INTRODUCTION

Inventory Management

INTRODUCTION:

Every enterprise needs inventory for smooth running of it’s activities. It serves as

a link between production and distribution process. There is generally, a time lag between

the recognition of a need and its fulfillment. The greater the time lag, the higher the

requirements for inventory, it also provides a cushion for future price fluctuations. The

investment in inventories constitutes the most significant part of current assets/ working

capital in most of the undertaking. Thus, it is very essential to have proper control and

management of inventories.

The purpose of inventory management is to ensure availability of materials in

sufficient quantity as and when required and also- to minimize investment in inventories.

MEANING AND NATURE OF INVENTORY:

In accounting language, inventory may mean the stock of finished goods only.

In a manufacturing concern, it may include raw materials, work- in- process and

stores etc.

INVENTORY INCLUDES THE FOLLOWING THINGS:

a) Raw Material: Raw material form a major input into the organisation. They

are required carry out production activities uninterruptedly. The quantity of raw

materials required will be determined by the rate of consumption and the time

required for replenishing the supplies. The factors like the availability of raw

materials and government regulations etc. Too affect the stock of raw materials.

b) Work in Progress : The Work in progress is that stage of stocks

which are in between raw materials and finished goods. The quantum of work in

progress depends upon the time taken in the manufacturing process.The greater

the time taken in manufacturing the more will be the amount of work in progress.

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c) Consumables : These are the materials which are needed to smother the

process of production . These materials do not directly enter production but they

act as catalysts. Consumables may be classified according to their consumption

and criticality. Generally consumable stores do not create any supply problem and

firm a small part of production cost. There can be instances where these materials

may account for much value than the raw materials. The fuel oil may form a

substantial part of cost.

d) Finished goods: These are the goods which are ready for the consumers. The

stock of finished goods provides a buffer between production and market.The

purpose of maintaining inventory is to ensure proper supply of goods to

customers.

e) Spares: The stocking policies of spares differ from industry to industry Some

industries like transport will require more spares than the other concerns. The

costly spare parts like engines, maintenance spares etc. are not discarded after use,

rather they are kept in ready position for further use.

2

BENEFITS OF HOLDING INVENTORIES:

Although holding inventories involves blocking of a firms funds and the costs of

storage and handling, every business enterprise has to be maintain certain level of

inventories of facilitate un- interrupted production and smooth running of business.

In the absence of inventories a firm will have to make purchases as soon as it

receives order. It will mean loss of time and delays in execution of orders which

sometimes may causes loss of customers and business.

A firm also needs to maintain inventories to reduce ordering cost and avail

quantity discounts etc.,

There are three main purposes of holding inventories.

i) The transaction motive: Which necessitates the holding of inventories for meeting

the unpredictable changes in demand and supplies of materials.

ii) The precautionary motive :Which necessitates the holding of inventories for

meeting the unpredictable changes in demand and supplies of materials.

iii) The speculative motive: which induces to keep inventories for taking advantage of

price fluctuations, saving in re-ordering costs and quantity discounts.

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RISK AND COSTS OF HOLDING INVENTORIES:

The holding of inventories involves blocking of a firm’s funds and incurrence of a

capital and other costs.

The various costs and risks involved in holding inventories are:

1. i) Capital Costs: Maintaining of inventories results in blocking of the firms

financial resources. The firm has therefore to arrange for additional funds to meet

the cost of inventories.

2. The funds may be arranged from own resources of form outsiders. But in both the

case, the firm incures a cost. In the former case, there is an opportunity cost of

investment while in the later case, the firm has to pay interest to the outsiders.

ii) Storage and handing costs: Holding of inventories also involves

costs on storage as well as handling of materials. The storage of

costs include the rental of the godown, insurance changes etc.

iii) Risk of price decline: There is always a risk of reduction in the

prices of inventories by the suppliers in holding inventoruies.

This may be due to increased market supply, competition or

general depression in the market.

iv) Risk of obsolescence : The inventors may become obsolete due

to improved technology, changes in requirements,

change in customer tastes etc.

v) Risk determination in quality : The quality of materials also

deteriorate while the inventories are kept.

4

Need for the study:

Every company, on average spend 70% on raw materials (inventory) Therefore,

there is a need to know the raw material cost and also there is a great importance to

understand the inventory management system of this company.

The study helps a lot to the stores department to take remedial steps to control the

inventory process.

Objectives of the study:

1. To examine the organization structure of inventory management in the stores of

the SCCL.

2. To discuss pattern, levels and trends of inventories in SCCL.

3. To understand the various inventory control techniques followed by stores in

SCCL

4. To access the performance of inventory management of the SCCL by selected

accounting ratios.

5. To know the inventory control techniques of SCCL

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Methodology of the study:

The study is based on secondary data

The secondary data has been collected annual reports, manuals, purchase registers,

storage records of the organization.

But it was supplemented by with interaction with the concerned personal with

regard to some primary data.

Limitations of the study:

The study has the following limitations

1. The study is limited only For a period of 6 years I.e from 2003-2004 to.2008-09

2. The limitations of ratio analysis can be applicable to the study.

3. There may be approximations

4. The study is purely based on secondary data.

Period covered:

The study was carried in Singareni collieries company limited Ramagundam for a period

of five weeks.

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HISTORY OF THE COMPANY ORGANISATION PROFILE:

The Singareni collieries history goes back to 1886 when the Hyderabad Deccan

Company was in corporated in England with mining rights to exploit coal in the Yellandu

Area initially. Such is a 112 Year old mining company harving started its mining

operators in the year 1889.

The operations were under the management of British (1886to 1945) Nizam

(1945-1949) and the state government of Andhra Pradesh thereafter since 1959 the

government of India has been maintaining an equity share of 49%. The Singareni

Colleries company was in corporate in 1920 and in 1921 the company was converted in to

a public limited company and listed on the London stock exchange. It acquired the assets

and liabilities of Hyderabad (Deccan) Co. Ltd.

In 1945 the Nizam of Hyderabad state purchased the shares of the company and

brought it under government control. This earned SCCL the distinction of being the 1st

government managed coal Company in India.

The Company became a government company under the company’s Act in 1956

when the state government of Andhra Pradesh acquired the majority of share holding the

company.

Government of India participated in the development activity of the company

from 2nd June 1959.Government of India preferred to maintain 49% equity as contribution

under the tripartite agreement.SCCL is governed by a tripartite agreement between

SCCL, Government of AP and Govt. of India.

Balance funding has been in the form of long term loans to the company by Govt.

of India.Such operator about 58 miner (47U.G mines to 11 open cast mines) with a

manpower of 82.527 as on 31.3.2005 in four district of A.P i.e Khammam, Karimnagrar,

Adilabad and Warangal. It is the only coal mining company in south India and caters to

the needs of power sector, cement and II other coal based industries spread over 4

southern states.

Such contributor 10% country’s coal production, owning about 6% of national

reserves.

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STRATEGIC LOCATION IN SOUTH INDIA:

Such is the only coal producing company in South India. By virtue of its strategic

location the company is able to cater to coal requirements in this region.With the location

advantage the company has been able to market its entire production even in the face of

competition from imported coal and moderate recession.Reduced pressure on vail net

work if coal is to be supplied from Mch or Wch it requires long hauls on vail and

blocking of wagons.Availability of freight cost advantage to such consumer.

Due to its location in a backward region of AP, many under privileged depend on

such either for direct employment or for indirect economic activity in colliery areas.

MISSION OF SCCL:

01. To emerge as a premier coal producing company operating in the competitive

business environment.

02. To strive for self-reliance by optimum utilization of existing resources and to earn

adequate return on capital employed.

03. To exploit the available mining blocks with maximum conservation & utmost

safety; through improved technologies.

04. To make coal available in large quantities through sharing experience and

expertise with other organizations and to provide reliable and qualitative supplies

to consumers.

