29
OBJECTIVES OF THE STUDY: 1. To examine the organization structure of inventory management in the stores of Kesoram Cements. 2. To discuss pattern, levels and trends of inventories in Kesoram Cements. 3. To understand the various inventory control techniques followed by studies in Kesoram Cements. 4. To access the performance of inventory management of the Kesoram Cements by selected accounting ratios. REVIEW OF LITERATURE The investment in inventories constitutes the most significant part of current assets / working capital in most of the undertakings. 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 – progress and stores etc. Inventory includes the following things:

Inventoty Management

Embed Size (px)

Citation preview

Page 1: Inventoty Management

OBJECTIVES OF THE STUDY:

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

Kesoram Cements.

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

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

Kesoram Cements.

4. To access the performance of inventory management of the Kesoram Cements by

selected accounting ratios.

REVIEW OF LITERATURE

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

working capital in most of the undertakings. 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 – progress and stores etc.

Inventory includes the following things:a) Raw Material: Raw material from a major input into the organization. They are

required to 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 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.

Page 2: Inventoty Management

c) Consumables: These are the materials which are needed to smoother the process of

production but they act as catalysts. Consumables may be classified according to their

consumption add critically. Generally, consumable stores doe 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 stock policies of spares fifer 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.

All decisions about spares are based on the financial cost of inventory on such spares and

the costs that may arise due to their non – availability.

BENEFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm’s 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 orders. It will mean loss of time and delays in

execution of orders which sometimes may cause 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 purpose of holding inventories.

1. The transaction motive: This facilitates continuous production and timely execution of

sales order.

Page 3: Inventoty Management

2. The precautionary motive: Which necessitates the holding of inventories for meeting

the unpredictable changes in demand and supplies of materials

3. The speculative motive: Which induces to keep inventories for taking advantage of price

fluctuations, saving in re–ordering costs and quantity discounts

RISK AND COSTS OF HOLDING INVENTORIES

The holding of inventories involves blocking of firms funds and incurrence of capital and

other costs.

The various costs and risks involved in holding inventories are:

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.

The funds may be arranged from own resources or from outsiders. But in both the cased,

the firm incurs 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 t he outsiders.

1. Storage and Handling Costs: Holding of inventories also involves costs on storage as

well as handing of materials. The storage of costs include the rental of the godown,

insurance charges etc.

2. Risk of Price decline: There is always a risk of reduction in the prices of inventories by

the supplies, competition or general depression in the market.

3. Risk of Obsolescence: The inventories may become absolute due to improved

technology, changes in requirements, change in customer tastes etc.

4. Risk Determination in quality: The quality of materials may also deteriorate while the

inventories are kept.

Objects of Inventory Management

Definition of Inventory Management: Inventory Management is concerned with the

determination of optimum level of investment for each components of inventory and the

operation of an effective control and review of mechanism.

The main objectives 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 means that inventory should not remain idle and minimum

working capital should be locked in it.

Page 4: Inventoty Management

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 time 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

and 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, pilferages, wastages and damages.

7. To ensure perpetual inventory control so that materials shown 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 data for short – term and long – term planning and control of

inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

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

also increases profit and causes substantial reduction in the working capital of the concern.

The following are the important tools and techniques of inventory management and

control.

1. Determination of stock levels:

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

Page 5: Inventoty Management

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 or shortage of production.

a) Minimum stock level:

It represents the quantity below its stock of any item should not be allowed to fall.

Lead time: A purchasing firm requires sometime to process the order and time is also

required by the supplying firm to execute the order.

The time in processing the order and then executing it is know as lead time.

Rate 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 materials: The nature of material also affects the minimum level. If a material

is required only against the special orders 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 – Re – ordering level – (Normal consumption x Normal re – order

period)

b) Re – ordering Level:

When the quantity of materials reaches at a certain figure 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 maximum level.

c) Maximum Level:

It is the quantity of materials beyond which a firm should not exceeds its stocks. If the

quantity exceeds maximum level limit then 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 – (Maximum Consumption x

Minimum reorder period)

d) Danger Stock Level:

Page 6: Inventoty Management

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.

