Inventory management and budgetary control system

Inventory management and budgetary control system.

1. MEANING OF INVENTORY.

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

Inventory only exist because there is a difference in the timing or rate of supply and demand. For example, if you had a product that that was immediately demanded when you received it, there would be no need to store it, therefore no inventory. As such, when the rate of supply exceeds the rate of demand, inventory increases; when the rate of demand exceeds the rate of supply, inventory decreases.However, there are various reasons for an imbalance between the rates of supply and demand at different points in any operation lead to the five different types of inventory.

1. Buffer inventory :- Also referred to as safety inventory, its purpose is to compensate for unexpected fluctuations in supply and demand.

Example :- If the firm is a retail establishment, a customer may look elsewhere to have

his or her needs satisfied if the firm does not have the required item in stock when the customer arrives.

If the firm is a manufacturer, it must maintain some inventory of raw materials and work-in-process in order to keep the factory running. In addition, it must maintain some supply of finished goods in order to meet demand.

2. Cycle inventory :- Occurs because one or more stages in the process cannot supply all the items it produces simultaneously. This type of inventory only

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results from the need to produce products in batches and the amount of it depends on volume decisions.

Example :- The inventory cycle for XYZ Company is 12 days for ordering, 35 days for

work in progress, and 20 days for finished goods and delivery.

3. De-coupling inventory : - Inventory that is used to allow work centres or processes to operate relatively independently.

Example :- As factory work orders pass from machine to machine, queues (stocks) of

inventory are often planned to enable each work center (machine) to absorb variations in workload due to such things as product mix changes. These queues of work separate the operations so that each work center can produce somewhat independently from other work centers. The objective is to prevent idle time in the factory of expensive, direct-labor people.

4. Anticipation inventory : - Inventory that is accumulated to cope with expected future demand or interruptions in supply.

Example :- A certain fashion was in vogue a season before, it may fail to reach the

same popularity again in the following year, leaving merchants with extra goods that they will have a hard time moving.

If an inventory taker miscounts the number of a specific product that the business has on hand, he may create the appearance that the product sold well when, in fact, it didn’t. This error could lead the company to over-order the product in the future in an attempt to meet this actually nonexistent demand.

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5. Pipeline inventory :- Pipeline inventory exists because material cannot be transported instantaneously between the point of supply and the point of demand.

Example :- Goods still in transit or in the process of distribution - have left the factory

but not arrived at the customer yet.

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2. Inventory Ratios.

The Objectives Of Inventory Turnover Ratios Are To Find Out :-

1. Fast Moving Stock2. Slow Moving Stock3. Dormant Stock4. Obsolete Stock.

Following Are Some Of The Ratios :-

1. Inventory Turnover Ratio :- This ratio is a relationship between cost of material consumed and average inventory held during the period. It is calculated by applying the following formula :-

= Cost of material consumed.

Cost of average stock held during the period.

Higher ratio indicates fast moving stock. Low ratio indicates up of work capital.

The ratio is calculated in days as follows :-

= Days during the period.

Inventory turnover ratio.

This ratio shows the period for which inventory is held. The period should be as minimum as possible. Shorter the period better is the management.

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2. Input output ratio :- This ratio is relationship between finished goods and material consumed. It is calculated as follows :-

= Value of output.

Value of input of materials.

The ratio can be calculated by applying the following formula :-

= Standard cost of Actual Quantity.

Standard cost of a Standard Quantity.

The ratio facilitates to know the performance of the firm. It also helps to know whether the use of material is favorable or unfavorable.

3. Ratio of Slow Moving Items to Total Inventory :- This ratio is calculated to find out the proportion of slow moving items to total inventory. It is given by the following formula :-

= Slow moving Stores.

Total Inventory.

This ratio helps to identify the slow moving items. Higher ratio indicates that there are many slow moving items and therefore capital is locked up. Management should take immediate steps to set right this situation.

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3. Stock levels.

This technique fixes stock control levels in terms of quantity to ensure that optimum quantity of materials is bought and stored. It also answers the question, when to buy & assists the management to budget and prepare time schedule of purchases. The technique requires fixation of stock control levels in respect of every type of material.

