A SUMMER TRAINING PROJECT REPORT ON INVENTORY MANAGEMENT

IN JUBILANT ORGANOSYS LTD. GAJRAULA, (U.P.)

PROJECT REPORT SUBMITTED IN PARTIAL FULFILMENT OF MASTER OF BUSINESS ADMINISTRATION OF Uttar Pradesh Technical University Under the Guidance of: Mr. Anil Kumar Goal (Finance Facul !" IVS In# i u e o$ Mana%emen (Ma &ura"
Submitted By: VAIBHAV AGARWAL M.B.A. IIIrd Sem. Roll. No. 0730870025

IVS In# i u e o$ Mana%emen Ma &ura

(A$$ilia e' o U ar Pra'e#& Tec&nical Uni(er#i !) *uc+no,"
N-./ 0el&i Ma &ura -i%&,a!) A+1ar2ur) Ma &ura ./34567(UP"

ACKNOWLEDGEMENT

I express my sincere gratitude to Mr. N. K. Agarwal (Sen or Manager! "#$ lan% Organo&'&( under whose super ision has he!ped to c!ari"y my concepts o" In entory Management# distinguished scho!ars and authors# whose wor$ I he e used in this pro%ect. I wou!d a!so !i$e to than$ to Mr. An l Goal )a*#l%' ) nan*e+. &o words o" appreciation are good enough "or the constant encouragement# which I ha e recei ed "rom him. I than$ Mr. Ma,e&, "a n (-ea. A**o#n%& an. ) nan*e # "#$ lan% Organo&'&( "or his unstinted support to the pro%ect. 'ina!!y# I wou!d !i$e to than$ Mr. ". L. G#/%a ()a*%or' Manager! "#$ lan% Organo&'&( to gi e the opportunity to comp!ete the pro%ect in the esteemed organi(ation.

VAIBHAV AGARWAL MBA IIIrd Sem

0re1a*e

As a part o" the partia! "u!"i!!ment o" the M.2.A. programme at 34S 3n&% %#%e o1 Manage5en%! A6$ar/#r )Ma%,#ra(# Summer *raining was underta$en with the internationa! company# "723LANT ORGANOS8S LIMITED# Ga%rau!a )+. ,. &AGAR-. *his pro%ect is specia!!y designed to understand the su.%ect matter o" In entory Management o" the company. *his pro%ect gi es us in"ormation and report a.out company/s In entory Management. *hroughout the pro%ect the "ocus has .een on presenting in"ormation and comments in easy and inte!!igi.!e manner. *he purpose o" the training was to ha e practica! experience o" wor$ing in a organi(ation and to ha e exposure to the arious management practices in the "ie!d o" 'inance. *his training has a!so gi en me an on the %o. experience o" 'inancia! Management. *his pro%ect is ery use"u! "or those who want to $now a.out company and In entory Management o" the company.

Contents

0ART9 3 01.%ecti e o" the Study 0Introduction o" 2ompany 0 2ompany ,ro"i!e 0 History 0 Board o" 3irectors 0 ,resence Across Va!ue 2hain 0 Awards : 0ro.#*%& 0 Guiding ,rincipa!s o" 2ompany 0 Structure o" the 2ompany 0 Research Methodo!ogy 0 Introduction o" the *opic 0 2onceptua! 3iscussions 0ART9 33 0 3ata 2o!!ection 0 'inancia! Statements 0 3ata Ana!ysis and Interpretation 0 ,ro.!ems and Suggestions 0 2onc!usions 0 Bi.!iography

OBJECTIVE OF THE STUDY

Objective of The Study:

In entories constitute the principa! item in the wor$ing capita! o" the ma%ority o" trading and industria! companies. In in entory# we inc!ude raw materia!s# "inished goods# wor$ in progress# supp!ies and other accessories. *o maintain the continuity in the operations o" .usiness enterprise# a minimum stoc$ o" in entory re4uired.

Howe er# the physica! contro! o" in entory is the operating responsi.i!ity o" stores superintendent and "inancia! personne! ha e nothing to do a.out it .ut the "inancia! contro! o" these in entories in a!! !ines o" acti ity in which they comprise a su.stantia! part o" the current assets is a "re4uent pro.!em in the management o" wor$ing capita!. Management o" in entory is designed to regu!ate the o!ume o" in estment in goods on hand# the types o" goods carried in stoc$ to meet the needs o" production and sa!es whi!e at the same time# the in estment in them is to $ept at a reasona.!e !e e!.

INTRODUCTION O COM!"N#

COMPANY PROFILE

Co5/an' 0ro1 le;

+u.i!ant 1rganosys Limited is the !argest specia!ty chemica! company o" India and a !eading g!o.a! manu"acturer in de"ined chemica! categories i(# second !argest in pyridine and its deri ati es# third !argest in so!id po!y iny! acetate and !eading positions in acety!s and other specia!ty chemica!s. *hese inc!ude pharmaceutica!s and !i"e science chemica!s# per"ormance chemica!s# organic intermediates# agri products and a range o" other specia!ty chemica!s.