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PERFORMANCE OF LAST5YEARS

Year Production

(Lakh)

Dispatches

(Lakh)

O.M.S

(Tons)

Profit / Loss

(Rs. Crass)2004-2005 332.36 334.79 1.55 411.722005-2006 338.54 339.41 1.47 503.992006-2007 353.03 348.25 1.62 576.012007-2008 361.38 354.47 1.74 332.492008-2009 377.04 376.29 1.91 117.20

TECHNOLOGY WISE PRODUCTION (IN MILION TONES)

Dispatches during 2007-2008

Sector wise 9 Dispatches

Power 267.9

Cement 47.9

HW. Plant 4.20

Others 27.00

Colliery consumption 0.12

Total 348.2

IX PLAN INVESTMENT AND PRODUCTION

AS PER RESTRUCTURING PACKAGE2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Total

ACTUALContribution form State of

Central Govt.361.17 388.29 478 584.14 779.00 2952.14

Production 32.54 33.01 33.47 33.95 34.83 198.85Anticipated Demand 33.12 33.42 33.50 33.60 35.00 201.25

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PRODUCTION PROJECTIONS:

Operating

Region

PRODUCTION (MT) IN THE TERMINAL YEAR OF

1X Plan 2001 X Plan 2006-

07

Xi Plan 2011-

12

Xii Plan 2016-

17Bellampalli 505 605 8.0 8.7

Ramagundam 16.1 17.6 13.3 11.4

Kothagudem 12.4 12.5 13.8 15.1

Total 34.0 36.6 35.1 35.3

Open cast 0% 52% 48% 44% 29%

Underground 48% 52% 56% 71%

SCCL BALANCE IXTRACTABLE RESERVES (PRESENTLY

PROVED)

Mine Reserves Production/Annum

(MT)

Balance life

Years

Product Rate

(MT/YR)

Open Cost 725 17.8 40 15

Underground 1503 16.2 75 20

RESTRUCTURING PACKAGE- JULY 2009

1. Goap equity investment is Rs. 268 cores in the IX plan.

2. Goi equity investment in SCCL is Rs. 257.51 crores in IX plan

3. Goi shall allow amoratorium on payment of outstand interest of Rs.

663.34 crores during VIII plan period up to 3 1-3-2007

4. From 2007- 08 SCCL shall sturt paying Rs. 663.34 corores in to equal

installments.

5.Goi shall waive the payment of Rs. 66.11 cores of penal interest and intest during the

period form 31-3-2006 to 1-4-2007.

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SCCL strengths and weaknesses:

Strengths

Quick and smooth adoption of new technologies. SCCL is a pioneer in adopting blasting

galley (BG) technology (French) inpit crushing & conveying technology (Germany) and

longwall (UK & China) performance is very encouraging.

Weaknesses.

1. Limited financially viable reserves, amenable for open cast mining.

High striping rations in ocprojects.

2. Difficult geo- mining conditions like steepness, existence of clay bands

Incompatible roof and low grade of coal.

3. Advice lows and order conditions arising out of radical activities.

PROFILE OF SCCL IN BRIEF AS ON 3 1.3.2007 2008-2009

1. Production m.t.s : 377.04

2. Manpower nos. : 82,224

3.Turnover Rs.Crs : 3790.55

4. Share capital

-Govt of APRs Crs : 885.60

-GOI Rs Crs : 847.56

-Other Rs Crs : 0.04

Total Rs Crs : 1733.20

5. Reserves and surplus Rs Crs : 400.00

6. Cumulative loss Rs Crs : 19.00

7 Networth(4+5-6) RsCrs : 2114.00

8. Term Loans—OQI RsCrs : 3372

9 Debt equity ration Rs Crs : 0.38:1

10. Contribution to exchequea

GOAP Rs.Crs : 584.86

Gol Rs : 205.22

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DETAILS OF LOCATION OF VARIOUS UNITS:

SCCL operates 71 mines including 12 open cast mines in 12 operating areas in the

state of Andhra Pradesh.

Area U.G Mines OC mines Total District

Area U.G. Mines OC Mines Total DistrictKothagudeim 5 1 6 KammamYellandu 3 3 6 KammamManuguru 2 3 5 KammamBellampalli 7 1 8 AdilabadMandamarri 7 7 AdilabadRamakrishnapuram 7 7 AdilabadSrirampur 10 10 Adilabad

During 2007-20089as against the target 3405 of this production from open cast

mines was 16.49 million tones which decreased marginally by 1.67% over the previous

year.

Production and sales during the past 3 years are as follows.

Year Production (LT) Turn - Over Value (Rs. Crores)

2004-05 332.36 334.79 3141.83

2005-06 338.54 339.41 3178.65

2006-07 353.03 348.25 3413.73

2007-08 361.38 354.47 3629.10

2008-2009 377.04 376.29 3790.55

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PERFORMANCE DURING 2008-2009

WORKING RESULTS:

During the year 2008-09 the company has earned a profit of Rs. 11720 crores after

setting a loss of Rs. 19 crores incurred by the coal chemical complex (ccc) being managed

by the company as against a profit of Rs. 377.04 crores in the previous year.

Despite earning profit during the year 2007-08 the accumulated losses stood at Rs.

190.60 crores at the end of 2008-2009 and such continued to be termed as a “potentially

sick” within the meaning of sec 23 of the sick industrial companies (special provision)

Act. 1985.

After making necessary dustmen for prior period expenditure, the carry forward

loss at the end of the year under report was Rs. 190.60 crores as against Rs. 281.5 crores

at the end of the previous year. In view of accumulated losses no dividend was declared

to the shareholders.

THE APPROVED PACKAGE INVISAGES:

Infusion of additional equity of Rs. 198.04 crores by both the governments during

the remaining period of IX plan over Rs. 327.47 Crores already committed.

Waival of outstanding interest of Rs. 663.00 crores.

Waival of payment of Rs. 24 crores representing penal interest and interest on

interest accured on the loans from 1.4.97 to 3 1.3.99

Re shedulement of VII plan loan installments due up to 1.3.1998 to 1999 —2000

and 2000-2001 to repay during 2000-2001 and 200 1-2002 in two installments.

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PROJECTS PENDING WITH GOVT. OF INDIA FOR SANCTION:-

The following projects approved by Board of Directors of the company are

pending with GOI for sanction.

Sl. No. Name of Project Capital (m.t/pa)

Capital Rs. crores

Date of Approved

1 Drivage of inter-seam tunnels &

sinking of air shaft for intehration of

GDK-10 & 10A inclines.

- 8.09 11-6-04

2 Introduction of continuous miner in

PVK-5 incline.

0.400 48.30 11-06-04

3 Introduction of 10 man riding systems

under phase-III

- 24.27 11-06-04

4 Introduction of continuous miners in

GDK-8, 10&11A inclines.

0.240

each

63.63 11-06-04

5 Introductionof semi-mechanisation

with SDLs in 13 UG mines.

- 29.84 11-06-04

6 Introduction of semi-mechanisation

with LHDs in 3 UG mines.

- 22.68 11-06-04

7 Drivage of inter-seam tunnels in

KTK-1&1A inclines

- 1.52 11-06-04

8 Introduction of manriding systems in

6 UG mines under phase-IV.

- 15.02 20-10-04

9 Srirampur OC project-II 1.500 49.08 20-10-0410 Abbapur OCP 0.600 39.48 20-10-0411 Marginal scheme for provision of 5

cum electrical hydraulic excavators

for RG OC-II

- 0.88 20-10-04

12 Drivage of inter-seam tunnels at RK-5

incline

- 1.71 20-10-04

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Projects / Schemes under implementation :-

As on 31-3-2009 there were 62 mining projects (14 open cast and 30

underground) in various stages of implementation with an ultimate aggregate capacity of

21.14 million tones per annum with a sanctioned capital outlay of Rs. 1384.52 crores. Out

of 44 projects, 34 projects are on schedule. The implementation of the remaining 10

projects viz, was delayed due to adverse geo- mining conditions, delay in awarding the

contract, and order problems during the initial stages of construction.

Category wise employment position as on 31-3-09

EXHIBIT-1

IMPORTANT EVENTS IN THE LIFE OP S.C.C.L

YEAR MILESTONES

1889 Commencement of Mining operations

1948 Introduction of Machine Mining (Shuttle Cars, Ls)

1951 Introduction of Incentive schemes.

1951 Introduction of Electrical coal Drills.

1952 Introduction of Electrical Cap lamps

1953 Introduction flame proof mining machinery.

1975 Commencement of open cast mining projects.

1981 Introduction of latest under ground machine.

1983 Introduction Long wall Face Machinery,

1984 Installation of First 132/33 KVA substation

1985 Singareni Coal work graded from “C” to “G” grade

1986 Introduction of walking dragline in CC Mines.

1989 Introduction of French Blasting Gallery Technique

1991 Computerized information systems.

1994 Introduction of In-Pit crushing in ocmines

1995 Open casting of developed pillars and go ap aran

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INVENTORY MANAGAMENT

Rs. In Crores

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

total Stores 67 48 13 11 55

Revenue Stores 210 188 194 170 165

Total Stores 277 236 207 181 220

Revenue Stores 199 209 213 257 302

Man Power / Month 16.58 17.41 17.75 21.41 25.46

Closing Stock in Number of

months Consumption5.7 4.7 4.8 3.6 3.9

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III. INVENTORY MANAGEMENT OF SCCL

In order to know inventory management system of SCCL a questionnaire analysis has

been served to the company and got it filled upon by stores Manager of the company.

The questionnaire data has been presented below the organization structure of

inventory and stores department are as follows.

ORGANISATION STRUCTURE OF SCCL, STORES

Director

Chief of Stores

AddL. Chief Engineer

Dv. Chief Engineer

Sr. D.E

Executive Engineer

Junior Engineer

ORGANISATION STRUCTURE OF AREA STORES

General Manager

Dy. Chief Engineer

Executive Engineer

Store Keeper

Staff

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The executive responsibilities to manage the inventory is to maintain

inventory is to maintain inventory without stock or hampering of production.

The company classifies inventory in to FM’s WIP, FG’s Stores and Spares &

Consumables.