The Different Limits Fixed Are :-

1. Maximum Level :- This level indicates maximum quantity of stock to be held at any time: It is the largest quantity of a particular material at any time. The quantity of stock should nos. exceed the level. This is to minimize stock holding costs.

Factors :-

i) Re-Order Level.ii) Re-Order Quantity.iii) Minimum Consumption.iv) Minimum Re-Order Period. v) Adequacy of Working Capital. vi) Storage Space.vii) Additional Storage Cost. viii) Additional Insurance Cost.ix) Risk of Loss Due To Obsolescence. x) Fluctuations in Price.xi) Supply of Imported Materials.

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This level is fixed by using the following formula :-

Maximum Level = Reorder Level + Reorder Quantity – ( Minimum Consumption * Minimum Time For Reordering.)

2. Minimum Level :-This level indicates minimum quantity of stock to be held at any time. It is the lowest quantity of material to be held at all the time. This is to avoid risk of dislocation of production process. This level is fixed after taking into consideration the rate of consumption and the time required to acquire sufficient materials to avoid dislocation of production.

Factors :-

i) Re-order Level. ii) Normal Consumption.iii) Normal Re-Order Period.

The following formula is used to fix up the minimum level :-

Minimum Level = Reorder Level – ( Normal Consumption * Normal Re-order Period)

3. Re-order Level :- This level indicates the time to place order for material. It signifies the action point for procuring the material. This level is between the minimum and maximum levels. It is the level at which purchase requisition should be made out for fresh supply. The object of this level is to indicate time to place order so that stock is not reduced to a level less than the minimum level.

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Factors :-

i) Maximum Consumption.ii) Maximum Re-order Period. iii) Minimum Level.

The following formula is used to fix up Reorder-Level :-

Reorder Level = ( Maximum Consumption * Maximum Reorder Period )

4. Danger Level :-It indicates the level of stock when the normal issue should be stopped. It indicates the need of urgent attention and emergency steps to replenish stock by procuring materials. The quantity of this level is between minimum and nil stock level. The objective of fixing danger level is to decide when an urgent action is required for procurement of fresh supply of material.

Factors :-

i) Normal Consumption.ii) Maximum Re-order Period for Emergency Purchases.

The following formula is used to fix up Danger Level :-

Danger Level = Normal Consumption * Maximum Re-order Period for Emergency Purchases.

5. Average Stock Level :-It is the average of maximum level and minimum level. It is the average stock of materials in the stores.

It is calculated by the following formula :-

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Average Stock = Minimum Level + ½ Re-order Quantity.

The fixation of control levels is based mainly on non-cost factors. It is based on times involved in several control procedures and rate of consumption.

Inventory system .

Periodic Inventory System.

Under this method, Stock is verified only at the end of a certain period, i.e. at the end of the financial year. The stock of all the items is verified at one and the same time. Stock taking is done only when the activities are suspended. Hence, stock taking should be done in minimum of time. He stores maintain stock records in the form of Bin Cards or Stores ledger Cards. The records give quantitative information about stock. Under this method balancing of materials is also done periodically. ,

Advantages :-

a) The system is simple to understand and to operate.b) Stocks of all the items are verified at the same time. c) Corrections in the records can be done at a time. d) Manipulation of stock is not possible. The shutdown of the plant makes it possible to undertake repairs work. e)Work in process can be checked accurately.

Disadvantages :-

a) The time gap between two stock takings is quite large. b) Errors may remain undetected for a long period as stock taking is done periodically reasons for discrepancies cannot be found out easily due to passage of time.

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c) There is no continuous check on stock. d) It is not able to safeguard against pilferage, loss or theft. This system is suitable when there are a few items of stock.

Continuous Stock taking / Perpetual Inventory System.

This is also known as automatic inventory system. The ICMA define the perpetual inventory system as, "a system of records maintained by the controlling department which reflects the physical movement of stock at their current balance". Wheldon has said that, "perpetual inventory system, is a method of recording stores balance after every receipts and issue to facilitate regular checking and to obviate closing down for stock taking".