It was incorporated in the year 5678 under the companies Act# 569:. *he company is a part o" +u.i!ant 2orporation# which a!so inc!udes +u.i!ant ;npro# 3omino/s# +u.i!ant Biosys. *he manu"acturing "aci!ities !ocated at Ga%rau!a in +.,.&AGAR 3istrict# <.,. *he company esta.i!ished an Research and 3e e!opment Group in the year 568= and Research and 3e e!opment was recogni(ed .y the 3epartment o" Science and *echno!ogy. *he groups ha e de e!oped a num.er o" products# which ha e .een commercia!i(ed o er a period o" time. *he arious group o" the Research and 3e e!opment carryout research in the "ie!d o" ,o!ymers and Adhesi es# >1rganic chemica!s# Biotechno!ogy and ;n ironment/. *he company di""erentiates itse!" in its manu"acturing approach which is .ased on the use o" a renewa.!e resource as the main "eed stoc$# the conser e energy re4uirement and a comp!ete recyc!ing and reuse o" the "ina! wastage at the p!ant. *he main "eed stoc$ "or %u.i!ant?s product !ine is Mo!asses# a renewa.!e .io@mass# occurs as a .y product in the sugar mi!! "rom which industria! a!coho! is produced "rom the process o" "ermentationand disti!!ation. *his ma$es the manu"acturing approach inheretant!y ecoAe""icient. Industria! a!coho! is "urther proccessed to produced a series o" a!ue added chemica!s.

+u.i!ant 1rganosys Limited has historica!!y# .een a producer and !eading manu"acturer o" acety!s in India "or more than two decades. +u.i!ant 1rganosys a!so en%oy a g!o.a! position in these products. +u.i!ant 1rganosys deri e our strengths in this .usiness "rom our mo!asses .ased production process. +u.i!ant 1rganosys use renewa.!e .iomass )mo!asses-# as "eedstoc$ "or manu"acturing acety!s. +u.i!ant 1rganosys# there"ore# are not impact .y the cost cyc!e that a""ects the industry wor!dwide.

Glo$all' "#$ lan% Organo&'& are %,e< 0Largest A!coho! 3isti!!ery 1utside Bra(i!. 0Largest Acetic Acid Manu"acturer 'rom Renewa.!eBGreen Resources. 0:th Largest in Aceta!dehyde. 08th Largest in ;thy!e Acetate. 06th Largest in Acetic Anhydride.

+u.i!ant 1rganosys owns disti!!eries at Ga%rau!a and &ira. *hese are strategic to the .usiness as they are !ocated in two !argest sugar .e!ts o" India ) <.,. C MAHARASH*RA -. 2ompany has !ong term contracts with sugar mi!!s to meet a!coho! re4uirements whi!e pro iding easy access to "eed stoc$. +u.i!ant 1rganosys Limited is an integrated pharmaceutica! industry p!ayer with a wide range o" products and ser ices "or g!o.a! !i"e sciences companies. 2ompany is one o" the !argest 2ustom Research and Manu"acturing Ser ices )2RAMS- and 3rug Ser ices 2ompanies in India. +u.i!ant 1rganosys ha e presence across the pharmaceutica!s a!ue chain right "rom drug# disco ery# medicina! chemistry and c!inica! research ser ices to custom research and manu"acturing ser ices "or ad ance intermediaries and "ine chemica!s# Acti e ,harmaceutica! Ingredients and 3osage 'orms.

+u.i!ant 1rganosys Limited has a strong internationa! presence ha ing internationa! su.sidiaries in <SA# B;LGI<M and 2HI&A. +u.i!ant ,harmaceutica!# Inc is a "u!! ser ice c!inica! research organisation pro iding c!inica! research# c!inica! data management# .iostatics# DAEregu!atory and contract sta""ing ser icing.1ur products are so!d across the g!o.e in more than 9F countries. +u.i!ant 1rganosys Limited is a co!!a.orati e# inno ati e pro ider o" products and ser ices to the g!o.a! !i"e sciences industry# stri ing to acce!erate the process o" pharmaceutica! drug

appro a!. +u.i!ant 1rganosys a!so en%oy !eadership in Industria! products and ,re"ormance ,o!ymers products in India. It is head4uarted in &1I3A# with net sa!es o" @ <S G HH7 mi!!ion in 'IF: and more than HHFF emp!oyees.