Danger Stock level = Average rate of consumption x emergency delivery time.

e) Average Stock Level:

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

Average stock level = Minimum stock level + ½ 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 in such a situation the

firm can be 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.

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 carrying

costs.

3) Economic Order Quantity (EOQ):

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

quantity.

This quantity is fixed in such a manner as to minimize the cost of ordering and carrying

costs.

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

Carrying Cost:

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

Page 7: Inventoty Management

Ordering Cost:

It is the cost of placing orders for the purchase of materials.

EOQ can be calculated with the help of the following formula

EOQ = 2CO / I

Where C = Consumption of the material in units during the year

O = Ordering Cost

I = Carrying Cost or Interest payment on the capital.

4) 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 category ‘C’ covers about 70%

of items of materials which contribute only 10% of value of consumption.

5) VED Analysis: (Vitally 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 a must for running the concern smoothly and these must be stored

adequately. The ‘E’ type of spares is 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 of 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 ration 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 the stocks. Symbolically.

Page 8: Inventoty Management

Inventory Turnover Ratio = Cost of goods sold

__________________________

Average inventory at cost

(Or)

Net sales

= ________________________

(Average) Inventory

And,

Inventory conversion period = Days in a year

______________________

Inventory Turnover ratio

7) Classification and Codification of Inventories:

The inventories should first be classified can 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 two 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

Page 9: Inventoty Management

Weighted average price method

CRITERIA FOR JUDGING THE INVENTORY SYSTEMWhile 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:

Comprehensibility

Adaptability

Timeliness

Area 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 purpose but

also for improving decision making.

Review of Classification: ABC and FSN classification must be periodically reviewed.

Improved Coordination: Better coordination among purchase, production, marketing and

finance departments will be help in achieving greater efficiency in inventory management.

Development of long term relationship:

Companies should develop long term relationship with vendors. This would help in

improving quality and delivery.

Disposal of obsolete / surplus inventories:

Procedures for disposing obsolete / surplus inventories must be simplified.

Adoption of challenging norms:

Page 10: Inventoty Management

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

improve inventory management.

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 spare 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 semi – processed materials to be stock for

the smooth running of the plant / industry.

Need of Inventory:

Inventories are maintained basically for the operational smoothness which they can be

affected by uncoupling successive stages of production, whereas 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 in inventories. Materials

department is accused of both stock outs as well a large investment in inventories. The solution

lies in exercise a selective inventory control and application of inventory control techniques.

Inventories build 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 coat can be controlled by applying Modern Techniques

viz., ABC analysis, SDE, ESN, HMC, VED etc. These techniques can be used effectively with

the help of computerization.

What is meant by inventory cost :

Page 11: Inventoty Management

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

B. Stores in transit and 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 and inventory model.

1. The cost of placing a replenishment order.

2. The cost of carrying inventory.

3. The cost of under stocking and

4. The cost of over stocking.

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

in 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. The ordering cost

may vary depending upon the type of items, for example raw material like steel against

production component like castings in steel plants, support materials in the case of coal industry.

The cost ordering includes:

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

2) Follow up costs the 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 of various quantities.

5) The salaries and wages of the purchase department.

Page 12: Inventoty Management

Cost of Inventory carrying:

This cost in 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 – labor costs, provision of storage 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) Obsolescence.

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

Accounted for by the interest on capital.

Under stocking cost:

This cost is the cost 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.

Over stocking 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 one time purchases, over cost would be = Purchase Price –

Scrap Price.

INVENTORY VALUATION AND COST FLOWS:

What is the cost of inventory?

Page 13: Inventoty Management

One can readily visualize the determination of inventory quantities by physical count or

by use of perpetual inventory records. When this quantity is determined, it must be multiplied by

a unity cost in order to determine the inventory value that is used on financial statements.

Trade and quantity discount are to be excluded from unit cost since these discount 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 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 at 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.