Advantages :-

a) It is not essential to stop production activities for the purpose of stock taking. b) Costly stock taking is avoided. Any discrepancies are noted easily. :c) Bin cards and stock ledger give ready information. It makes it possible to prepare final accounts at a short notice. Corrective action is taken promptly.

Disadvantages :-

a) It does not provide for physical verification of stock. b) It is rather costly. It requires separate staff. c) It involves paper work.

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4. ROLE OF INVENTORY IN CURRENT ASSETS.

In accounting, a current asset is any asset reasonably expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle (whichever period is longer). Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, stock inventory and the portion of prepaid liabilities which will be paid within a year.

On a balance sheet, assets will typically be classified into current assets and long-term assets.

The current ratio is calculated by dividing total current assets by total current liabilities. It is frequently used as an indicator of a company's liquidity, its ability to meet short-term obligations.

Current Assets :-

This section of the balance sheet shows the assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.

Current assets are, therefore, very important to cash flow management and forecasting, because they are the assets that a business uses to pay its bills, repay borrowings, pay dividends and so on,

Current assets are listed in order of their liquidity :-

In other words, how easy it is to turn each category of current asset into cash.

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http://en.wikipedia.org/wiki/Short-term_debt

http://en.wikipedia.org/wiki/Liquidity

http://en.wikipedia.org/wiki/Current_liability

http://en.wikipedia.org/wiki/Current_liability

http://en.wikipedia.org/wiki/Current_ratio

http://en.wikipedia.org/wiki/Long-term_assets

http://en.wikipedia.org/wiki/Long-term_assets

http://en.wikipedia.org/wiki/Balance_sheet

http://en.wikipedia.org/wiki/Inventory

http://en.wikipedia.org/wiki/Accounts_receivable

http://en.wikipedia.org/wiki/Cash_equivalents

http://en.wikipedia.org/wiki/Cash

http://en.wikipedia.org/wiki/Fiscal_year

http://en.wikipedia.org/wiki/Asset

http://en.wikipedia.org/wiki/Accounting


Inventories Inventories (often also called “stocks”) are the least liquid kind of current asset. Inventories include holdings of raw materials, components, finished products ready to sell and also the cost of “work-in-progress” as it passes through the production process.

For the balance sheet, a business will value its inventories at cost. A profit is only earned and recorded once inventories have been sold.

Not all inventories can eventually be sold. A common problem is stock “obsolescence” – where inventories have to be sold for less than their cost (or thrown away) perhaps because they are damaged or customers no longer demand them. For these inventories, the balance sheet value should be the amount that can be recovered if the stocks can finally be sold.

Trade and other receivables

Trade debtors are usually the main part of this category. A trade debtor is created when a customer is allowed to buys goods or services on credit. The sale is recognised as revenue (income statement) when the transaction takes place and the amount owed is added to trade debtors in the balance sheet. At some stage in the future, when the customer settles the invoice, the trade debtor balance converts into cash!

Most businesses operate with a reasonably significant amount owed by trade debtors at any one time. It is not unusual for customers to take between 60-90 days to pay amounts owed, although the average payment period varies by industry. Of course some customer debts are not eventually paid – the customer becomes insolvent, leaving the business with debtor balances that it cannot recover.

When a business is doubtful whether a customer will settle its debts it needs to make an allowance for this in the balance sheet. This is done by making a “provision for bad and doubtful debts” which effectively reduces the value of trade debtors to the total amount that the business reasonably expects to receive in the future.

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Short-term investments

A business with positive cash balances can either hold them in the bank or invest them for short periods – perhaps by placing them on short-term deposit. Such investments would be shown in this category.

Cash and cash equivalents

The most liquid form of current assets = the actual cash balances that the business has .The bank account balance would be the main item in this category.

Excluding Non-current Assets :-

If an asset is not considered current, then by definition, it is noncurrent or "long-term." Some examples of long-term assets are land, buildings, equipment, long-term investments, and goodwill. By their nature, these are assets that a company holds onto for a long period of time.

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5. DIFFERENT METHODS OF EVALUATION OF INVENTORY.

A large part of stock valuation comes from being able to understand how inventory is valued and built.