OUR VISION

OUR PROMI SE

OUR VALUES

e !ill care"#lly select$ train and devel%& %#r &e%&le t% 'e creative$ e(&%!er the( t% ta)e decisi%ns$ s% that they res&%nd t% all c#st%(ers !ith agility, confidence and teamwork

e stretch %#rselves t% 'e cost effecti e and e""icient in all as&ects %" %#r %&erati%ns and "%c#s %n flawless deli ery t% create and &r%vide the 'est val#e t% %#r c#st%(ers

By sharin* %#r )n%!led*e and learnin* "r%( each %ther and "r%( the (ar)ets !e serve$ !e !ill c%ntin#e t% s#r&rise %#r c#st%(ers !ith inno ati e s%l#ti%ns

ith #t(%st care "%r the en ironment and safety$ !e !ill al!ays strive t% e+cel in the ,#ality %" %#r &r%cesses$ %#r &r%d#cts and %#r services

-ISTORY

-3STOR8

2005 Ac4uires *arget Research Associates# Inc.# renamed 2!insys Inc.J a <S .ased 2!inica! Research 1rganisation )2R1Ac4uires *rinity La.oratories# Inc. and its who!!y owned su.sidiary# *rigen La.oratories# Inc.# renamed +u.i!ant ,harmaceutica!s# Inc.# a generic pharmaceutica! company in <SA ha ing a <S '3A appro ed "ormu!ations manu"acturing "aci!ity ;nters 2!insys 2!inica! Research Ltd. .usiness .y setting up who!!y owned su.sidiary +u.i!ant 2!insys Ltd. 200= Sets up medicina! chemistry ser ices .usiness through who!!y owned su.sidiary +u.i!ant 2hemsys Ltd. ;nters "ormu!ations and regu!atory a""airs .usinesses .y ac4uiring ,harmaceutica!s Ser ices Incorporated# &.V. and ,SI Supp!y &.V.# the pharmaceutica! companies in ;urope. 2003 Sets up a new state@o"@the@art Research C 3e e!opment 2entre in &oida# near &ew 3e!hi e4uipped with a!! !atest scienti"ic instruments. 2002 Ac4uires the Acti e ,harmaceutica! Ingredients .usiness

200>

&ew corporate identityK +u.i!ant 1rganosys Ltd. re"!ecting changed corporate and .usiness pro"i!e 2000 ;nters the Bio E chemo in"ormatics arena .y setting up +u.i!ant Biosys Ltd. >??8 ;nters high a!ue@added ,yridine deri ates. 2ommissions ,yridine HBR and 2yano ,yridine p!ants. 'orms mar$eting su.sidiary in the <SA. Ac4uires acety! p!ant in western India. >??7 2ommissions "irst Mu!ti@purpose "ine chemica!s p!ant. ,!ant "or "ood po!ymer commissioned. >??5 Gets IS1 6FF5 certi"ication. >??0 2ommissions ,yridine C ,ico!ine p!ant. >?88 Launches its "irst .randed productK Vamico!# an adhesi e product. >?87

Introduces new products in ,er"ormance 2hemica!s segmentsK ,o!y iny! acetate emu!sion "or paint# texti!e# paper C pac$aging and woodwor$ing industry. >?85 Research C 3e e!opment center gets recognition "rom Go ernment o" India. >?83 2ommercia! production o" Viny! Acetate Monomer )VAM-. >?8> Initia! ,u.!ic 1""ering. Listing on !eading stoc$ exchanges o" India.

>?78 Incorporated as Vam 1rganic 2hemica!s Ltd.

BOARD OF DIRECTOR S

2oar. O1 D re*%or& Shyam S Bhartia 2hairman C Managing 3irector

Hari S Bhartia

2o@2hairman C Managing 3irector

na

;xecuti e 3irector C ,resident M Li"e S & Singh

Sciences

;xecuti e 3irector @ 2hemica!s

;xecuti e 3irector @ Manu"acturing C Supp!y 2hain A%ay Re!an A.hay Ha a!dar 3irector 3irector

Bodhishwar Rai Ara.inda Ray

3irector 3irector

PRESENCE ACROSS VALUE CHAIN

0RESENCE ACROSS 4AL7E C-A3N;

AWARDS

AWARDS
+u.i!ant?s rapid progress across a!! corporate aspects has consistent!y .een ac$now!edged .y arious industry .odies# go ernment and non@go ernment agencies in the "orm o" awards and certi"ications. Go!den ,eacoc$ award "or Inno ation Management @ =FFH Six@sigma Dua!ity Award at the A!! India 2II 2on ention @=FFN *he Greentech 'oundation Award "or ;n ironment ;xce!!ence *he ;nergy 2onser ation Award )2hemica! sector- "rom the Go ernment o" India "or the Ga%rau!a unit Best Managed Manu"acturing ,!ant "or Sing!e super phosphate .y 'AI @ =FFH Best HR ,ractices Award .y 2entre "or Internationa! Businesses @ =FFN , 2 Acharya Award "or 3e e!opment o" Indigenous *echno!ogy .y I2MA @ =FFN *op 9 Best Managed Wor$"orce in India @ Hewitt Award *he 3SIR Award "or Inno ation in 2hemica!s C A!!ied Industries

