Department of Business Administration

Block No. 13, Sector H-8, Allama Iqbal Open University, Islamabad.

Financial Accounting (528)
Assignment No. 02
Submitted to:
Mr. Attiqur Rehman
House No. A-64/4, Lane No. 02, Lalarukh, WAH CANTT (0300-513 5164)

Submitted by:
Muhammad Hammad Manzoor MBA (HRM) – 1st Semester
Roll No. 508195394 508, 5th Floor, Continental Trade Centre (CTC) Block – 08, Clifton, KARACHI (0321-584 2326, 0322-555 5901)

Financial Accouting (528)

ACKNOWLEDGEMENT

All praises to Almighty Allah, the creator of the Universe who blessed me with the knowledge and enabled me to complete this research. I feel great pleasure and honor to express my sincere gratitude and heartfelt thanks to my worthy subject faculty member Mr. M. Attiq ur Rehman Sab, for his guidance, encouragement and friendly attitude during the present study and throughout the period of M.B.A (Semester I).

I pay my thanks to all the Faculty of the Department & AIOU Karachi Campus Staff for their kind support, constructive criticisms and real encouragement. I wish to thank Ms. Zehra Jabeen for valuable discussions and knowledge sharing during the completion of this project. I further wish to record my thanks to all my students, class fellows, well wishers and especially Cera-e-Noor Management, Akhtar Naseem, Mr. Usman Javed (Manager – Marketing), Mr. Khizar Iftikhar, Khurram Shahzad, Rehan Hassan, Sohail, Waleem, Javed for their help, valuable suggestions, whole hearted cooperation and prayers.

Finally, I owe all my academic success and progress in life to my loving parents and sisters, whose affection, endless prayers, good wishes and inspiration remained with me for higher ideals of life.

M. Hammad Manzoor

2
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

ABSTRACT
The study had been carried out by keeping in mind about the selection criteria for and use of appropriate inventory system in the Cere e Noor. Cera-e-Noor (Karachi) has been selected for the sake of the data analysis and working on its merits and demerits, the methodology includes the evaluation of the inventory control management system, that how they take care of the inventory management system in the way they initialize the work flow. After analyzing the inventory management system, different inventory technique had been worked out from Cere e Noor which lead the study for further SWOT analysis. SWOT analysis had been carried out and conclusion followed by recommendations had been made in this regards.

3
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Sr. No.
1

Contents Description
Introduction
• • • • • • • • • • • • • • What is Inventory? Inventory Control System Inventory Management Inventory Control Business Inventory Typology Principle of Inventory Proportionality High level Inventory Management System Inventory Cost Procedures FIFO LIFO Weighted Average Method Company Profile Data Collection

Page No.
5-7

2

Review of Literature

6-20

3 4

Cera-e-Noor Ceramics

21-30 31

Data Analysis
Demerits and Deficiencies Merits & Strengths

5

Recommendations

32

6

References

33

4
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Introduction
What is Inventory?

Inventory means a list compiled for some formal purpose, such as the details of
an estate going to probate, or the contents of a house let furnished. The term inventory is a designation for goods that are held for sale in the normal course of business, as well as for goods that are in production or are to be placed in production. Practically all tangible items fall into this classification at one time or another. Gasoline, oil and automotive supplies are included in the inventory of a service station, crops and livestock are the inventory of a farmer etc.

Inventory Control System:
An inventory control system is a process for managing and locating objects or materials. In common usage, the term may also refer to just the software components. Modern inventory control systems often rely upon barcodes and radio-frequency identification (RFID) tags to provide automatic identification of inventory objects. In an academic study performed at Wal-Mart, RFID reduced Out of Stocks by 30 percent for products selling between 0.1 and 15 units a day. Inventory objects could include
5
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
any kind of physical asset: merchandise, consumables, fixed assets, circulating tools, library books, or capital equipment. To record an inventory transaction, the system uses a barcode scanner or RFID reader to automatically identify the inventory object, and then collects additional information from the operators via fixed terminals (workstations), or mobile computers.

Application - Inventory Control System:
An inventory control system may be used to automate a sales order fulfillment process. Such a system contains a list of order to be filled, and then prompts workers to pick the necessary items, and provides them with packaging and shipping information. An inventory system also manages in and outwards material of hardware. Real-time inventory control systems may use wireless, mobile terminals to record inventory transactions at the moment they occur. A wireless LAN transmits the transaction information to a central database. Physical inventory counting and cycle counting are features of many inventory control systems which can enhance the organization.