The company purchase inventory from local, non- local and some times

imports.

The objective purchase inventory management of this company are

i) Maintaining minimum inventory.

ii) Not to hamper the production

iii) Avoid stock out situation.

iv) Proper planning of materials.

The company plans for inventory requirements using ABC analysis technique.

Items costing 70% arc denoted as high level and grouped in to ‘A’ type medium level

items value 20% will be grouped in to ‘B’ type and the low level items valuing 10%

will be taken in to ‘C’ type.

The Company plans for inventory consumption on monthly basis.

The company values the materials applying FIFO and weighted average methods.

In order to control the inventory the company is through tenders.

The specific problems of this company with regard to inventory are computerization,

inter stores transitioning. The method adopted by the company for stock verification

is done once in an year physically with the help internal audit department. In general

this physical affection is done in the month of January.

Verified balance will be certified on the bin card by internal audit the bin card and

ledger balance should be tallied with verified balance.

The methods adopted for controlling the storage loss are checking with the

stores ledger.

The company is not maintaining any inventory norms, ratios.

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Stores Management:-

In Singareni, We have total 19 stores.

Area Main

Stores

Long

Wall

Stores

Open

Cast

Stores

Central

Stores

Area

Stores

Total

KGM 1 1 Nil 1 Nil 3G.K Nil - 1 - - 1YD - 1 1 - 1 3MNG - - 1 - 1 2RGM - 1 3 - 1 5BHPL - - - - 1 1BPA - - - - 1 1MM - - - - 1 1RKP - - - - 1 1SRP - - - - 1 1TOTAL 1 3 6 1 8 19

A calendar Programme for purchase of various items in different months is

prepared, but this may not be strictly followed.

Main stores sends blank want sheets to respective stores. They send their

requisition to main stores. Consolidation of various want sheets in done here and

forwarded to purchase department for placing order.

Calculation of net stock to be ordered (at area level)

Projected Requirement (PR)

Average monthly consumption X 15

(12 months requirement + 3 mon. safety stock) = A Net

Requirement (Actual)

P.R - Stock - B.O (Balance in order)=3

Example last two years consumption

2007-08/08-09or Any months consumption / No of months

After processing purchase order When actually order is placed before selected

supplier- A reviewed requirement is sent to purchase department by main stores.

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Reviewed wan sheet requirements report :-

User Actual Consumption Requirement

as per the

want sheet

Projected

req. during

Stock

on

hand

Balance

on order

Net

Requirement

Remarks

2006-07 07-08 08-09

Codification:-

Advances of codification

1. Eliminates stocking of same item under different item function or by use.

2. Eliminate unnecessary varieties for example - sizes.

3. Enables proper storage and prompt issue of materials.

4. Enable proper procurement and accounting.

5. Facilitates introduction of modern inventory control.

6. Facilitates introduction of computerization for accounts and reporting.

Codification in to class of material is done taking in to consideration the

characteristic and use etc.

Code Structure :-

1 2 34 56 789 10

Main Clause

Sub-Clause

Detailed

classification or

Special

Features Or

Subassembly

Sequential

Number

Check Digit

Stores Accounting System

Spares parts information system

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Example :-

Number :- t)140011863

Check digit Calculation

6 X 10 = 60

1 X 9 = 9

4 X 8 = 32

0 X 7 = 0

0 X 6 = 0

1 X 5 = 5

1 X 4 = 4

8 X 3 = 24

6 X 2 = 12

Proof:- 11)146(13

11

36

33

3

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DIFFERENT TYPES OF TENDERS :-

1. Open tender or Global tender :- If item is to be imported, then

global tender is given.

= If value of tender> 5 lakshs.

= If refillable source of supplier not known

= Advt. May bring better response.

=To avoid connivance of tenders.

2. Limited Enquiry.

Value of tender < 5 lakhs.

Reliable source of supply is known with previous record.

For value of tender> 5 lakshs in urgent matters.

3. Single tender :-

If purchase is form original equipment manufacturer (or)sub assembly

manufacturer, single tender is floated. If purchase is from authorised dealer-list of

those peal and to be obtained.

For Property items and items procured regularly, long tern contract

(may be one year) is entered to supply the material at particular rate.

4. Report order:-

The original order is undertaken in normal course.

Not more than 2 years gap in original order and repeat order.

There should not be declining price trend.

Not more than two repeat orders to be placed.

Sanction of competent authority to be taken.

# Tender documents are purchased alter paying requisite fees. Tenders are put in a

buy. Normally they are opened on Wednesdays and Saturdays.

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5. CIL order basis :- For explosives and other heavy equipment like dumpeas,

dozes rate paid by CIL is adopted.

6. Emergency Purchases :- They can be produced at Hyderabad/ Corporate /

Are level.

Tenders submission Period:-

For limited quotation 3 to 4 weeks.

Open advertisement 4 to 6 weeks.

Imports 12 weeks.

Place of submission :-

Corporate office — Kothagudem.

Hyderabad Office

Godavarikhani

Tender is closed at 5-OOPM on tender closing date.

Only EMD part and technical part are opened price part opened only after technical

acceptance.

Members for technical evaluation committee

E.D(E&M)

G.M (Project Planning)

Concerned Area General Manager

Addl. Chief (Corporate)

Chief Survey Officer

After obtaining permission of competent authority, price quotations are

opened Date of opening intimated to technically accepted parties. Cancellation of

tender

Parameters like lead, lift, bench- wise quarries due to geological reasons, after

approval form appropriate authority.

Curtail the price increase ring formation.

No response or Poor response.

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Termination of Contract :-

If work is not up to specifications, then contract can terminated. In case of

legal problems too. Then payment is done only up to portion of work completed.

Disposal Section:-

Under this mainly non- moving items are disposed For assessing the value of

disposal item there is a committee called disposal committee. Other disposal items are

machineay and non- machinery items. The disposal committee disposes these items

basing on survey off report through form” A” .These items are entered in financial

books (B). These are sold of as scrap according to format B.

Mode of Payment :-

73.5% of material value along with applicable taxes and duties on 100%

material value should be drawn in favour of the SCCL Payable at

Kothagudem.

1.5% of material value in favour Payable at Visakhapatnam.

The above Payments have to be manic within the following target dates.

i) Material value for each lot below 5

lakkhs

With in 20 days from the date of auction

ii) Material value for each lot between 5-

15 lakhs

With in 25 days from the date of auction

iii) Material value for each lot be Aviv 15

lakhs

With in 30 days from the date of auction

iv) CST @ 4% against fro ‘C’ will be accepted from registered central sales tax

24

25

C & MD

DIR (PAE)

FUNCTIONARIES HAVE OVERLAPPIN MINING & NON MINING

FUNCTION ARIES HAVE OVERLAPPIN

FUNCTION ARIES HAVE OVERLAPPING & NON MINING ACTIVITIES

NONMINING DEPTS.

SCHOOL & COLLEGE

CHF (TRG)

GM (W)

NONMINING EDEPTS.

CMO

ED(P&tm HFM

& M

CIE

HOSPITAL

ACPA - IASO

ED= Executive Director

E & M = elec. & rnech.

CE = Chief Engineer

OCP Open Cost Project

P & W = under ground mines

SFTY = safety

CIE= Chief industrial engineer

QM= Quality Management

OF & A = Chief finance & a accountant

PERS = Personal

CVO= Chief Vigilance officer

EMC= Environment Monitoring cell

M & M = Marketing & Movement

PAW= Personal admin & welfare

EDP= Electronic Data

RO=Resident Officer

CMO= Chief Medical Officer

P &T = Plantation & Timber

ACFA = Additional chief finance asst.

IA = Internal Audit.

SECY= Security

T= Training.

26

REVIEW OF LITERATURE

Definition of inventory Management: Inventory management is concerned

with the determination of optimum level of investment for each components of

inventory and the efficient use of components and the operation of components and

the operation of an effective control and review of mechanism. The main objective of

inventory management are operational and financial. The operational objective mean

that the materials and spares should be available in sufficient quantity so that work is

not disrupted for want of inventory. The financial objective mean that the materials

and spares should be available in sufficient quantity so that work is not disrupted for

want of inventory.

The following are the objective means that investments in inventory should

not remain idle and minimum working capital be locked in it.

The following are the objectives of inventory management:

1) To ensure continuous supply of materials, spares and finished goods so that

production should not suffer at any tie and the customers demand should also

be met.

2) To avoid both over-stocking and under-stocking of inventory.

3) To maintain investment in inventories at the optimum level as required by the

operational ad sales activities.

4) To keep material cost under control so that they contribute in reducing the cost

of production and overall costs.

5) To eliminate duplication in ordering or replenishing stocks. This is possible

with the help of centralizing purchases.

6) To minimize loses through deterioration pilferage wastages and damages.

7) To ensure perpetual inventory control so that materials show in stock ledgers

should be actually lying in the stores.