To put it in the most basic form, inventory is what you have in stock. If you expand on this definition to look at what is involved on the other side of the scale to get the ending inventory amount, the equation for inventory is

Beginning Inventory + Net Purchases – Cost of Goods Sold = Ending Inventory.

In words, your beginning inventory along with your purchases and then subtracting what you have sold, results in ending inventory.But this is where it gets tricky with GAAP rules. Depending on the inventory valuation method used by the company, the COGS can vary considerably which ultimately affects the ending inventory.

Three inventory valuation methods are used in the US.

1. Average Cost Method.

2. First in First Out (FIFO) Method.

3. Last in First Out (LIFO) Method.

4. Weighted Average Cost Method (WAC).

5. Highest in First Out Method (HIFO).

6. Next in First Out Method (NIFO).

7. Cost Production.

8. Market Production.

9. Replacement.

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1. Average Cost Method :-

To put it real bluntly, the average cost method is rarely used. This method does not offer any real convenience or added accuracy.

The equation for average cost method is as follows :-

Average Cost = (Total Quantity of Inventory Units) / (Total Quantity of Units)

where

Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)

For example if 1,000 toys are produced on Monday at a cost of $1 and then on Tuesday another 1,000 toys are manufactured at a price of $1.05, the average cost method would value the inventory at $1.025 a piece.

2. FIFO Method :-

As mentioned previously on aggressive and conservative accounting policies, the FIFO method of valuing inventory is considered to be the aggressive method.

FIFO works like how you maintain your fridge at home. After you have bought some groceries, you tend to place what you just bought at the back of the fridge in order to finish off the older food before it spoils.

In other words, under FIFO, the oldest goods are sold first and the newest goods are sold last.

As a formula it would look like this :-

Unit Cost per batch = (Cost/Quantity) for each batch

where

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Using the toy example above, if 1,000 toys were then sold on Wednesday, the COGS would be $1 per unit. The remaining inventory on the balance sheet would then be worth $1.05 each.

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3. LIFO Method :-

LIFO is the opposite of FIFO. Instead of the oldest inventory being considered as sold first, the newest product is sold first. While the factory analogy works for the

FIFO, consider a bakery. By lunch or evening, the bread baked from the morning will not sell as well as the fresh ones from the afternoon batch.

This means that cost of the latest inventory now becomes the COGS with the cost of the oldest inventory being assigned to the inventory value on the balance sheet.

The equation is essentially the same as FIFO since both are calculated based on batches of unit sold.

Unit Cost per batch = (Cost/Quantity) for each batch

Where,

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Using the toy example, the 1,000 units sold on Wednesday would have a COGS of $1.05 per unit, with the remaining 1,000 toys being valued at $1 each.

4. WEIGHTED AVERAGE COST METHOD :-

Inventory valuation method used where different quantities of goods are purchased at different unit costs. Under this method, weights are assigned to the cost price on the basis of the quantity of each item at each price.

5. HIFO Method :- In accounting, an inventory distribution method in which the inventory with the highest cost of purchase is the first to be used or taken out of stock. This will impact the company's books such that for any given period of time, the inventory expense will be the highest possible. Companies would likely choose to use the HIFO inventory method if they wanted to decrease their taxable income for a period of

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time. Because the inventory that is recorded as used up is always the most expensive inventory the company has (regardless of when the inventory was purchased), the company will always be recording maximum cost of goods sold.

6. NIFO Method :- A method of valuation where the cost of a particular item is based upon the cost to replace the item rather than on it's original cost. This form of valuation is not one of the generally accepted accounting principles (GAAP) because it is said to violate the cost principle. The cost principle is an accounting concept that states that goods and services should be recorded at their original cost, not present market value.

7. Cost Production :- A cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor. To figure out the cost of production per unit, the cost of production is divided by the number of units produced. A company that knows how much it will cost to produce an item, or produce a service, will have a clearer picture of how to better price the item or service and what will be the total cost to the company. Businesses that know their production costs know the total expense to the production line, or how much the entire process will cost to produce the item. If costs are too high, these can be decreased or possibly eliminated. Production costs can be used to compare the expenses of different activities within the company. In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic, metal or labor incurred to produce such an item. Indirect costs include overhead such as rent, salaries or utility expense.