Inventory Management:
Inventory management is the active control program which allows the management of sales, purchases and payments. Inventory management software helps create invoices, purchase orders, receiving lists, payment receipts and can print bar coded labels. An inventory management software system configured to your warehouse, retail or product line will help to create revenue for your company. The Inventory Management will control operating costs and provide better understanding. We are your source for inventory management information, inventory management software and tools. A complete Inventory Management Control system contains the following components:
• • • • • • • •

Inventory Management Definition Inventory Management Terms Inventory Management Purposes Definition and Objectives for Inventory Management Organizational Hierarchy of Inventory Management Inventory Management Planning Inventory Management Controls for Inventory Determining Inventory Management Stock Levels
6

By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Inventory management is primarily about specifying the shape and percentage of stocked goods. It is required at different locations within a facility or within many locations of a supply network to proceed the regular and planned course of production and stock of materials. The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.

Inventory Control:
The ultimate challenge in managing inventory is balancing the supply of inventory with demand for inventory. In other words, a company would ideally want to have enough inventory to satisfy the demands of its customers for its products – no lost sales due to inventory stock-outs. However, the company does not want to have too much inventory supply on hand because of the cost of carrying inventory. Enough but not too much is the ultimate objective! Our experience shows that companies with sustainable profitability have deep understanding of the complex tradeoffs in managing inventory. Top performers are able to reduce inventory carrying costs by as much as 25-50%, while maintaining or increasing stock availability.

Who needs inventory control?
All companies that stock and distribute products and have a need to reduce tied-up capital in inventory and/or seek to increase the service level to their customers. What's in it for you? Through a thorough analysis, we create a dynamic set of rules for inventory control that supports the client’s business. By keeping the right product, in the right quantities clients can decrease capital tied-up in inventory by 25-50% and simultaneously boost sales through higher service levels and fewer stock-outs.

7
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Business Inventory:

The reasons for keeping stock
There are three basic reasons for keeping an inventory:
1. Time - The time lags present in the supply chain, from supplier to user at

every stage, requires that you maintain certain amounts of inventory to use in this "lead time." However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance. 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product.

Special terms used in dealing with inventory:

• •

Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Stockout means running out of the inventory of an SKU. "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.

Typology:
1. Buffer/safety stock. 2. Cycle stock (Used in batch processes, it is the available inventory, excluding

buffer stock). 3. De-coupling (Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process). 4. Anticipation stock (Building up extra stock for periods of increased demand e.g. ice cream for summer). 5. Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet).
8
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Inventory Examples:
While accountants often discuss inventory in terms of goods for sale, organizations manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
• • • •

Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable.

For example: Manufacturing A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organization to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its parameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organization in isolation.
9
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Principle of Inventory Proportionality: Purpose
Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory," that is, inventory that would be left over of another product when the first product runs out. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management, replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first, while at the same time balancing out the inventory supply of all products to make their inventories more proportional, and thereby closer to achieving the primary goal. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future; this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages, a much more accurate and optimal outcome.

Applications
The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground
10
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
storage tanks. This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today.

Roots
The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time parts inventory management made famous by Toyota Motors in the 1980s

High Level Inventory Management System:
The dominance of financial reporting accounting over management accounting remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory. Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period: Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available Cost of goods available − cost of ending inventory at the end of the period = cost of goods sold The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure. Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) and its inverse Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio This ratio estimates how many times the inventory turns over a year. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending
11
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced. While these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include: • • • • Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO.

Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold. The ratio may not be able to reflect the usability of future production demand, as well as customer demand. Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory turns. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess.

12
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Inventory — Cost Procedures:Inventories represent one of the most active elements in business operations, being continuously acquired, converted and resold. A large part of a company’s resources is frequently tied up in goods that are purchases or manufactured. The cost of such goods must be recorded, grouped and summarized during a period. At the end of the period, cost must be allocated to current activities and future activities. Such allocation occupies a central role in the measurement of periodic operating results as well as in the determination of financial position. Failure to allocate costs properly can result in serious distortions of financial progress and position.