8) To ensure right quality goods at reasonable prices. Suitable quality

standards will ensure proper quality of stocks. The price analysis, the cost-

analysis and value analysis will ensure payment of proper prices.

9) To facilitate furnishing of date for short-term and long-term planning and

control of inventory.

27

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

A proper inventory control not only helps in solving the acute problem of

liquidity but also increases profits and causes substantial reduction in the working

capital of the concern.

1. Determination of Stock Levels:

Carrying of too much and too little of inventory is detrimental to the film. If

the inventory level is too little, the firm will face frequent stock outs involving heavy

ordering cost and if the inventory level is too high it will be unnecessary tie up of

capital.

An efficient inventory management requires that a firm should maintain an

optimum level of inventory where inventory costs are the minimum and at the same

time there is no stock out which may result in loss or sale of shortage of production.

2 Minimum Stock Level: It represents the quantity below its stock of any item

should not be allowed to fall. Lead Time: A purchasin firm requires sometime to

process the order and time is also required by the supplying firm to execute the order.

The time taken in processing the order ad then executing it is known as lead

time.Read of consumption: It is the average consumption of materials in the factory.

The rate of consumption will be decided on the basis of past experience and

production plans. Nature of material: The nature of material also affects the minimum

level if a material is required only against the special order of the customer then

minimum stock will not be required for such material. Minimum stock level can be

calculated with the help of following formula.

Minimum stock level = Reordering level - (normal consumption x normal re-

order period)

28

b) Re-ordering level:

When the quantity of materials reaches at a certain figures then fresh order is

sent to get materials again. The order is sent before the materials reach minimum

stock level. Re-ordering level is fixed between minimum level and maximum level.

Re-ordering level = Maximum consumption x Maximum re-order period.

C) Maximum Level:

It is the quantity of materials beyond which a firm should not exceed its

stocks. If the quantity exceeds maximum level limit the it will be over-stocking.

Overstocking will mean blocking of more working capital, more space for

storing the materials, more wastage of materials and more chances of losses from

obsolescence.

Maximum stock = level = Reordering level + Reorder quantity (Minimum

Consumption x Minimum reorder period).

d) Danger Stock Level:

It is fixed below minimum stock level.

The danger stock level indicates emergency of stock position and urgency of

obtaining fresh supply at any cost.

e) Average Stock Level:

This stock level indicates the averages stock held by the concern.

Average stock level = Minimum Stock level + 1/2 x reorder quantity.

2. Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated increase in usage. The

demand for materials may fluctuate and delivery of inventory may also be delayed

and in such a situation the firm can face a problem of stock out.

In order to protect against the stock out arising out of usage fluctuations, firms

usually maintain some margin of safety stocks.

29

Two costs are involved in the determination of this stock that is opportunity

cost of stock outs and the carrying costs.If a firm maintains low level of safety

frequent stock outs will occur resulting into the larger opportunity costs. On the other

hand, the larger quantity of safety stocks involves carruing costs.

3. Economic Order Quantity (EQQ):

The quantity of material to be ordered at one time is known as economic

ordering quantity. The quantity is fixed in such a manner as to minimize the cost of

ordering quantity.

The quantity is fixed in such a manner as to minimise the cost of ordering and

carrying costs.

Total cost of material = Acquisition Cost + Carrying Costs + Ordering Cost.

Carrying Cost:

It is the cost of holding the materials in the store.

Ordering Cost:

It is cost of placing order for the purchase of materials

EOQ can be calculated with the help of the following formula.

EOQ = √2 CO/I

Where C = consumption of the material in units during a year

O = Ordering Cost

I = Carrying Cost or interest payment on the capital.

I

EOQ

CO

30

A - B C Analysis: (Always better control analysis)

Under A-B-C Analysis the materials are divided into 3 categories viz. A,B and C.

Almost 10% of the items contribute to 70% of value of consumption and this category

is called ‘A’ category.

About 20% of the items contribute about 20% of value of consumption and

this is known as category ‘B’ materials. Category ‘C’ covers about 70% of items of

materials which contribute only 10% of value of consumption.

5. VED Analysis : (Vital, Essential, Desire)

The VED analysis is used generally for spare parts. Spare parts classified as Vital (V),

Essential (E)and Desirable(D) The vital spares are must for running the concern

smoothly and these must be stored adequately. The ‘E’ type of spares are also

necessary but their stocks may be kept at low figures.

The stocking of ‘D’ type spares may be avoided at times. If the lead time of

these spares is less then stocking if these spares can be avoided.

6. Inventory turnover ratio:

Inventory turnover ratios are calculated to indicate whether inventories have been

used efficiently or not.

The inventory turnover ratio also known as stock velocity is normally calculated as

sales / average inventory of cost of goods sold / average inventory.

Inventory conversion period may also be calculated to find the average time taken for

clearing t stocks. Symbolically,

Cost of goods sold Inventory Turnover Ratio = -------------------------------

Average inventory at cost. Or

Net sales= --------------------------

(Average) Inventory.

(Cost of goods sold = opening stock + Net profit + Direct expenses – Closing Cost)

Average inventory =( Opening inventory + Closing Inventory) /2

Days is a year And Inventory conversion period = -----------------------------------

Inventory Turnover Ratio

31

7. Classification and Codification of inventories:The inventories should first be classified and then code numbers should be

assigned for their identification. The identification of short names are useful for

inventory management not only for large concerns but also for small concerns. Lack

of proper classification may also lead to reduction in production.

Generally, materials are classified accordingly to their nature such as

construction materials consumable stocks spares lubricants etc. After classification the

materials are given code numbers. The coding may be done alphabetically or

numerically. The later method is generally used for coding.

The class of materials is assigned two digits and then tow or three digits are

assigned to the categories of items divided into 15 groups. Two numbers will be

category of materials in that class.

The third distinction is needed for the quality of goods and decimals are used

to note this factor.

8. Valuation of inventories — Method of valuation:

FIFO method

LIFO method

Base Stock method

Weighted average price method

32

CRITERIA FOR JUDGING THE INVENTORY SYSTEM:

While the overall objective of the inventory system is to minimize the cost to the

firm at the risk level acceptable to management the more proximate criteria for

judging the inventory system are

o Comprehensibility

o Adaptability

o Timeliness

Areas of improvement:

Inventory management in India can be improved in various ways improvements could

be affected through.

Effective computerization : Computers should not be used merely for

accounting purposes but also for improving decision making.

Review of classifications : ABC classification must be periodically reviewed.

Improved Co- ordination: Better co- ordination among put chase production

marketing, and finance department will help in achieving greater efficiency in

inventory management.

Development of long term relationships:

Procedures for disposing obsolete / surplus inventories must be simplified.

Adoption of challenging norms:

Companies should set benchmarks with global competitors and use ideals like JIT to

improve inventory management.

33

Inventory cost-an overall view

Introduction:

In financial parlance inventory is defined as the sum of the value of the raw materials

fuels and lubricants spares parts maintenance consumable semi processed materials

and finished goods stock at any giving point of time. The operational definition of

inventory would be amount of raw materials fuel and lubricants spare parts and semp-

processed materials to be stocked for the smooth running of the plant/industry.

Need of inventory:

About 10% of the total cost of production in SCC Limited represents

inventory cost. Inventories are maintained basically for the operational sooth ness

which they can be affected by. uncoupling successive stages of production where as

the monetary value of the inventory serves as a guide to indicate the size of the

investment made to achieve this operational convenience. The materials management

departments primary function is to provide this operational convenience with a

minimum possible investment inventories. Materials departments is accused of both

stock outs as well as large investments in inventories. The solution lies in exercising a

selective inventory control and application of inventory control techniques.

Inventories built to act as a cushion between supply and demand. It is sufficient to

take care of the requirements of demand till the next supply arrives. It is sufficient to

take care of probable delays in supply as well as probable variations in demand.

The size of the inventory depends upon the factors such as size of industry

internal lead time for purchase, supplier’s lead time, vendor relations, availability of

the materials, annual consumption of the materials. Inventory cost can be controlled

by applying Modern Techniques Viz., ABC analysis, SDE, FSN, HMC, VED etc.,

These techniques can be used effectively with the help of computerization.

34

Who determines Inventory:

Norm per inventory could be set by the area top management. In the SCCL

corporate planning department will allocate this investment with the various items

taking into consideration the requisitions given by the areas and requisition approved

by the corporate planning department for smooth operation of the company. Purchase

department will process the procurement action.

What is meant by inventory cost:

Inventory Cost Represents:

A. The total value of stores and spares and capital spares

B . Stores in transit an under inspection and

C. Stock of finished products.

Normally, there are certain problems in maintaining optimum level of

inventory Problems of inventory can be resolved by the cost implications. Costs

which are relevant for consideration are discussed in the following lines;

Basically there are four costs for consideration in developing an inventory

model.

1) The Cost of placing a replenishment order.

2) The cost of carrying inventory.

3) The cost of overstocking.

4) The cost of overstocking.

The cost of ordering and inventory carrying cost are viewed as the supply side

costs and help in the determination of the quantity to be ordered for each

replenishment.