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8. Market Production :- In a general sense, market production refers to the production of a product or service which is intended for sale at a money-price in a market. The product or service in principle has to be trade able for money.

9. Replacement :- The cost to replace the assets of a company or a property of the same or equal value. The replacement cost asset of a company could be a building, stocks, accounts receivable or liens. This cost can change depending on changes in market value. Replacement cost insurance can be purchased to protect and cover a company or individual from this type of cost. This insurance pays the full amount needed to replace the asset or property. The gradual reduction of the asset value or depreciation is not taken into account for insurance purposes.

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6. COST OF CARRYING INVENTORY.

In marketing, carrying cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, pilferage, shrinkage and insurance.

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

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

How do you calculate the cost of carrying inventory ?

The cost of carrying or holding inventory is the sum of the following costs :-

1. Money tied up in inventory, such as the cost of capital or the opportunity cost of the money.

2. Physical space occupied by the inventory including rent, depreciation, utility costs, insurance, taxes, etc.

3. Cost of handling the items.

4. Cost of deterioration and obsolescence.

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http://www.accountingcoach.com/blog/what-is-depreciation

http://www.accountingcoach.com/blog/what-is-the-cost-of-capital

http://www.accountingcoach.com/blog/what-is-inventory

http://en.wikipedia.org/w/index.php?title=Psychic_stock&action=edit&redlink=1

http://en.wikipedia.org/wiki/Safety_stock

http://en.wikipedia.org/w/index.php?title=Cycle_stock&action=edit&redlink=1

http://en.wikipedia.org/wiki/Just_In_Time_(business)

http://en.wikipedia.org/wiki/Opportunity_cost


Often the costs are computed for a year and then expressed as a percentage of the cost of the inventory items. For example, a company might express the holding costs as 20%. If the company has $300,000 of inventory cost, its cost of carrying or holding the inventory is estimated to be $60,000 per year.

The cost of carrying inventory will vary from company to company. For instance, if a company has a large cash balance with no attractive investment options, has excess space for storage, and its products have a low probability for deterioration or obsolescence, the company's holding or carrying costs are very low. A company with enormous debt, little space, and products subject to deterioration will have very high holding costs.

For decision making, such as determining the economic order or production quantity, it is important to determine the incremental holding costs for a year. In other words, what will be the additional holding costs expressed as an annual cost for the items being purchased or produced.

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7. FACTORS DOMINATING COST CARRYING.

1. Availability of local / foreign :-

The primary purpose of this budget is to provide the amount of the inventory asset that appears in the budgeted balance sheet, which is then used to determine the amount of cash needed to invest in assets. If you do not intend to create a budgeted balance sheet, there is no need to create an ending finished goods inventory budget. When a company needs to closely monitor its cash balances on an ongoing basis, the ending finished goods inventory budget should not only be created, but also updated on a regular basis.

The ending finished goods inventory budget contains an itemization of the three main costs that are required to be included in the inventory asset under both generally accepted accounting principles and international financial reporting standards. These costs and their derivation are :-

1. Direct materials :- The cost of materials per unit (as listed in the direct materials budget), multiplied by the number of ending units in inventory (as listed in the production budget).

2. Direct labor :- The direct labor cost per unit (as listed in the direct labor budget), multiplied by the number of ending units in inventory (as listed in the production budget).

3. Overhead allocation :- The amount of overhead cost per unit (as listed in the manufacturing overhead budget), multiplied by the number of ending, units in inventory (as listed in the production budget). If there are many types of products expected to be in ending inventory, it quay be too difficult to calculate this budget on an item-by-item basis. If so, an alternative is to create an approximate cost per unit based on feral classifications of inventory types; this derivation is usually based ma historical costs, modified for costs expected to be incurred during the budget period.

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2. Obsolesce risk :-

Inventory costs are the costs related to storing and maintaining its inventory over a certain period of time. Typically, inventory costs are described as a percentage of the inventory value (annual average inventory, i.e. for a retailer the average of the goods bought to its suppliers during a year) on an annualized basis. They vary strongly depending on the business field, but they are always quite high. It is commonly accepted that the carrying costs alone represent generally 25% of inventory value on hand.