Classes of Inventories:Merchandise Inventory:It is generally applied to goods held by a trading concern, either wholesale or retail, when such goods have been acquired in a condition for resale. e.g. Soaps, Toothpastes, Shampoo etc.

Manufacturing Inventory:The term raw materials, goods in process and finished goods refer to the inventories of a manufacturing concern.

Raw Materials:Raw materials are those tangible goods that are acquired for use in the productive process. For example newsprint is the finished product of the paper mill but it represents raw material to the printer who acquires it.

Goods in Process:Goods in Process referred to as work in process; consist of materials partly processed and requiring further work before they can be sold. This inventory is considered to be made up of three cost elements

i. ii. iii.

Direct Material Direct Labour Manufacturing Overhead / Direct Factory Overheads

Finished Goods:Finished goods are the manufactured products awaiting sale. The cost of the finished products consists of the direct material, direct labour and manufacturing overhead costs assigned to it. Finished parts that were purchased and that are to be used in the production of the finished products are normally classed as raw materials. Finished parts that are held for purposes of sale may be reported as finished goods.

13
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Inventories in the Measurement of Income:When goods that are purchased or manufactured are all sold within a fiscal period, the determination of the gross profit on sale is a simple matter. The total cost of goods purchased or manufactured is also the cost of goods sold that is properly chargeable to revenue. Such a situation however is seldom found in practice. Normally, a part of the goods acquired remains on hand at the end of the period. A value must be assigned to these goods. This value is subtracted from the total merchandise acquisition costs and is carried into the subsequent period to be charged against future revenue. Adequate records are required in providing cost data for statement purposes. Such records are also required for the proper internal control of goods on hand.

Inventory Method:Quantities of inventories on hand are ascertained either through a periodic system that calls for physical inventory at the end of each period, or a perpetual system that involves perpetual or book inventories.

Periodic Inventory System:A periodic inventory system is an alternative to a perpetual inventory system. In a periodic system, no effort is made to keep up to date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically usually at the end of each year.

Perpetual Inventory System:In a perpetual inventory system, merchandising transactions are recorded as they occur. The system draws its name from the fact that the accounting records are kept perpetually up to date. Purchases of merchandise are recorded by debiting an asset account entitled inventory. When merchandise is sold, two entries are necessary one to recognize the revenue earned and the second to recognize the related cost of goods sold. This second entry also reduces the balance of the inventory account to reflect the sale of the company’s inventory.

14
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Comparison of Perpetual and Periodic Inventory Systems:Perpetual systems are used when management needs information throughout the year about inventory levels and gross profits. Periodic systems are used when the primary goals are to develop annual data and the to minimize record keeping requirements.

Perpetual Inventory System
Large company with professional management. Management and employees want information about items in inventory and the quantities in which specific products are selling.

Periodic Inventory System
Small company, run by owner.

Accounting records of inventories and specific products sales are not needed in daily operations. Such information is developed primarily for use in annual income tax returns. Items in inventory have a high per unit cost. Inventory consists of many different kinds of low cost items. Low volume of sales transactions or a High volume of sales transactions and a computerized accounting system manual accounting system lock of full time accounting personnel. Merchandise stored in multiple locations or in All merchandise stored at the sale site. warehouses separate from the sales sites.

Items to be included in Inventory:Goods in Transit:When the terms of Sales are “f.o.b. shipping point”, title passes to the buyer with the loading of goods at the point of shipment. Goods in transit mean we purchase goods form outside (may from outside the country or city). Physically we have not received these goods yet but we include it into our stock or inventory because we pay money for buying and bringing these goods. These goods are near on the way and near to reach us. Segregated Goods:When goods are prepared on special order and segregated for shipment, title may pass with such segregation. When goods are segregated at the end of the period and title has passed, the vendor may properly recognize a sale and exclude segregated goods form his inventory, while the vendee may properly recognize both a purchase and an inventory increase. Frequently, one encounters many practical problems in arriving at the portion of the inventory that is segregated as well as perplexing legal problems in defining the precise status of such goods. These difficulties normally lead to the adoption of a policy whereby entries for both sale and purchase await formal shipment of goods by the vendor. 15
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Goods on Consignment:Consignment is an act of sending the goods by the owner (manufacturer or whole seller) to his agent, who agrees to collect, store and sell them on the risk and behalf of the owner on commission basis. Conditional and Installment Sales:Some inventory or merchandise is sold out on conditional or installment basis. This inventory is in our ownership till the full amount of installment is paid.