The under stocking and over stocking costs are viewed as the demand side

costs and help I the determination of the amount of variations in demand and the

delay in supplies which the inventory should withstand.

Whenever an order placed for stock replenishment, certain costs are involved,

and for most practical purpose it can be assumed that the cost per order is constant.

35

The ordering cost may very depending upon the type of items, for example raw

material like steel against production component like castings steel plants, support

materials in the case of coal Industry.

The cost of ordering includes:

1) Paper work costs, typing and dispatching an order:

2) Follow up costs — the follow up required to ensure timely supplies includes

the travel cost for purchase follow up, the telephones, telex and postal bills

etc.,

3) Costs involved in receiving of the order, inspection, checking and handling in

the stores.

4) Any set up cost of machines charged by the supplier, either directly indicated

in quotations or assessed through quotations for various quantities.

5) The salaries and wages of the purchase department.,

Cost of inventory carrying:

This cost is measured as % of the unit cost of the item. This measure gives

basis for estimating what is actually costs a company to carry stock.

This cost includes:

1) Interest on capital

2) Insurance and Tax Charges

3) Storage costs — labour costs, provision of storages area and facilities like

bins, racks etc.,

4) Transport bills and hamali charges.

5) Allowance for deterioration or spoilages.

6) Salaries of stores staff.; 7) obscene.

The inventory carrying cost varies and a major portion of this is accounted for by

the interest on capital. SCCL is paying 20% interest on back loans.

36

Under stocking Cost:

This cost is the incurred when an item is out of stock. It includes cost of lost

production during the period of stock out and the extra cost per unit which might have

to be paid for an emergency purchase.

Overstocking Cost:

This cost is the inventory carrying cost (which is calculated per year) for a

specific period of time. The time varies in different contexts it could be the lead time

of procurement of entire life time of machine. In the case of time purchases, over

stocking cost would be = purchase price -- scrap price.

Inventory cost In relation to SCCL shall be classified as follows:

Inventory can be classified as capital and revenue. Certain items though titled

as capital in nature. Example coal tubs, cap lamps etc., 100% of the depreciation shall

be charged in the year they are drawn. Hence, due care is to be taken by used mine

while drawing the material.

Materials which are to be imported from other countries have to

be planned well in advance nearly about 24 months and to initiate the proposals for

procurement.

Similarly some of the items do not require any lead time since they are

available I the local market. For example sand, dolomite power, automobile spares

etc.,

Sand transportation could be done with minimum lead time in Manuguru,

Kothagudem areas and Godavarikhani region since abundant sand is available in

nearby areas of operations. Similarly some of the inventories are to be procured

during particular seasons For example timber. General experience in SCCL reveals

that the production during the moths of November to March is on high side as such

the requirement of spares and stores will be on high side. As such we must be in a

position to keep the material with better economics far these five months taking lead

time into account for procurement of material to get optimum production. In the

current financial year production trend reveals that the production is improving and

37

showing good performance through out the year unlike earlier years in underground

mines.

Inventory cost of any organisation also adversely affects by retaining

obsolete / scrap and inventory costs can be reduced by the- management with an

advance planning of procurement of materials, periodical review of existing spares

with reference to the fast consumption, ascertaining the information regarding the

availability of spares in other areas Holding of extra inventory will be an additional

financial burden to the company due to payment of interest charges on the materials

purchased, diminishing value

of materials by keeping them in stores for a long time handling charges, space

rent etc., inventory in SCCL during 2004-05 to 2008-09.

Rs. In Lakhs 2004-05 2005-06 2006-07 2007-08 2008-09

1) Stores and spares

and capital items.23738.70 20794.40 18184.29 22115.37 20126.41

2) Stores in transit

Under inspection2677.11 2452.64 3538.64 2659.71 4160.00

3) Stock of Coal,

Coke and Coal for

fuel

4181.58 2522.84 1656.22 4994.40 8225.15

In general 3 months consumption of stores and spares and one month sales of

coal stock, will represent idle inventory. The stock of consumable spares at

Godavarikhani projects area during 1997-98 were in the order of Rs. 867.94 lakhs

against the consumable spares of Rs.404.96 lakh as on 31-12-2002 showing a

reduction of Rs.462.98 lakhs.

Expenditure incurred during November 1999 in SCCL on stores inventory in

Rs. 1138.46 lakhs reflecting the inventory of stores spares cost at Rs.43.77 per tonne

exclusive of explosives.

Area — wise details are as follows:

38

AREA Output Stores Cost (Rs. In Lakhs)

Cost / tonne (In Rs.)

Upto Nov,. 2008 Cost / Tonne

Kothagudem 2.72 161.49 59.37 100.19Yellandu 2.21 2.21 40.56 50.16Manuguru 4.59 165.38 36.03 38.99Bellampalli 0.71 48.00 67.61 77.78Mandamarri 1.60 58.82 36.76 40.48Srirampur 2.12 86.39 40.75 42.25Ramagundam-I 2.31 125.31 54.25 47.31Ramagundam-II 2.47 192.31 77.86 156.97Ramagundam-III 5.41 148.50 27.45 43.96Bellampalli 0.37 6.44 17.40 41.97SCCL 26.01 1138.46 43.77 57.75

CONCLUSION:

In order to reduce the inventory cost the following steps may be considered.

1) Accurate assessment of materials requirement from area level to corporate

office.

2) Communicating proper delivery schedule to suppliers based on our

requirements.

3) Better planning at mine level before installation of equipment viz., gravitation

fans, haulage and pumping etc.,

4) After careful study the norms should be fixed regarding consumption of

various spares / items.

5) Standardization of equipment will facilitate inter changeability in the event of

breakdowns and also reduce the downtime of machines / equipment.

6) Preventive maintenance of equipment as per the schedules.

7) Periodical spot checks at work spots for tracing the availability of spares and

the consumables.

8) Accountability and responsibilities are to be fixed.

9) Introduction of technical audit calls and

10) Updating of technology from time to time.

11) Re-utilization of materials. Accounting for materials:

39

Accounting for materials:

The accounting for direct material begins with the issuance of the purchase

requisition and ends only when the finished product has been shipped to the customer.

In the course of this cycle the other two elements of cost, direct labour and

factory over heads become part of material cost to the extent that they are applied to

production and included in inventory values.

Acquiring raw materials from vendors:

Four basic documents are involved in acquiring materials from vendors. They

are: purchase requisition, the purchase order, the receiving report an the vendors

invoice. After due consideration of purchase requisition, a vendor is selected and a

purchase order is sent to the vendor by the purchasing agent. Ultimately the

merchandise ad the vendors invoice are received and the receipt of merchandise is

recorded on a receiving report. If the vendors invoice, the purchase order, and the

receiving report are found to be in agreement, a voucher for payment is approved. At

this time the receipt of the merchandise is recovered in the General ledger as follows:

Debit Raw materials inventory

Credit Accounts Payable

When payment is made, the blowing general ledger entry is made:

Debit Accounts Payable

Credit Cash

Purchase Requisition:

This is used to request the purchasing agent to order materials. Timing of the

requisition and the amount to be requisitioned depend on the kind of material and the

circumstances.

For control purposes it is import ant that the individuals authorised to issue

purchase requisitions be limited to such personnel as foremen, store keepers and

deptmenta1 heads.

40

The purchase requisition originates a substantial percentage of the total costs

of a company, and one of the surest ways to control costs is to control them before

they are incurred.

Purchase requisitions may be dispensed with in those instances where

agreements are made with a supplier to meet specified requirements over a period of

time. Such agreements arc blanket purchase requisitions.

In many companies, a copy of the requisition is sent to the accounting

department for checking of the propriety of the code. The origination also inserts the

quantity to be ordered the description of the material, the amount on hand, the

monthly consumption and any special rotation as to the purpose for which the

material is ordered. Vendor selection upon such things as quality and availability of

desired quantities when needed as well as price.

Purchase Orders:

A purchase order is prepared from the purchase requisition, with sufficient

copies to meet the requirements of the company organization structure. Usually at

least four are prepared, the original for the vendor and copies for the purchasing

department files, the accounts payable department and the receiving department. The

copy for the latter department may have the quantity ordered blocked out so that the

count of material at receiving will not be influenced by the quantities shown on the

purchase order.

The purchase order is a vital document in the materials accounting process for

when it is accepted by the vendor, it becomes a contract. As a contract it must be

complete and specific. Therefore, following the listing of items ordered would be

stated the required delivery date, packing and shipping instruction, billing instruction,

and terms of payment. It is customary to include clauses and conditions as to

warranty, patent infringement, contractor’s liability when services are to be performed

etc., Such clauses may be inserted as required or be printed on the face or back of the

order with a definite and well marked statement that they are a part of the contract.

These clause are very useful controlled devices from the point of view of preventing

costly legal entanglements.

41

Receiving Reports:

When material is received, the quantity is determined by counting, weighting

or other measurement by the receiving department. This is done to assure that

payment is made only for goods actually received.