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 out (FIFO) average, and

last – in first – out (LIFO). The selection of the method for 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 consequently and cannot be changed for year

to year in order to secure the most favorable 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 are 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.

Page 14: Inventoty Management

The value inventory would remain the same even if the “perpetual inventory system” is

followed.

Advantage:- The FIFO method has the following advantages.

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

consisting of

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 longer longest in stock.

Disadvantages:- The method suffers from the following disadvantages.

1) It involves complicated calculations and hence increases the possibility of clerical

errors.

2) Comparison between different jobs using the same type of material becomes

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

bear an entirely different charge for materials because the first job completely

exhausted the supply of materials of the particular lot.

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. The frequency of purchases is not large.

III. There are only moderate fluctuations 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:

Page 15: Inventoty Management

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 base 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 bulky and non –

Perishable type.

Base Stock Method:

This 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 always valued at this price and it’s carried forward as a fixed asset. Any

quantity over and above the base stock is valued 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 goods other than the base stock. The base

stock method has advantage of charging out material / 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.

Weighted average price method:

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

bin, they lose their identity. Hence, the inventory consists of no specific batch of goods. The

inventory is thus priced on the basis of average priced on 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 purchase of materials is made

in place of calculating it every now and then as is the case with FIFO, LIFO methods. However,

in case of this method different prices of materials are charged from production particularly

when the frequency of purchases and issues/sales in quite large and the concern is following

perpetual inventory system.

Page 16: Inventoty Management

Valuation of inventories – impact on the flow of 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 are paid to acquire inventory are always divided between the balance sheet

(inventories) and the income statement (cost of goods sold), there is not 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 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 differences appear small, but the only reason for this is that the dollar amounts

have been kept small to make the illustration workable.

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

impact on the work in process inventory and the transfer of completed merchandise to finished

gods. Ultimately when goods are sold; the varying methods of valuing inventories will have their

impact on cost of goods sold and these profits. The effects of the cost flows on cost of gods sold

and profits can be accentuated further it the differing methods of valuing inventories are applies

to work in process and finished goods.

Evaluation of methods – What causes the differences?

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

from only one factor, that it, changing purchases prices or unit costs. If purchase prices had

remained stable or unchanged, each method would have produced the same inventory value and

cost flow.

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

Page 17: Inventoty Management

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 on 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.

When the units in inventory are identical, interchangeable and do not follow any specific

pattern of physical flow, the average cost system would seen 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. Finding a situation where there is no specific pattern of

physical flow should be quite difficult because of the fact that most inventory items are subject to

deterioration by instituting a person would attempt to reduce such 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.

Ordinarily the LIFO method cannot be justified on the basis of the physical flow of

materials. Under conditions of changing prices, the advocate of LIFO says that the only method

which matches costs and revenues is the 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 other hand,

assumes that the first item in is the first item out, and thus the non-current costs of matching

current costs 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 fit the situation. A physical flow pattern comparable to

FIFO would force one to consider the FIFO 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 to consider the LIFO method especially where there appears to

Page 18: Inventoty Management

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 is no need of spending a great deal of time and money tracing unit cost through perpetual

inventory record.

PERPETUAL INVENTORY CARD UNDER A STANDARD COST

SYSTEMPerpetual inventory Plant: …………………… Standard cost:……………………

Location:……………………………………… Order Quantity:………..………...

Order Point: …………………..…

Date Description On order Received IssuedAvailable

On order On hand

As shown above, there is need only for physical quantities since the inventory values 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 purpose. On the basis of a few calculations concerning into inventories on a

FIFO, a LIFO, or an average cost basis.

Inventory of Obsolescence:

Page 19: Inventoty Management

Absolvent 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 change to operating account. Inventory

obsolescence, and a credit to inventory. If the material is scrapped, this will be for the full

inventory value or used in areas where it will be work less than its

Original value, the entry would be only for the amount of write down. Some companies carry a

solvage inventory and transfer to it materials which may be sold or used at reduced values.

Where this is done, the entry would be:

Dr. Solvage inventory

Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies inventory.