GUIDING PRINCIPALS OF JUBILANT ORGANOSYS LTD

G73D3NG 0R3NC30ALS O) "723LANT ORGANOS8S LTD

5. We wi!! conduct ourse! es or .usiness with the highest standards o" honesty# integrity and pro"essiona!ism. =. We wi!! recogni(e the positi e contri.ution that indi idua!s C our team mem.ers to produce .usiness success"u!!y. H. We wi!! encourage a !earning en ironment where peop!e can constant!y grow# de e!op C contri.ute. N. We wi!! stri e "or exce!!ence and see$ continuous impro e in e erything. 9. We wi!! respect a!! stoc$ho!ders inc!uding emp!oyees# partners and supp!iers C sti!! them with a passion to de!i er the highest 4ua!ity goods ser ices. :. We wi!! "oster initiati e Ccreati e .y empowering indi idua!s to attain we!! de"ined o.%ecti es.

STRUCTURE

OF

THE COMPANY

STR7CTRE O) T-E COM0AN8

+u.i!ant 1rganosys Ltd. act upon the ru!es C regu!@ ations o" the 2ompanies Act# 56N8. *he company ha e we!! de"ined structure .It ha e the "o!!owing departmentsK

5. HRE ,ersonne! department =. Accounts departments H. ,urchase departments N. Store department 9. Dua!ity department :. Shipping department 7. Sa!es C ;xcise department

ORGAN3SAT3ONAL C-ART O) "OL

RESEARCMET-ODOLOG8

RESEARC- MET-ODOG8
Research methodo!ogy is the way to systematica!!y so! e the research pro.!em . 1.%ecti e o" research study is Ana!ysis o" in entory o" +u.i!ant 1rganosys Ltd. Ana!y(ing o" in entory# we determining "o!!owing in entories@ 5. Raw materia!s in entory. =. Wor$ in progress in entory. H. 'inished goods in entory C N. Supp!ies in entory. In this section o" in entories# we shou!d ana!y(e the annua! in estment in in entories# Va!uation o" in entory a"ter c!osing .a!ance o" items in in entory. In this manner# we ca!cu!ate reorder point# sa"ety stoc$ !e e!s# minimum C maximum !e e!s o" in entory. Wor$ing hypothesis o" the o.%ecti e is that in entories are the stoc$ pi!es o" goods .*he a!! organi(ation on their in entories. +1L in ests a.out :FOo" tota! assets in entory shou!d .e ana!y(ed their records. *he ana!ysis o" in entory according to their data a ai!a.!e in the company. *he data co!!ection o" in entory "or ana!ysis .y the direct store department. We shou!d record primary and secondary data .y the he!ps o" assistants !edger .oo$s M R & etc. We went to the a!! in entories as raw materia! # wor$ in progress in entory# "inished goods in entory .y the proper o.ser ation o" data/s o" the company.

*he particu!ar method "or data co!!ecting used direct inter iew with assistants and te!ephone inter iew with "riends to $nown a.out annua! in estment o" in entories and other important data.

INTRODUCTION OF THE TOPIC

3NTROD7CT3ON
In entories constitute the most signi"icant part o" current assets o" a !arge ma%ority o" companies in India. 1n an a erage# in entories are approximate!y :FO o" current assets in pu.!ic !imited companies in India. Because o" the !arge si(e o" in entories maintained .y "irms# a considera.!e amount o" "euds is re4uired to .e committed to them. It is there"ore# a.so!ute!y imperati e to mPnage in entories e""icient!y and e""icient!y in order to a oid unnecessary in estment. A "irm neg!ecting the management o" in entories wi!! .e %eopardi(ing its !ong run pro"ita.i!ity and may "ai! u!timate!y. It is possi.!e "or "ore a company to reduce its !e e!s o" in entories to a considera.!e degree e.g. 5F to =F percent# with out any ad erse e""ect on production and sa!es# .y using simp!e in entory p!anning and contro! techni4ues. *he reduction in excessi e in entory carries a "a ora.!e impact on a company/s pro"ita.i!ity.

MEAN3NG O) 3N4ENTOR8;9
In entory is the physica! sto$e o" goods maintained in an organi(ation "or its smooth sunning. In accounting !anguage it may mean stoc$ o" "inished goods on!y. In a manu"acturing concern# it may inc!udes raw materia!s# wor$@in@progress and stores etc. In the "orm o" materia!s or supp!ies to .e consumed in the production process or in the rendering o" ser ices. In .rie"# In entory is unconsumed or unso!d goods purchased or manu"actured.

NAT7RE O) 3N4ENTOR3ES ;9

In entories are stoc$ o" the product a company is manu"acturing "or sa!e and components that ma$e up the product. *he arious "orms in which in entory exist in a manu"acturing company are raw materia!s# wor$ in progress and "inished goods.