Specific Identification of Costs with Inventory items:FIRST – IN, FIRST – OUT METHOD (FIFO):-

This method, frequently referred to as FIFO, assumes that the oldest materials are issued first and are issued at the rate at which they were received. In other words, materials in the store are issued according to their order of receipts in the store.
Advantages of FIFO Method:-

1. 2. 3. 4. 5.

The FIFO method is widely used since it is rational, systematic and consistent with the actual physical flow of the materials. The materials received first in the store tend to be the first materials issued. Material are issued at the prices they were purchased, so costs of jobs of work orders are correctly ascertained so far as material costs are concerned. This method is useful when prices are falling. This method is simple to understand, easy to operate and not subject to manipulation. Closing stock of material under FIFO, will be valued at the most recent unit costs as it will consist of most recent purchases of materials.
Disadvantages of FIFO Method:-

1. 2. 3.

This method increases the possibility of errors if the prices of the material fluctuate. Sometimes, more than one price for valuing issue of materials may have to be adopted for pricing even a single requisition. It is when the material is issued from the different lots of purchases. If the prices fluctuate, comparison between one job and the other job becomes difficult.

LAST – IN, FIRST – OUT METHOD (LIFO):-

16
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
In this method, pricing of issue of material is done in the reverse order of purchase, i.e. materials are priced by taking the price of the latest available consignment in the stores. Materials received last in the store are issued first, so the method is known as “Last in First out”. Advantages of LIFO Method:Materials are issued at cost price and therefore no profit or loss will result by the following this method. Like FIFO, this method recovers cost from production because actual cost of materials is charged to production. Production is charged at the recent prices as far as possible because materials are issued form the latest consignment. In times of rising prices, this method is suitable because materials are issued at the current market prices. Disadvantages of LIFO Method:This method may lead to clerical error in time of recording. The comparison between one job and other job is difficult. The stock in hand is valued at a price, which does not reflect current market price. So closing stock will be understated or overstated in the balance sheet. Sometime more than one price is charged for a single requisition. WEIGHTED AVERAGE METHOD:When the average-cost method is in use, the average cost of all units in the inventory is computed after every purchase. This average cost is computed by dividing the total cost of goods available for sale by the number of units in inventory. As the average cost may change following each purchase, this method is also called as moving average. Advantages of Weighted Average Method:This method is rational, systematic and not subject to manipulation. Average price method is considered to be the best method when prices fluctuate considerably because this method trends to smooth out fluctuations in prices. Issue prices are not to be calculated each time issue are made. Issue prices are changed only when new lot of material is received. This method covers the cost of materials from production. This method maintains the issue prices as near to the market price as possible. This method eliminates the necessary for adjustments in stock valuation.

1. 2. 3.

1. 2. 3. 4.

1. 2. 3. 4. 5. 6.

Disadvantages of Weighted Average Method:17
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
1. 2. The great disadvantages of this method are that a fresh rate calculation will have to be made as soon as a new lot of materials are purchased which may involve tedious calculation. Thus, there are chances of clerical errors. Issue price of materials does not represent actual cost price of materials issued but it represents average cost of materials in the stores.
Example:Inventory Costing Method. Sufyan & Co makes the following purchases and issue to manufacturing department: October 1. Opening balance: 800 units @ Rs. 6 5. Purchased 200 units @ Rs.7 6. Purchased 200 units @ Rs. 8 16. Issued 400 units 24. Purchased 300 units @ Rs. 9 27. Issued 500 units. Required: The cost of materials used and the cost assigned to the October 31. by the following costing methods 1). FIFO 2). LOFO 3). Average Cost Method. 1). FIFO:
Unit Received Date Oct. 1 5 6 Qty. 200 200 Unit Cost 7.00 8.00 Amount (Rs) 1400 1600 Qty. Unit Issued Unit Cost Amount (Rs) Qty. 800 800 200 800 200 200 400 200 200 400 200 200 300 100 200 300 Unit Balance Unit Cost 6.00 6.00 7.00 6.00 7.00 8.00 6.00 7.00 8.00 6.00 7.00 8.00 9.00 7.00 8.00 9.00 Amount (Rs) 4800 4800 1400 4800 1400 1600 2400 1400 1600 2400 1400 1600 2100 700 1600 2100