The receiving department prepares receiving reports, either on a special form

or on a receiving copy or copies of the purchase order.

Payment of Invoices:

Vendor’s invoices are sent to the accounts payable department. Approved

vendor’s invoices are filled by vendor according to date of payment. On the date a

voucher is prepared on which are listed the invoices of the vendor covered by the

voucher. The cheque is draw for the net amount indicated by the voucher. A

combination cheque and voucher dorm is frequently used. The Reordering in the

invoice register may be done when the invoice are received or after they are attached

to the voucher for payment.

Internal Control:

The purchasing, receiving and payment procedures for goods are services are a

vital part of system of internal control.

The matching of purchase orders, receiving records, and vendor’s invoices

assures that payments are not made for goods and services not received and that the

items of the invoice are in agreement with those specified in the purchase order. The

entire process aids in the control of costs, for any payment for goods and services

must ultimately be reflected in the accounts as a cost of the current period or of a

future period.

42

ACQUIRING RAW MATERIALS FROM THE STORE

ROOM

Recognise need for

materials in

production

Stores

requisition

Materials are sent to work place

Notifies

Storeroom Clerk

Of Needs

Requisition is recorded in

1. Requisition summary used to

record general ledger entry

transferring R.M’s to WIP.

2. Perpetual inventory records.

3. Departmental cost records used

to accumulate materials costs by

responsibility centres ad to

determine costs for individual

production process.

4. Job cost sheets used when

manufacturing is of a job shop

variety and costs must be kept

by individual jobs.

43

JOURNAL ENTRY:

To record total of requisition summary

Debit Work in process

Credit Raw materials inventory.

The first step is the recognition of the fact that materials are needed for

production. Workers, foreman and production control personnel are usually the people

that recognize the need for material.

The store requisition is prepared in order to obtain materials from the store

rooms that materials are to be released for production. For control purposes it is best

to have the foreman and / or specified production control personnel requisition the

materials.

In some plants the production control department may issue stores requisition

at the same time that production schedules are issued. The foreman in such cases

might be restricted only to the issuance of the requisition for materials required in

excess of estimated or standard quantities. This excess stores requisition is usually a

distinct form which might require a supervisor’s signature as well as foreman’s

signature. Waste of material cannot be hidden for long when excess stores requisitions

are used.

44

REORDERING THE STORES REQUISITION - THE GENERAL

LEDGER

The stores requisition is recorded in the general ledger and in various

subsidiary ledgers. Among the usual subsidiary leaders are the perpetual inventory

cards, departmental cost records, and job cost sheets.

STORES REQUISITION SUMMARY

Date Req. No. Dept. I Dept-II Total

Direct Indirect Direct Indirect Direct Indirect

Total

In the general ledger, stores requisitions are recorded by a transfer from raw

materials inventory (a credit) to work in process ( a debit).

Each stores requisition is not the subject of a general ledger entry. The stores

requisitions for a month are totaled, and this total is the subject of the above general

ledger entry. Ordinarily each stores requisition is recorded in a requisition summary

which is totaled each month to determine the dollar amount of the general ledger

entry.

A requisition summary show above provides departmental distinctions as well

as distinctions between direct and indirect materials.

When the general ledger contains only one work in process account and one

factory overhead account the monthly entry from the requisition summary would be:

Debit Work in process (for direct materials)

45

Debit Factory overhead (for indirect materials)

Credit Raw materials inventory

When the general ledger contains departmental account the monthly entry

from the requisition summary would be:

Debit Work in Process — I

Debit Factory Overhead — I

Debit Work in Process — 11

Debit Factory Overhead — II

Credit Raw materials inventory

Reordering the stores requisition - a subsidiary ledger:

The three basic subsidiary ledgers in which stores requisitions might be

recorded are the perpetual inventory cards, departmental cost records, and job cost

sheets. Perpetual inventory are very useful for inventory control purposes, whereas

departmental cost records are valuable aids in a accounting for each area of

responsibility” In addition, departmental cost records are indispensable aids in

calculating unit costs when production is of a continuous process nature for example a

canning factory. Stores requisitions can be recorded individually in subsidiary ledgers,

or if summarizations are possible requisitions can be recorded in summary form. The

perpetual inventory cards are to be useful aids in controlling inventories, the stores .

requisitions must be recorded therein at least once each week or ever daily for critical

major materials. Departmental cost records can take many different forms. However,

if they are to be complete, direct materials, direct labor, and factory overhead must be

a part of such records.

The job cost sheet contains complete information on the costs pertaining to a

job. Direct labourm direct material, other direct charges, and factory overhead are all

included on a job cost sheet. Other direct charges include such items as special tools

and dies which can be and are worthwhile tracing to individual jobs. Factory overhead

per job is usually estimated in terms of direct labour costs or direct labour hours. This

estimate is called the applied factory overhead” per i he job.

46

PHYSICAL COUNTS - TESTING THE PERPETUAL

INVENTORY RECORDS:

Perpetual inventory records must be verified by periodic physical counts.

These counts are a necessary part of testing the accuracy of records used in inventory

control and of testing the extent to which established inventory procedures are

followed. The counting may be done on a rotating basis with some items counted each

day or week or a complete count may be made at the end of a year.

INVENTORY VALUATION AND COST FLOWS

What is the cost of inventory?

One can readily visualize the determination of inventory quantities by physical

count or by use of perpetual inventory records. When the quantity is determined, it

must be multiplied by a unit cost in order to determine the inventory value that is used

on financial statements.

Trade and quantity discounts arc to be excluded from unit cost since these

discounts exist for the purpose of defining the true invoice cost of merchandise. Cash

discounts, on the other hand, have been considered as a reward for early payment and

as a penalty for late payment. The “reward” has often been interpreted as a loss of

income, whereas the “Penalty” has often been interpreted as a loss rather than as a

part of unit cost. Thus it would not be difficult to find difference of opinion as to

whether invoice cost includes or excludes cash discount. When the “current

replacement cost” of material on hand on the close of a year is less than the actual

cost, the inventory value is reduced to replacement cost (current market price). Thus

the acceptable basis inventory valuation is the “lower of cost or market” or more

properly the “lower of actual cost or replacement cost”.

The determination of inventory values is very important from the point of

view of the balance sheet and the income statement since costs not included in the

inventory (the balance sheet) are considered to be expensive and are thus included in

the income statement.

47

Valuation of Inventories — Methods of Determination:

Although the prime consideration in the valuation of inventories is cost, there

are a number of generally accepted methods of determining the cost of inventories at

the close of an accounting period. The most commonly used methods are first – in

first – our (FIFO) average, and last.in.first.out (LIFO). The selection of the method of

determining cost for inventory valuation is important for it has a direct bearing on the

cost of goods sold and consequently on profit. When a method is selected, it must be

used consistently and cannot be changed from year to year in order to secure the most

favourable profit for each year.

THE FIFO METHOD (FIRST.IN.FIRST.OUT METHOD)

Under this method it is assumed that the materials or goods first received arc

the first to be issued or sold. Thus according to this method, the inventory on a

particular date is presumed to be composed of the items which were acquired most

recently.

Advantages: The FIFO method has the following advantages:

1) It values stock nearer to current market prices since stock is presumed to be

consisting or

2) The most recent purchases

3) It is based on cost and therefore, no unrealized profit enters into the financial

accounts of the company.

4) The method is realistic since it takes into account the normal procedure of

utilizing or selling those materials or goods which have been longest in stock.

Disadvantages: The method suffers from the following disadvantages:

1) It involves complicated calculations ad hence increase the possibility of

clerical errors.

2) Comparison between different jobs using the same type of materials become

sometimes difficult. A job commenced a few minutes after another job may

have to been an entirely different charge for material because the first job may

have to bean a entirely different charge for materials because the first job

completely exhausted the supply of materials of the particular lot.

48

The FIFO method of valuation of inventories is particularly Suitable in the following

circumstances

i) The materials or goods are of a perishable nature.

ii) He frequency of purchases is not large

iii) There arc only moderate fluctuation in the prices of materials or goods

purchased.

iv) Materials are easily identifiable as belonging to a particular purchase lot.

THE LIFO METHOD (LAST IN FIRST -OUT METHOD)

This method is based on the assumption that last item of materials or goods

purchased are the first to be issued or sold. Thus, according to this method, inventory

consists of items purchased at the earliest cost.

Advantages: This method has the following advantages.

1) It takes into account the current market conditions while valuing materials

issued to different jobs or calculating the cost of goods sold

2) The method is based on cost and, therefore, no unrealized profit or loss is

made on account of use of this method.

The method is most suitable for materials which are of a bulky and non perishable

type.

BASE STOCK METHOD:

The method is based on the contention that each enterprise maintains at all

times a minimum quantity of materials or finished goods in its stock .This quantity is

termed as base stock. The base stock is deemed to have been created out of the first

lost purchased, therefore, it is always valued at this price and is carried forward as a

fixed asset. Any quantity over and above the base stock is value in accordance with

any other appropriate method. As this method aims at matching current costs to

current sales, the LIFO method will be most suitable for valuing stock of materials or

finished good other than base stock. The base stock method has the advantage of

charging out materials/ goods at actual cost. Its other merits or demerits will depend

on the method which is used for valuing materials other than the base stock.