That being said, it is not easy to establish a clean definition. Inventory cost, total inventory cost (TIC), total cost of inventory ownership, the nomenclature surrounding the terms of "inventory costs" can be in ° itself somewhat tricky, and what it covers tends to vary slightly depending on the sources and the business fields concerned. In this article, we focus on the vision of the costs of a "static" inventory, rather than the costs caused by inventory movements. To be more precise, we put aside the aspects related to the flow of goods to focus solely on the costs of actually owning a certain amount of inventory. We also adopt a perspective on the matter most suited for commerce.

For retailers or wholesalers, as well as for most e-commerce’s, inventory is usually the largest asset, as well as the largest expense item. Assessing . inventory costs is therefore essential and has repercussions on the finances of the company as well as on its management. It helps companies determine how much profit can be made on the inventory, how costs can be reduced, where changes can be made, which suppliers or items must be chosen, how capital must be allocated, etc.

3. Staff :-

Group of persons, as employees, charged with carrying out the work of an establishment or executing some undertaking. a group of assistants to a manager, superintendent, or executive a member of a staff.

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4. Rate of material :-

Value update (such as inventory value, standard price, periodic unit price, percentage price variance) Single-level / multilevel differences (price and exchange rate differences of ending inventory) • Quantity update • Material attributes (such as material type, division, or valuation class) • Sales order or project stock (sales order number, WBS element) • Administration (period status)

5. Storage :-

Non-transitory, semi-permanent or long-term, containment, holding, leaving, or placement of goods or materials, usually with the intention of retrieving them at a later time. It does not include the interim accumulation of a limited amount during processing, maintenance, or repair. Management of storehouses or warehouses, handling operations, and safe custody and protection of inventory items.

6. Budget :-

Every organization realizes, at one point or another, that its resources are limited. Despite a company's efficiency and profit record, each accounting period brings new competition, changing economic conditions, and challenges to continued existence. The budgeting process illustrated in Chapter 22 represents a tool which is necessary for both effectiveness (accomplishing goals) and efficiency (using resources wisely).

As pointed out in your text, a budget can be thought of as both a planning tool, and, after results are determined, a control tool. The results of operating for a period of time can be compared to the original plan, and an organization can learn to understand its cost and revenue behaviors better over time. Some benefits of budgeting are described in your text. Budgets enhance communication between managers and workers, put an emphasis on conservation of resources, and help to improve company performance. A budget demonstrates the company's commitment to plans and goals, by attaching money to them.

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8. DIFFERENT COST ASSOCIATES FOR MAINTAINING INVENTORIES.

Inventory financing charges :-

This may seem easy to calculate, but to measure inventory financing charges accurately is not quite as simple as it might first look. For some companies, working capital financing may be essentially financing inventory, and little else, but for many others it may also be financing accounts receivable. The float between payables and receivables may in fact be partially financing inventory as well. For importers, this may be fairly straight forward to quantify if they are opening Letters of Credit prior to their vendors making shipment from overseas. In this case, the cost of the LC facility may be easily identified as the inventory financing charges. Finally, it's critical to be able to measure what portion of the inventory is being financed externally and what portion is being financed through internal cash flow. For that portion that is being financed from cash flow the opportunity costs of that investment must be measured.

Opportunity costs :-

When thinking of the opportunity cost associated with the investment in inventory, it's easy to focus strictly on the opportunity cost of dead or under performing inventory. In fact, the opportunity cost relates to the value of the total inventory. If this value were not invested in inventory, what return could be expected if it were invested in something else, such as treasuries, mutual funds, or even a money market account.

Inventory insurance and taxes :-

These items should be fairly straight forward to quantify as a percentage of average inventory value. And because both insurance and taxes are highly variable with inventory value, any reduction in average inventory value will deliver savings directly to the bottom line, not to mention improving cash flow.