16

400

6.00

2400

24

300

9.00

2100

27

400 100

6.00 7.00

2400 700

2).
Date

LIFO:
Unit Received Unit Issued Unit Balance

18
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Qty. Oct. 1 5 6 200 200 Unit Cost 7.00 8.00 Amount 1400 1600 Qty. Unit Cost Amount Qty. 800 800 200 800 200 200 800 800 300 600 Unit Cost 6.00 6.00 7.00 6.00 7.00 8.00 6.00 6.00 9.00 6.00 Amount 4800 4800 1400 4800 1400 1600 4800 4800 2100 3600

16 24 27 300 9.00 2100

200 200

8.00 7.00

1600 1400

300 200

9.00 6.00

2100 1200

3).
Date Oct. 1 5 9 16 24 27

Average Cost Method:
Unit Received Unit Amount Qty. Cost (Rs) 200 200 300 7.00 8.00 9 1400 1600 400 2700 500 7.18 3590 6.50 2600 Qty. Unit Issued Unit Amount Cost (Rs) Qty. 800 1000 1200 800 1100 600 Unit Balance Unit Amount Cost (Rs) 6.00 4800 6.20 6200 6.50 7800 6.50 5200 7.18 7900 7.18 4310

*Formula of Average Cost = Total Unit Cost / Total No of Units

Inventories — Special Valuation Procedures:Inventory Valuation at Cost or Market, Whichever is Lower Modification in the Lower of Cost or Market Value Methods of Applying Lower of Cost or Market Procedures Evaluation of Lower of Cost or Market Procedure Application of Lower of Cost or Market in the Accounts Lower of Cost or Market and LIFO Deteriorated Goods, Trade – Ins, Repossessions Losses on Purchase Commitments Valuation at Sale Price Valuation at Market

Inventories — Techniques for Estimating Inventory Valuation:Estimated costs Gross Profit Method 19
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Retail Inventory Method Dollar – Value LIFO Procedures Inventory Valuation in a Manufacturing Concern Inventories on the Balance Sheet Prepaid Expenses

20
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Practical Study of

Cera-e-Noor
http://www.cera-e-noor.com/

Manufacturer of finest tableware
Company Portfolio Cera-e-Noor plant located in the industrial area of city of Hub in Lasbela, Balochistan province of Pakistan, was acquired by the Hashoo Group in the year 2000. It is a stateof-the-art facility for the manufacture of crockery (tableware). The plant was designed and commissioned with the collaboration of French ceramic giant, Bernardaud Liamoges and technical/engineering expertise from other major players in the French ceramic industry such as Ceric and Cerlim. Notable features of the manufacturing unit are automatic plate lines, universal jiggering machines capable of producing extra large sized platters, PLC controls and highly advanced shuttle kilns for both gloss and biscuit firing. A Ceramics manufacturing company, “Cera-e-Noor” specializes in hospitality and domestic grade porcelain crockery and table ware. The state of the art facility included the latest technology and processes including automated lines, universal machines capable of producing extra large size plotter, PLC controls and highly advanced Shuttle kens of both glass and biscuit. “Cera-e-Noor” uses imported China Clay vitrified at extremely high temperatures to produce hardwaring and scratch resistant porcelains crockery and table ware in different grades. “Cera-e-Noor” porcelain is highly durable and four times stronger than conventional ceramics table ware and is microwave and diswasher sale. Limited addition customs design and grids can be commissioned suitable for Government or Corporate levels use. All products are entirely free from harmful material and exhibits excellent thermal stability. Apart from meeting the industry needs of the Hashoo Group, “Care-e-Noor” also caters to the needs of other customers in the commercial and domestic sectors as well as international markets at easy realistic prices. Being the only facility in Pakistan capable of manufacturing hard ceramic product in large quantities “Care-e-Noor” is committed to total customer satisfaction by
21
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
consistently providing innovative and unmatched quality products through team efforts.

VISION OF THE COMPANY: We strive to be bench-marked against the best in the tableware industry. Our aim is to exceed our customer's expectations ensuring them of highest standards of service levels and unmatched product quality. FUTURE PLANS: In the future competition will increase in this market and there will be large availability of Chinese product at relatively low price. Customer will become brand & quality conscious. In future we plan to expand our product line by introducing more categories, designs & varieties in both casual & formal ware. We also plan to go beyond the national boundaries and market of products worldwide.