RAW MATER3ALS;9
Raw materia!s are those inputs that are con erted into "inished product though the manu"acturing process. Raw materia!s in entories are those units which ha e .een purchased and stored "or "uture productions.

WORK 3N 0ROGRESS;9
*hese in entories are semi manu"actured products. *hey represent products that need more wor$ .e"ore they .ecome "inished products "or sa!es.

)3N3S-ED GOODS;9
'inished goods in entories are those comp!ete!y manu"actured products which are ready "or sa!e. Stoc$ o" raw materia!s and wor$ in progress "aci!itate production. Whi!e stoc$ o" "inished goods is re4uired "or smooth mar$eting operation. *hus# in entories ser e as a !in$ .etween the production and consumption o" goods. *he !e e! o" three $inds o" in entories "or a "irm depend on the nature o" its .usiness. A manu"acturing "irm wi!! ha e su.stantia!!y high !e e!s o" a!! three $inds o" in entories# whi!e a retai! or who!esa!e "irm wi!! ha e a ery high and no raw materia! and wor$ in progress in entories. Within manu"acturing "irms# there wi!! .e di""erences. Large hea y engineering

companies produce !ong production cyc!e products# there"ore they carry !arge in entories. 1n the other hand# in entories o" a consumer product company wi!! not .e !arge# .ecause o" short production cyc!e and "ast turn o er. 'irms a!so maintain a "ourth $ind o" in entory# supp!ies or stores and spares.

S700L3ES;
It inc!udes o""ice and p!ant c!eaning materia!s !i$e soap# .rooms# oi!# "ue!# !ight# .u!.s etc. *hese materia!s do not direct!y enter production# .ut are necessary "or production process. <sua!!y# these supp!ies are sma!! part o" the tota! in entory and do not in o! e signi"icant in estment. *here"ore# a sophisticated system o" in entory contro! may not .e maintained "or them.

MANAGEMENT OF INVENTORY
In entories constitute the principa! item in the wor$ing capita! o" the ma%ority o" trading and industria! companies. In in entory# we inc!ude raw materia!s# "inished goods# wor$@in@progress# supp!ies and other accessories. *o maintain the continuity in the operations o" .usiness enterprise# a minimum stoc$ o" in entory re4uired. Howe er# the physica! contro! o" in entory is the operating responsi.i!ity o" stores superintendent and "inancia! personne! ha e nothing to do a.out it .ut the "inancia! contro! o" these in entories in a!! !ines o" acti ity in which they comprise a su.stantia! part o" the current assets is a "re4uent pro.!em in the management o" wor$ing capita!. Management o" in entory is designed to regu!ate the o!ume o" in estment in goods on hand# the types o" goods carried in stoc$ to meet the needs o" production# and sa!es whi!e at the same time# the in estment in them is to .e $ept at a reasona.!e !e e!.

CONCE0T O) 3N4ENTOR8 MANAGEMENT

*he term in entory management is used in two ways@ unit contro! and a!ue contro!. ,roduction and purchase o""icia!s use this word in term unit contro! whereas in accounting this word is used in term o" a!ue contro!. As in estment in in entory represents in many cases# one o" the !argest asset items o" .usiness enterprises particu!ar!y those engaged in manu"acturing# who!esa!e trade and retai! trade. Sometimes the cost o" materia! used in production surpasses the wages and production o erheads. Hence# the proper management

and contro! o" capita! in ested in the in entory shou!d .e the prime responsi.i!ity o" accounting department .ecause resources in ested in in entory are not earning a return "or the company. Rather# on the other hand# they are costing the "irm money .oth in terns o" capita! costs .eing incurred and !oss o" opportunity income that is .eing "oregone.

O2"ECT34ES O) 3N4ENTOR8 MANAGEMENT

*he .asic manageria! o.%ecti es o" in entory contro! are two@"o!dJ "irst# the a oidance o er@in estment or under@in estment in in entoriesJ and second# to pro ide the right 4uantity o" standard raw materia! to the production department at the right time. In .rie"# the o.%ecti es o" in entory contro! may .e summari(ed as "o!!owsK

A.
)5-

O/era% ng O$@e*% Ae&;

En&#r ng AAa la$ l %' o1 Ma%er al&; *here shou!d .e a continuous a ai!a.i!ity o" a!! types o" raw materia!s in the "actory so that the production may not .e he!p up wants o" any materia!. A minimum 4uantity o" each materia! shou!d .e he!d in store to permit production to mo e on schedu!e.

)=-

AAo .an*e o1 A$nor5al Wa&%age; *here shou!d .e minimum possi.!e wastage o" materia!s whi!e these are .eing stored in the godowns or used in the "actory .y the wor$ers. Wastage shou!d .e a!!owed up to a certain !e e! $nown as norma! wastage. *o a oid any a.norma! wastage# strict contro! o er the in entory shou!d .e exercised. Lea$age# the"t# em.e((!ements o" raw materia! and spoi!age o" materia! due to rust# .ust shou!d .e a oided.