49

WEIGHTED AVERAGE PRICE METHOD:

This method is based on the presumption that once the materials are put into a

common bin, they lose identity. Hence, the inventory consists of no specific batch of

goods. The inventory is thus priced on the basis of average prices paid for the goods,

weighted according to the quantity purchased at each price.

Weighted average price method is very popular on account of its being based

on the total quantity and value of materials purchased besides reducing number of

calculations. As a matter of fact the new average price is to be calculated only when a

fresh purchases of materials is made in place of calculating it every now and then as is

the case with [‘IPO, LIFO methods. However, in case f this method different prices of

materials are charged from production particularly when the frequency of purchases

and issues! sales is quite large and the concern is following perpetual inventory

system.

VALUATION OF INVENTORIES IMPACT ON THE FLOW

COSTS.

As should be quite evident, the different methods of calculating inventory

values will all have their impact on the flow of costs through the balance sheet into

the income statement. The dollars that arc paid to acquire inventory are always

divided between the balance sheet inventories) and the income statement (cost of

goods sold), there is no other place to put them. Thus if the different methods of

calculating inventory produce differing inventory values, they will also produce

differing cost of goods sold figures, .and the differing cost of goods sold figures will

naturally produce differing profit figures.

In order to show the impact of inventory valuation on cost flows, the

preceding exhibits are summarized. Each method produces a different figure for the

transfer of raw materials to work in process. These difference appear small, but the

only reason for this is that the dollar amounts have been kept small to make the

illustration workable.

50

With the transfer of materials to work in process, the cost of flow or transfer

will have its impact on the work in process inventory and the transfer of completed

merchandise to finished goods. Ultimately when goods are sold, the varying methods

of valuing inventories will have their impact on cost of goods sold and this profits.

The effects of the cost flows on cost of goods sold and profits can be accentuated

further if the differing methods of valuing inventories arc applied to work in process

and finished goods.

Evaluation of methods — what causes the difference?

The differences in inventory values and cost flows for each of the method

illustrated result from only one factor, that is changing purchase prices or unit costs. If

purchase prices had remained stable or unchanged, each method would have produces

the same in inventory value and cost flow.

Cost flows and inventory are exactly the same under stable prices. With a

rising price level, the LIFO method produces the highest cost flow and the lowest

inventory. With a falling price level, the LIFO method produces the lowest cost flow

and the highest inventory. The cost flow under LIFO follows the price level LIFO

produces larger cost flows when prices are rising and smaller cost flows when prices

are falling. A final item to consider is that the average method produces results which

fall between the extremes of LIFO and FIFO.

Evaluation of methods — can we justify the differences?

The best method of inventory valuation might be “specific identification” that

is the units in inventory should be identified with the specific invoices and thus

specific unit costs to which they apply. Fortunately, the FIFO method constitutes a

very useful approximation to the specific identification method if one can reasonably

assume that the actual flow of materials is First. in First. Out. This assumption is not

unreasonable and thus we have stated the main argument for the FIFO inventory

scheme, that is the physical flow of materials would match the flow of costs under the

first. in first.out method.

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When the units in inventory are identical, inter changeable and do not follow any

specific pattern of physical flow, the average cost system would seem to appropriate.

The primary difference between the FIFO and average methods is centered on the

physical flow since both methods could involve identical and interchangeable units.

The FIFO method fits a first. in first. out physical flow. The average method fits a

system which has no specific pattern of physical flow should be quite difficult

because of the fact that most inventory items are subject to deterioration and any

reasonable person would attempt to reduce such deterioration by instituting a physical

flow approximating first. in first. out. The major reason for the use of the average

method is something other than the lack of specific physical flow. Ordinary the LIFO

method cannot be justified on the basis of the physical flow of materials. Under

conditions of changing prices, the advocates of LIFO method. The LIFO method

assumes that the latest item is the first item out and thus the current costs of materials

are matched with the current selling p4ces or current revenues. The FIFO method, on

the other hand, assumes that the first item in is the first item out and thus the non

current costs of materials are matched with current selling prices of current revenues.

This matching current with current revenues is the essence of the argument for the

LIFO method.

As can be seen by the above comments there is no one best method of valuing

inventories. The method chosen should fir the situation. A physical flow pattern

comparable to FIFO would force one to consider the PIFO method. The lack of a

discernible physical flow pattern would force one to consider the average method.

Concentration on cost flows, as distinct from physical flows, would force one to

consider the LIFO method especially where there appears to be a discernible trend

towards rising prices (or falling prices) as has been the case in our economy during

recent years.

Inventories valued at standard cost:

A very useful method of valuing inventories is at a standard cost. With a

standard cost system there is no need for spending a great deal of time and money

tracing unit costs through perpetual inventory records.

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PERPETUAL INVENTORY CARD UNDER A STANDRD COST SYSTEM

Peripheral InventoryPlant:

Location

Standard cost………………....Order Quantity ………………Order Point ………………….

Date Description On order Received Issued AvailableOn order On hand

As shown above there is need only for physical quantities since the inventory

value is the physical quantity multiplied by the standard cost. With the cost and value

columns disposed off, a perpetual inventory card can include additional data such as

quantities on order, quantities reserved and quantities available These additional data

are very useful for inventory and production control purposes. On the basis of a few

calculations concerning actual units costs, inventories at a standard costs could easily

be converted into inventories on a FIFO, a LIFO or an average cost basis.

Inventory of Obsolescence:

Obsolent inventories cannot be used or disposed off at values carried on the

books. Frequent reviews should be made of all inventories, and when obsolescence is

indicated a request for revaluation should be prepared for approval by management.

The difference between original and obsolete value should be recorded by a charge to

an operating account. Inventory obsolescence and a credit to inventory. If the material

is scrapped, this will be for the full inventory value of the material. If it is anticipated

that the material can be sold at reduced value or used in areas where it will be worth

less than its original value, the entry would be only for the amount of write down.

Some companies carry a solvate inventory and transfer to its materials which may be

sold or used at reduced values.

Where this is done, the entry would be

Debit Salvage inventory

Debit Inventory obsolescence

Credit Raw material inventory or Supplies inventory.

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ANALYSIS OF DATA & FINDINGS

RATIO ANALYSIS

The SCCL inventory consists of stores and spares stores in transit and under

inspection, stock of coal, stock of finished products.The various components of

inventory over a period of 5 years from 2004 to 2009 presented in the following table.

1. COMPONENTS OF INVENTORY

YearsStore &

Spares

Stores in

transit

Stores of

coal

Stock of

FAS

Total Stock

Inventory2004-2005 2388600 248511 626992 369 32644722005-2006 2373870 257711 418158 369 30501082006-2007 20794.40 245264 252284 202 25771902007-2008 1818429 353864 165622 150 23380652008-2009 2217537 265971 499440 123 2977071

Table 1

Graph 1

INTERPRETATION:

From the above table it can be understood that the inventory of SCCL was at

3,26,44,72,00 during the year 2004-2005 and it is declined to Rs 2,33,80,65,00 during

2006-07 and it is increased to Rs. 2,97,70,71,00 during 2008-09.

54

2. COMPONENTIAL ANALLYSTS:

The componential analysis of inventory of SCCL from the year

2004-05 to 2008-09 is shown in the following table.

Years Store & Spares

Stores in transit

Stores of coal

Stock of FAS

Total

2004-20052388600 248511 626992 3264472 6528575

2005-20062373870 257711 418158 3050108 6099

2006-20072079440 245264 252284 2577190 5154178

2007-20081818429 353864 165622 233806 5154178

2008-20092211537 265971 499440 2977071 5954019

Table 2

Graph 2

INTERPRETATION:

a) The investment in stores and spares, stores in transit, stock of coal and stock of

finished good were registered at 36.61%, 3.81%, 9.60%, 50% respectively during the

year 2004-05. During the year 2008-2009 investment in stores & spiral stores I transit

stock of coal, stock of finished goods were registered at 37.14%, 4.46% 8.38%, 50%

respectively. On avg. the investment in stock of finished goods is more when compare

with other components current assets.

55

3 TREND ANALYSIS:

Trend analysis technique is applied to know the growth rate in investment of

inventory of SCCL over the review period which is shown in the following table.

Years Inventory (amount in crores) Trend %

2004-2005 6528575 100

2005-2006 6099847 93

2006-2007 5154178 79

2007-2008 4675980 72

2008-2009 5954019 91

Table 3

Graph 3

INTERPRETATION:

a) The investment on inventories shows that inventory is 100% during the year 2004-

05. Ad then has shown a down ward trend after the year 2007-08 and the inventory

was increased in the year 2008-2009.

b) The investment in inventory is showing fluctuating trend.