22
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

23
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Genuine Hard Porcelain
24
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
Cera-e-Noor product line is unique – it is the only facility in the country, manufacturing products of hard porcelain from imported quality China clay. Durable Decoration Due to extremely controlled temperature & atmospheric conditions in the fast firing fully automatic tunnel Kiln our decorations fuse with the glaze, which gives high degree of durability even after high dishwasher use. Domestic and Institutional Product Ranges Built-in versatility in our production systems allows us to offer both the fine tableware for home dinning & the tough thick ware for the institutional client. We can custom make company logos as well as design transfers according to specifications. Realistic Prices High speed, high volume production facilities combined with experienced technical staff ensures quality products at realistic prices. Try us - you will be pleasantly surprised. Free of Harmful Materials Strict quality control in the selection of raw materials for the composition is maintained to avoid hazardous material which can be injurious to health. High Durability Cera-e-Noor porcelain is vitrified at an extremely high temperature, making it four times stronger than conventional ceramic tableware and is dishwasher safe. Scratch Resistant The hardness of the Cera-e-Noor glazed surface can withstand tough commercial use with high resistance to scratching/silver marking.

25
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Methodology Used: Turn Over Targets
• • • To achieve a target of PKR 222 million (2 million pieces) within the 1st year To achieve a target of PKR 400 million (4 million pieces) within the 2nd year To achieve a target of PKR 1 billion (8 million pieces) within the 3rd year

Profit Oriented Targets
• • • To achieve profit at the rate of 2% within the 1st year 2007-08 To achieve profit at the rate of 4% within the 2nd year of 2008-9 To achieve profit at the rate of 8 % within the 3rd Year of 2008-09

Sales Targets
• • • • • • To achieve a target Expand the number To achieve a target Expand the number To achieve a target Expand the number net sales of Rs. 222 million within the1st year of 2007-08 of dealers by 10 % net sales of Rs. 400 million within the 2nd year of 2008-09 of dealers by 30 % net sales of Rs. 1billion within the 3rd year of 2009-10 of dealers by 50 %

26
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Inventory control Methodology Used by Cere e Noor:

27
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

1) - Department Requisition:
The first major step in Inventory control system is the departmental purchase requisition. It serve the different purposes for purchasing of raw data or the material required for the packing for preparation of ceramics etc. The budgeting is being prepared by the concerned department that how to meet the order.

2) - Stock Check:
The second major step in Inventory control system is the Stock Check for the sake of purchase requisition. The Purchase request is the system generated and directly delivered the concerned persons, i.e. purchase officer, procurement officer etc. It is the responsibility of the concerned department to validate the department requisition, that either it is available in the present stock or need to purchase from vendor.

3) - Purchase Department:
The third step in Inventory control system is that the Purchase department raised the request for price quote to the different vendors to sort out the different prices comparisons for financial evaluations and the technical evaluations. The lowest bidder with good technical specifications is to solicit and get it approved from bidding committee or through Manager Finance for onward further process.

4) - Purchase Order:
The forth step in Inventory control system is the placement of Purchase Order which includes the Turn Around Time for completion of that project, Terms and conditions and mode of payments.

5) - GRN & MRN:
The fifth step in Inventory control system is the receiving of material which is handled by GRN (Goods Receiving Note) and by MRN (Material Receiving Note). All the material is characterized by GRN & MRN. These notes include the details of the material and the quantity of material received. It is handled at the main entrance by the concerned departments.

6) - Stock Build Up:
The Sixth step in Inventory control system is the Stock Build Up of the received material. All the received material is placed in the stock maintained by the Store

28
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)
department. The receipt of material is notified to the concerned department that their requested data has been maintained in the store.

7) - Raw Material Request:
The seventh step in Inventory control system is the receiving issuance of the raw material request. The concerned department made a formal request through the software system to the store department for issuance of the raw material in order to accomplish the order.

8) - Issuance of the material:
The Eight step in Inventory control system is the issuance of the raw material. The store department issues the raw material along with the maintenance of the balance sheet. The issuance of the material is made through the manual or electronic system.

9) - Financial Sheet:
The Ninth step in Inventory control system is the Financial Sheet and balance of material. The financial sheet is maintained by store department and then onward pass on to the Finance department.