)H-

0ro5o% on o1 Man#1a*%#r ng E11 * en*'; I" the right type o" raw materia! is a ai!a.!e to the manu"acturing departments at the right time# their manu"acturing e""iciency is a!so increased. *heir moti ation !e e! rises and mora!e is impro ed.

)N-

AAo .an*e o1 O#% o1 S%o*6 Danger; In"ormation a.out

a ai!a.i!ity o" materia!s shou!d

.e made continuous!y a ai!a.!e to the management so that they can do p!anning "or procurement o" raw materia!. It maintains the in entories at the optimum !e e! $eeping in iew the operationa! re4uirements. It a!so a oids the out o" stoc$ danger. )9- 2e%%er SerA *e %o C#&%o5er&; Su""icient stoc$ o" "inished goods must .e maintained to match reasona.!e demand o" the customers "or prompt execution o" their orders. (B(- g,l g,% ng &low 5oA ng an. o$&ole%e %e5& o1 5a%er al&. (7( De& gn ng /oorer organ Ca% on 1or nAen%or' 5anage5en%; 2!ear cut accounta.i!ity shou!d .e "ixed at arious !e e!s o" organi(ation.

2. ) nan* al O$@e*% Ae&;

(>( E*ono5' n /#r*,a& ng; A proper in entory contro! .rings certain ad antages and

economies in purchasing a!so. ; ery attempt has to ma$e to e""ect economy in purchasing through 4uantity and ta$ing ad antage to "a ora.!e mar$ets. (2( Rea&ona$le 0r *e; Whi!e purchasing materia!s# it is to .e seen that right 4ua!ity o" materia! is purchased at reasona.!y !ow price. Dua!ity is not to .e sacri"iced at the cost o" !ower price. *he materia! purchased shou!d .e o" the 4ua!ity a!one which is needed. )H- O/% 5#5 3nAe&% ng an. E11 * en% 7&e o1 *a/ %al; *he .asic aim o" in entory contro! "rom the "inancia! point o" iew is the optimum !e e! o" in estment in in entories. *here shou!d .e no excessi e in estment in stoc$# etc. In estment in in entories must not tie up "unds that cou!d .e used in other acti ities. *he determination o" maximum and minimum !e e! o" stoc$ attempt in this direction.

T80ES O) 3N4ENTOR8
>. MoAe5en% 3nAen%or e&K@ Mo ement in entories are a!so ca!!ed transit or pipe!ine in entories. *heir existence owes to the "act that transportation time is in o! ed in trans"erring su.stantia! amount o" resources.

=.2#11er nAen%or e&K@ In Bu""er in entories are he!d to protect against the uncertainties o" demand and supp!y. An organi(ation genera!!y $nows the a erage demand "or arious items that it needs. ,rod.deptt. issue store inspect recei e supp!ier Supp!ies 3emand In entory in Hand ,urchase dep/t. &et order issue recei e tender p!ace 1rders

Duantity

tenders

4uotation e a!uations

3nAen%or' *'*le

H. An% * /a% on 3nAen%or e&. Anticipation in entories are he!d "or the reason that "uture demand "or the product is anticipated. ,roduction o" specia!i(ed times !i$e crac$ers we!! .e"ore dewi!y# um.re!!as and raincoats .e"ore taints set in# "ans whi!e summers are approachingJ or the pi!ing up o" in entory stoc$s when a stri$e is on the an i!# are a!! examp!es o" anticipation in entories.

CONTROL O) MATER3ALS ;
Rigid contro! o er materia!s are necessary not on!y to guard against the"t# .ut a!so to minimi(e waste and misuse "rom causes such as excessi e in entories# o er issue# deterioration# spoi!age# and o.so!escence. *here are certain prere4uisites to an e""ecti e contro! system "or materia!sK 5.Materia!s o" the desired 4uantity wi!! .e a ai!a.!e when neededJ =.Materia!s wi!! .e purchased on!y when a need exists and in economica! 4ua!itiesJ H.,urchases o" materia!s wi!! .e made at most "a ora.!e pricesJ N.Vouchers "or the payments o" materia!s purchased wi!! .e appro ed on!y i" the materia!s ha e .een recei ed in good conditionJ 9.Materia!s wi!! .e protected against !oss .y proper physica! contro!J :.Issue o" materia!s wi!! .e proper!y authori(ed and accounted "orJ and 7.A!! materia!s# at a!! times# wi!! .e charged# as the responsi.i!ity o" some indi idua!.

*he contro! o" materia!s# as an e!ement o" cost o" production# is i!!ustrated with re"erence to the purchase and issues procedures# in entory systems# and in entory contro! techni4ues.