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Material handling expenses :-

Measuring material handling expenses not directly associated with picking and shipping customer orders may be just as tricky. These expenses are made up mostly of wages and benefits, but also include lease payments or depreciation on material handling equipment, depreciation on automation, robotics and systems, as well as miscellaneous expenses for supplies such as pallets, corrugated, UPC labeling materials and the like.

Warehouse overhead :-

The quickest way to measure this is to split the total expenses for rent, utilities, repairs and maintenance, and property taxes by the percentage of the building associated with processing customer orders, picking and shipping, and that portion of the building associated with receiving and storing inventory. While that portion associated with receiving and storage may seem fixed, in fact it quickly becomes much more variable when you consider what you could rent out the space for as contract storage if your inventory wasn't there!

Inventory control and cycle counting :-

These expenses may also be made up primarily of wages and benefits, but may also include the depreciation or expense on hand-held radio frequency (RF) units, and other related equipment, as well as any miscellaneous expenses directly related to your inventory control team.

Inventory shrink, damage and obsolescence :-

Capturing and measuring these costs appear to be fairly straight forward at first glance. The costs of shrink, damage and obsolescence are the value of the write-

offs taken, or stated in percentage terms, the value of those write-offs over a given period of time divided by the average inventory during that period. This assumes, however, that all write-offs were taken on a timely basis throughout the year. 9. 9.

9. DIFFERENCE BETWEEN TATA MOTOR AND MARUTI MOTORS.

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TATA MOTORS.

Tata Motors is India's largest CV manufacturer, with an overall domestic market share of 59.4% in FY12 and the second largest producer of passenger vehicles (13.1% in FY12). In 2008, the company acquired two iconic brands, 'Jaguar' and 'Land Rover' from Ford for a total consideration of US$ 2.3 bn and this is likely to transform it into a global player in the passenger vehicles space. It is also credited with the launching of 'Nano', the world's cheapest car till date. Tata Motors is also the first company in the Indian automobile sector to be listed on the New York Stock Exchange.

MARUTI SUZUKI.

Maruti Suzuki, incorporated in 1981, is the country's largest passenger vehicle manufacturer with a domestic market share of close to 40%. The Company offers 14 models with over 200 variants across the Industry segments such as passenger cars, utility vehicles and vans. It has 5 plants in the Gurgaon and Manesar areas of Haryana with a production capability of 1.55 million units per annum. After remaining a near monopoly till 1992, the entry of other multinationals has resulted in the company losing market share.

Current Valuations

TATA MOTORS MARUTI SUZUKI TATA MOTORS/

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MARUTI SUZUKI P/E (TTM) x 9.1 28.9 31.4% View Chart

P/BV x 2.5 3.9 64.8% View Chart

Dividend Yield % 0.4 0.4 88.5%

Financials

EQUITY SHARE DATA

TATA MOTORS MARUTI SUZUKI TATA MOTORS/ 5-Yr Chart

Mar-14 Mar-14 MARUTI SUZUKI Click to enlarge

High Rs 417 1,976 21.1% Low Rs 255 1,217 21.0% Sales per share (Unadj.) Rs 723.4 1,471.5 49.2%

Earnings per share (Unadj.) Rs 43.5 94.4 46.0%

Cash flow per share (Unadj.) Rs 77.9 164.5 47.4%

Dividends per share (Unadj.) Rs 2.00 12.00 16.7%

Dividend yield (eoy) % 0.6 0.8 79.1%

Book value per share (Unadj.) Rs 203.8 711.6 28.6%

Shares outstanding (eoy) m 3,218.68 302.08 1,065.5% Bonus/Rights/Conversions - - - Price / Sales ratio x 0.5 1.1 42.8% Avg P/E ratio x 7.7 16.9 45.8%

P/CF ratio (eoy) x 4.3 9.7 44.5%

Price / Book Value ratio x 1.6 2.2 73.5%

Dividend payout % 4.6 12.7 36.2% Avg Mkt Cap Rs m 1,082,120 482,271 224.4% No. of employees `000 66.6 NA - Total wages/salary Rs m 215,564 14,237 1,514.1% Avg. sales/employee Rs Th 34,963.7 NM - Avg. wages/employee Rs Th 3,237.0 NM - Avg. net profit/employee Rs Th 2,101.0 NM -