56

4.INVENTORY TURNOVER RATIO :-

This ratio indicates the number of times the stock has been turned over during

the period and evaluates the efficiency with which a firm is able to manage its

inventory. This ratio is calculated by applying the following formula.

Inventory turnover ratio = net sales / average inventory at cost

Years Net Sales (Sales of Coal + Coke + Coal far fuel

Average Stock(Closing Stock)

Ratio Change (0%) diff

2004-2005 27436267 626890 43.8 7.9

2005-2006 29490271 418158 70.5 26.7

2006-2007 31418375 252284 124.5 54

2007-2008 31786580 165622 191.9 67.4

2008-2009 34137306 499440 68.3 -123.6

Table 4

Graph 4

INTERPRETATION

1) From the above table it can be observed that inventory turnover ratio times during

the year 2005-06 and it gradually increased to 191.9 times in the year 2007-08. It

indicates that the stock has been turned in to sales very quickly and it is decreased to

68.3 in the year 2008-09 .

57

2) The lowest turnover ratio was at 43.8 times during the year 2004-05 and the highest

inventory was recorded at 191.9 times during the year 2008-09.

58

5. INVENTORY CONVERSION PERIOD:

It may also be of interest to see average time taken for clearing the stocks.

This can be possible by calculating inventory conversion period. This period is

calculating by dividing the number of days by inventory turnover this formula may be

Inventory Conversion Period = Days In A Year( 360 )/ Inventory Ratio

Years Net Sales Average Stock Ratio ICP (days)

2004-2005 27436267 626890 43.8 8

2005-2006 29490271 418158 70.5 5

2006-2007 31418375 252284 124.5 3

2007-2008 31786580 165622 191.9 2

2008-2009 34137306 499440 68.3 5

Table 5

Graph 5

INTERPRETATION:

1) The inventory conversion period was 8 days during the year 2004-05 and declined

to 2 days during the year 2005-06. Which indicates that the stock has been very

quickly converted in to sales. In 2006-07 it has been increased to 5 days during the

year 2007-08 slowly converted in the sales.

2) The lowest inventory conversion period was recorded at 2 days in the year 2007-08

and the highest inventory conversion period was 8 days recorded in 2004-2005

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6. PERFORMANCI OF INVENTORY OVER CURRENT ASSETS

In order to know the percentage of inventory over current assets the ratio of

inventory to current assets is calculated and which is presented in the following table.

InventoryInventory over current assets ratio = --------------------- X 100

Current Assets

Years Inventory Current Assets Ratio(%)

2004-2005 3264472 6690713 49

2005-2006 2575477 6516630 39

2006-2007 2291134 5781012 40

2007-2008 2095494 87787878 24

2008-2009 2667621 10342620 26

Table 6

Graph 6

INTERPRETATION:

1) During the year 2004-05 the ratio was 49% and it gradually declined to 24% and

there is a net decrease to the extent of 33% and slowly increased in the year 2007-08.

2) The lowest inventory over current assets ratio was recorded at 24% during the year

2008-09 and the highest inventory over current assets ratio was at 49% during the

year 2006-07.

3) The average inventory over current assets ratio was recorded at 42.5 %

60

7. PERCENTAGE OF INVENTORY OVER TOTAL ASSETS;

CURRENT ASSETS + FIXED ASSETS

Years Invention Total Assets Current Ratio

2004-2005 3264472 264228842 12.35%

2005-2006 2575477 25999873 9.90%

2006-2007 2291134 24132888 9.49%

2007-2008 2095494 26347993 7.95%

2008-2009 2667621 28500692 9.36%

Table 7

Graph 7

INTERPRETATION :

1) During the year 2004-2005 the ratio was 12.35% and it was decreased to 7.95% in

the year 2005-06 and then started increasing up to 9.36% during the year 2006-07

2) The lowest5 inventary over total assets ratio was at 7.95% during the year 2007-08

and the highest inventory ratio at 12.35% during the year 2004-05

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8. CURRENT RATIO:-

In order to know the current ratio the percentage of current assets

to current liabilities to calculated and which is presented in the following table. Current Assets

Current ratio = --------------------------------Current Liabilities

Years Current Assets Current Liabilities Current Ratio

2004-2005 6690713 13047044 0.513

2005-2006 6516630 8549887 0.762

2006-2007 5781012 6865103 0.842

2007-2008 87787878 8009667 1.096

2008-2009 10342620 8075040 1.280Table 8

Graph 8

INTERPRETATION:

1) From the above table it can be understand that the % of current assets over

current liabilities ratio i.e current ratio was showing a increasing trend till

2007-08. During the year 2004-05 the ratio was 0.513 and has increased to

1.280 till the year 2008-09.

2) The lowest current ratio was recorded at 0.513 during the year 2004-05 and

the highest current ratio was recorded at 1.280 during the year 2008-09.

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9. QUICK RATIO:

The quick ratio is the relation ship between quick assets to current liabilities

quick rat LO is more rigorus test of liabilities. Quick ratio is more rigorous test of

liability position of a firm. It computed by applying the following formula.

Quick AssetsQuick ratio = --------------------------

Current LiabilitiesWhere Quick Asset = Current assets — Inventory

Years Quick Assets Current Liabilities Quick Ratio

2004-2005 3426241 13047044 0.263

2005-2006 3941153 8549887 0.460

2006-2007 3489878 6865103 0.508

2007-2008 6683284 8009667 0.834

2008-2009 7674999 8075040 0.950

Table 9

Graph 9

INTERPRETATION

1) From the above table it can be understand that the % of current assets over

current liabilities ration i.e current was showing a increasing trend till 2008-09

2) During the year of 2004-05 the ratio was 0.263 and it gradually increased to

0.950 till the year 2008-09.

3) The Average ratio was recorded at 0.984 during the review period.

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10. PROPRIETARY RATIO

Share holder funds

Total Assets.

This ratio establisher the relation ship between share holder funds and total

Assets.

Years Share holders funds Total Assets Ratio

2004-2005 18546545 26428842 0.70%

2005-2006 19685760 25999873 0.76%

2006-2007 20650380 24132888 0.85%

2007-2008 21240369 26347993 0.81%

2008-2009 21237960 28500692 0.74%

Table 10

Graph 10

INTERPRETATION:

1) During the year 2004-05 the ratio was 70% and it was increasing in the year 2005-

06 at ratio was 85% and was declining 74% during the year 2007-08.

2) The lowest inventory was recorded at 70% during the year and the highest ratio

recorded at 85% during the year 2004-2005.

64

CONCLUSIONS

In this Chapter an attempt is made to give the conclusions at a glance on

inventory Management of Singareni Collieries Company Ltd.,

The following conclusions have been drawn.

1. Overall, the inventory Management in SCCL is upto the Mark where by

adequate supplies of materials and stores, minimization of stock outs and

avoided costly interruptions in operations.

2. It has kept down the investments in inventories, inventory carrying cost and

obsolescence losses to the minimum through purchasing economies by the

measurement of requirements on the basis of recorded experience.

3. It also enable the management to make cost and consumption comparisons

between operations and periods.

4. The total of the components of inventory recorded in the year 2004-05 is

32,64,472 (Rs. In ‘000) and has declined to 26,67,621 (Rs. In ‘000) by the

year 2008-09.

5. The inventory conversion period has been 8 days during the year 2004-05 and

presently it is 5 days i.e., 2008-09.

6. The Percentage of inventory over the Current Assets during the year 2004-05

is 49°/o and has decline to 26% during the year 2008-09.

65

SUGGESTIONS

a) Provision of internet facility to all stores in SCCL to have effective on line

communication.

b) Stock transfers from one stores to others stores have to be done effectively.

c) Disposal action for obsolete and non-moving items to be take up on priority.

Identification of buyers to be done.

d) Implementation of buy back clause incorporated the earlier equipment purchase

orders has to be taken up with the suppliers and returning of the unconsumed

spare parts to be done. Such items are to be identified.

e) Orders are released mostly for all the items covered in the open order agreements.

Rate contracts immediately on their receipt. This has to be controlled. Only the

items required for consumption are to be procured otherwise the items procured

will not get consumed and become non-moving.

f) Utility of items costing more than 1.00 lakh has to be reviewed to take further

action.

g) Linking up alternate part numbers and elimination of duplicate code numbers so

that effective utilization of the available items could be done and unnecessary

purchases could be avoided.

66

BIBLIOGRAPHY

01. KHAN M.Y. & JAIN P.K FINANCIAL MANAGEMENT

3rd Edition

Tata MC Grawhills

02. Dr. S.N.MAHESWARI FINANCIAL MANAGEMENT

Principles and practice

6th Edition

Sulthan chand publications

03. I.M PANDEY FINANCIAL MANAGEMENT

8TH Edition Vikas Publications,

2004

04. PRASANNA CHANDRA FINANCIAL MANAGEMENT

5TH Edition

Tata MC Grawhills, 2001

Websites referred:

www.scclmines.com

www.google.com

www.inventorymanagement.com

www.iimm.org

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