3M0ORTANCE O) 3N4ENTOR8 CONTROL;

*he importance or necessity o" in entory contro! is we!! exp!ained in the terms o" the o.%ects o" in entory contro!# which are o.tained through it. A proper in entory contro! !owers down the cost o" production and impro es pro"ita.i!ity o" enterprise.

AD4ANTAGES O) 3N4ENTOR8 CONTROL;

)5)=)H)N)9):Reduction in in estment in in entory. ,roper and e""icient use o" raw materia!s. &o .ott!enec$ in production. Impro ement in production and sa!es. ;""icient and optimum use o" physica! as we!! as "inancia! resources. 1rdering cost can .e reduced i" a "irm p!aces a "ew !arge orders in p!ace o" numerous sma!! orders.

)7-

Maintenance o" ade4uate in entories reduces the set@up cost associated with each production run.

R &6 an. *o&% A&&o* a%e. w %, 3nAen%or e&;

Ho!ding o" In entories expose the "irm to a num.er o" ris$s and costs.

Ma@or r &6& areK

)a0r *e .e*l neK *hey may .e due to increase in mar$et supp!y o" the product# introduction o" a new competiti e product# price@cut .y the competitors etc. ).0ro.#*% .e%er ora% on; *his may due to ho!ding a product "or too !ong a period or improper storage conditions. )cO$&ole&*en*e; *his may due to change in customer/s taste# new production techni4ue# impro ements in product design# speci"ications etc.

T,e Co&%& o1 ,ol. ng nAen%or e& are a& 1ollow&;

)aMa%er al Co&%; *his inc!ude the cost o" purchasing the goods# transportation and hand!ing charges !ess any discount a!!owed .y the supp!ier o" goods.

).-

Or.er ng Co&%; *his inc!udes the aria.!es cost associated with p!acing an order "or the goods. *he "ewer the orders# the !ower wi!! .e the ordering costs "or the "irm.

)c-

Carr' ng Co&%; *his inc!udes the expenses "or storing and hand!ing the goods. It comprises storage costs# insurance costs# spoi!age costs# cost o" "unds tied up in in entories etc.

ESSENT3ALS O) 3N4ENTOR8 CONTROL S8STEM

'or an e""icient and success"u! in entory contro! there are certain important conditions that are a "o!!owsK (>( Cla&& 1 *a% on an. 3.en% 1 *a% on o1 nAen%or e&; *he usua! in entory o"

manu"acturing "irm inc!udes raw@materia!# stores# wor$@in@progress and component etc. *o "aci!itate prompt recording the dea!ing# each item o" the in entory must .e assigned a particu!ar code num.er and it must .e c!assi"ied in suita.!e group or su.@di isions. AB2 ana!ysis o" materia! is ery he!p"u! in this context. (2( S%an.ar. Ca% on an. & 5/l 1 *a% on o1 nAen%or e&; In order to "aci!itate in entory contro!# the in entory !ine shou!d .e simp!i"ied. It re"ers to the e!imination o" excess types and si(es o" items. Simp!i"ication !eads to reduction in c!assi"ication o" in entories and its carrying costs. Standardi(ation# on the other hand# re"ers to the "ixation o" standards o" raw materia! to .e purchased and speci"ication o" the components and too!s to .e used. (3( Se%% ng %,e MaD 5#5 an. M n 5#5 l 5 %& 1or ea*, /ar% o1 nAen%or'; *he third step in this process is to set the maximum and minimum !imits o" each item o" the in entory. It a oids the chances o" o er@in estment as we!! as running a short o" any item during the cost o" producing. Reordering point shou!d a!so .e "ixed .e"orehand.

(=( E*ono5 * Or.er E#an% %'; It is a!so a .asic in entory pro.!em to determine the 4uantity as how much to order at a time. In determining the ;1D# the pro.!em is one to set a .a!ance .etween two opposite costs# name!y# ordering costs and carrying costs. *his 4uantity shou!d .e "ixed .e"orehand.

(5(A.eF#a%e &%orage )a* l % e&; *o ma$e the system o" in entory contro! success"u! and e""icient one# it is a!so essentia! to pro ide the ade4uate storage "aci!ities. Su""icient storage area and proper hand!ing "aci!ities shou!d .e organi(ed. (B(A.eF#a%e Re/or%& an. Re*or.&; In entory contro! re4uires the maintenance o" ade4uate in entory record and reports. Various in entory records must contain in"ormation to meet the needs o" purchasing# production# sa!es and "inancia! sta"". *he typica! in"ormation re4uired a.out any c!ass o" in entory may .e re!ating to 4uantity on hand# !ocation# 4uantities in transit# unit cost# code "or each item o" in entory# reorder point# sa"ety !e e! etc. Statements "orms and in entory records shou!d .e so designed that the c!erica! cost o" maintaining these records must .e $ept a minimum. (7(3n%ell gen% an. ED/er en*e. 0er&onnel; An important re4uirement o" success"u! in entory contro! system is the appointment o" 4ua!i"ied and experienced sta"" in purchase and stores department. Mere esta.!ishment o" procedures and the maintenance o" records wou!d not gi e the desired resu!ts as there is no su.stitute "or sincere and de oted as we!! as experienced hands. Hence# the who!e in entory contro! structure shou!d .e manned with trained# 4ua!i"ied# experienced and de oted emp!oyees. (8(Coor. na% on; *here must .e proper coordination o" a!! departments in o! ed in the process o" in entory contro!# such as purchase# "inance# recei ing# appro ing# storage and accounting departments. *hese a!! departments ha e di""erent out!oo$ and o.%ects in in entory management .ut "inancia! manager has to coordinate them a!!.