29
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Inventory methods Used by Cere e Noor:
Inventory Methods used by Cere e Noor are as follows;

Periodic Inventory Method Used by Cere e Noor:
Periodic Inventory method is used by Cere e Noor. They generally carry out the periodic inventory by physical inventory at the end of each month.
In periodic Inventory methodology of the Cere e Noor, the store department is responsible for maintain all the records for the material received and issued by the Store Department.

FIFO (First In & First Out) Method Used by Cere e Noor:
Another method used by Cere e Noor is the First In & First Out (FIFO) method). This method is worked out for the items that are to utilize at the earliest as we can. In the FIFO technique, the sensitive material holds by the store department is to utilized first. The utilization of the different colors for the ceramics preparation, generally few color brands are very sensitive for utilization, due to temperature and light exposure. FIFO technique is sometime applied in such cases.

30
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Merits, Demerits, Strengths and Deficiencies: Merits & Strengths:
• • • Premier local manufacturer of porcelain tableware. Part of the elite Hashoo group -the owners and operators of two leading chains of hotels namely Marriott and Pearl Continental Ability (knowledge, skills and facility) to manufacture hard porcelain.

Demerits and Deficiencies:
• • Inventory management system is not equipped with the advance technologies, like modern instruments to maintain the sensitive material (paints). No modern alarming system has yet been installed with Hashoo group; the old alarming system in use generally generates the request which is not required by the purchaser. Plant is geared towards small volumes and labor intensive manufacturing resulting high. Cost of manufacturing Quality is acceptable but consistency needs to be ensured. Further improvement in quality is necessary to compete with top International brands. Lack of Decal Development Facility. Lack of original designs Lack of brand awareness in relevant markets Lack of proper HRD( succession planning, Training & Development) Lack of planning strategy for Inventory Management.

• • • • • •

Opportunities:
• • • • Huge growing domestic market Growing purchasing power of people within the economy More and more consumers are becoming brand conscious Modern lifestyles markets are growing.

Threats:
• • • • Growing Manufacturing Power of China (they can do reasonable quality at low cost) Increasing energy costs.(Oil & Electricity) Increasing prices of raw material Political stability is at a decline.

31
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528) Recommendations:
• • • • • • • • Enhance the planning strategy for inventory management. Better alarming system should be installed. Receiving management should be improved enough, so that no illegal store keeping could be made at arriving place (main gate) Enhance the manufacturing plant capacity to get the maximum number Enhance the brand design Enhance HRD to meet the appropriate professional needs for onward competition Administration department needs to address for of hiring experienced professionals of the relevant trade. The emphasis of the company emphasized is work progress, nor on the personality grooming of an individual, which could be helpful for company operation smooth conduction and helping out for better prospectivity in the form of his personal growth and motivation to company. Sophisticated inventory plan should be prepared to meet the order in a more proficient way.

32
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

References:
A special tribute and thanks to the following professionals of Cera-e-Noor for cooperating in providing data and fruitful assistance.

Name
Eshan Ali Muhammad Usman Javed

Designation
Manager HR Manager Marketing

Contacts
eali@cera-e-noor.com.pk javd.u@pepl.com.pk

o o o o o o o o

http://en.wikipedia.org/wiki/Inventory http://en.wikipedia.org/wiki/Inventory_control_system www.inventorymanagement.com/
http://www.unitedlog.com/Inventory%20control-086.aspx? gclid=CLTZl6K__KsCFU0a6wodkizTlg

http://www.bized.co.uk/educators/169/business/inventory/lesson/inventorystrat.htm http://www.netmba.com/marketing/pricing/ http://www.learnmarketing.net/inventory.htm http://www.vladvisors.com/images/PDF/VisionLink_Ten-Steps-BuildingEffective Inventory-Plan.pdf

33
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Financial Accouting (528)

Mr. Attiq ur Rehman House. No. A-64/4 Lane No. 02, Lalarukh WAH CANTT. (0300-513 5164)

M. Hammad Manzoor 508195394 # 508, 5th Floor, CTC Continental Trade Centre, Block-08 08, KARACHI. (0321Clifton 584 2326) Financial Accounting 02 528

34
By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton – 08, Karachi. (Roll No. 508195394)

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.