INCOME DATA

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Net Sales Rs m 2,328,337 444,506 523.8%

Other income Rs m 8,286 8,305 99.8% Total revenues Rs m 2,336,623 452,811 516.0% Gross profit Rs m 348,377 52,038 669.5%

Depreciation Rs m 110,782 21,160 523.5% Interest Rs m 47,338 1,845 2,565.7% Profit before tax Rs m 198,544 37,338 531.7% Minority Interest Rs m -595 -16 3,715.6% Prior Period Items Rs m -537 229 -234.5% Extraordinary Inc (Exp) Rs m -9,854 0 - Tax Rs m 47,648 9,022 528.1% Profit after tax Rs m 139,910 28,529 490.4%

Gross profit margin % 15.0 11.7 127.8%

Effective tax rate % 24.0 24.2 99.3% Net profit margin % 6.0 6.4 93.6%

BALANCE SHEET DATA

Current assets Rs m 958,453 145,536 658.6% Current liabilities Rs m 923,561 82,309 1,122.1% Net working cap to sales % 1.5 14.2 10.5%

Current ratio x 1.0 1.8 58.7%

Inventory Days Days 43 14 295.3%

Debtors Days Days 17 68 24.5%

Net fixed assets Rs m 973,754 136,732 712.2% Share capital Rs m 6,438 1,510 426.3% "Free" reserves Rs m 498,291 204,269 243.9% Net worth Rs m 656,035 214,964 305.2% Long term debt Rs m 452,586 6,274 7,213.7% Total assets Rs m 2,199,983 314,114 700.4%

Interest coverage x 5.2 21.2 24.5% Debt to equity ratio x 0.7 0 2,363.7%

Sales to assets ratio x 1.1 1.4 74.8% Return on assets % 8.5 9.7 88.0%

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Return on equity % 21.3 13.3 160.7%

Return on capital % 21.2 17.8 119.0%

Exports to sales % 1.5 9.3 16.3% Imports to sales % 0.7 11.1 6.4% Exports (fob) Rs m 35,083 41,125 85.3% Imports (cif) Rs m 16,632 49,366 33.7% Fx inflow Rs m 69,417 41,417 167.6% Fx outflow Rs m 28,532 81,598 35.0% Net fx Rs m 40,885 -40,181 -101.8%

CASH FLOW

From Operations Rs m 361,512 49,946 723.8%

From Investments Rs m -298,930 -49,969 598.2%

From Financial Activity Rs m -38,832 -739 5,254.7%

Net Cashflow Rs m 42,770 -762 -5,612.9%

Share Holding

Indian Promoters % 34.3 0.0 - Foreign collaborators % 0.0 56.2 - Indian inst/Mut Fund % 10.1 14.0 72.4% FIIs % 27.0 22.0 122.9% ADR/GDR % 21.3 0.0 - Free float % 7.3 7.8 93.6% Shareholders 356,574 100,212 355.8% Pledged promoter(s) holding % 6.0 0.0 -

.

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10. CONCLUSION.

Inventory only exist because there is a difference in the timing or rate of supply and demand. For example, if you had a product that that was immediately demanded when you received it, there would be no need to store it, therefore no inventory. As such, when the rate of supply exceeds the rate of demand, inventory increases; when the rate of demand exceeds the rate of supply, inventory decreases.However, there are various reasons for an imbalance between the rates of supply and demand at different points in any operation lead to the five different types of inventory.

Hence due to this inventory management and budgetary system is very essential in the organization.

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11. BIBLOGARPHY/WEBLOGRAPHY.

Bibliography :-

Companion site to the book Inventory Accuracy: People, Processes, & Technology - By David J. Piasecki

Weblography :-

1.) http://www.wikipedia.com2.) http://www.investopedia.com3.) http://www.economictimes.com 4.) http://www.accountnet.com5.) http://www.investorwords.com

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http://www.investorwords.com/

http://www.accountnet.com/

http://www.investopedia.com/

http://www.wikipedia.com/

http://www.inventoryops.com/services/about.html

Economy & Finance

Inventory management and budgetary control system