged to the


    production are not cost incurred on the materials but the latest market prices. "he market prices may either be replacement prices or realisable prices. "he 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.

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