(?(2#.ge% ng; An e""icient .udgeting system is a!so re4uired. ,reparation o" .udgets concerning materia!s# supp!ies and e4uipment to ensure economy in purchasing and use o" materia! is a!so necessary.

(>0(3n%ernal C,e*6; 1perating o" a system o" interna! chec$ is a!so ita! in in entory management so that a!! transactions in o! ing materia! supp!ies and e4uipment purchase are proper!y appro ed and automatica!!y chec$ed.

)ACTORS A))ECT3NG STOCK 3N4ESTMENT LE4EL

*hese "actors can .e put in two categoriesK Genera! and Speci"ic. Genera! 'actorsK *hese "actors inc!ude those "actors# which a""ect direct!y or indirect!y !e e! o" in estment in any asset. *hese are as "o!!owsK

)5)=)H)N)9):-

&ature o" Business Si(e and sca!e o" Business ;xpected Sa!es Vo!umes ,rice Le e! 2hanges A ai!a.i!ity o" 'unds Management iew ,oint S$ecific %cto&s: *hese "actors are direct!y re!ated with in estment in stoc$. 'o!!owing are the main "actorsK

)5-

Sea&onal C,ara*%er o1 Raw Ma%er al&; I" supp!y o" raw materia! used in the "irm is seasona!# the "irm wi!! re4uire more "unds "or the purchase o" raw materia! during season. <sua!!y# raw materia!s are a ai!a.!e at cheaper rates during is production season.

)=-

Leng%, an. Te*,n *al Na%#re o1 %,e /ro.#*% on /ro*e&&; I" production process is !engthy and o" technica! nature# higher in estment is re4uired in raw materia!. In the technica! nature production process# 4ua!ity contro! o" raw materia! is gi en more emphasis.

)H-

Ter5& o1 0#r*,a&e; I" some concessions or discount in price or "aci!ities o" credit are pro ided .y supp!iers on purchase o" raw materia!s in huge 4uantity then the "irm is inspired "or excessi e purchase o" goods and hence comparati e!y more in estment is re4uired in in entory.

)N-

Na%#re o1 En. 0ro.#*%; &ature o" end product a!so in"!uences in estment in in entory. I" the end product is a dura.!e good# high in estment wi!! .e re4uired .ecause dura.!e goods can .e stored "or a !ong period. 1n the other hand# perisha.!e goods cannot .e stored "or a !ong period. Hence# in estment in in entory o" such products is !ow.

)9-

S#//l' Con. % on&; I" the supp!y o" raw materia! is regu!ar and there is no possi.i!ity o" interruption in "uture# high in estment in in entories is not re4uired.

):-

T 5e )a*%or; *he !ead time o" raw materia! time to$en in production process and sa!e o" product a!so in"!uence in estment in in entories. Longer the period# higher wi!! .e the in estment in in entories.

)7-

Loan )a* l % e&; I" raw materia!s are purchased on credit or !oan "rom the .an$ or other "inancia! institution can .e o.tained on the security o" raw materia!# !esser in estment wou!d .e re4uired. In the a.sence o" such !oan "aci!ity# higher in estment wou!d .e re4uired.

)8-

0r *e LeAel )l#*%#a% on&; I" there are expectations o" price rise in "uture then raw materia!s may .e store in high 4uantity and so more in estment wou!d .e re4uired. 1n the contrary# i" the prices o" raw materia!s are expected to go down in "uture# then comparati e!y !esser in estment wou!d .e re4uired.

)6-

O%,er 1a*%or&; ,rice contro!# rationing# change in taxation and export po!icy o" go ernments etc. a!so in"!uence in estment in in entories.

TECHNIQUES OF INVENTORY CONTROL

TEC-N3E7ES O) 3N4ENTOR8 CONTROL

In managing in entories# the "irm/s o.%ecti e shou!d .e in consonance with the wea!th maximi(ation princip!e. *o achie e this# the "irm shou!d determine the optimum !e e! o" in estment in in entory. *o dea! with the pro.!ems o" in entory management e""ecti e!y# it .ecomes necessary to .e con ersant with the di""erent techni4ues o" in entory contro!. A!though the concepts in o! ed in in entory management are production@oriented and are not strict!y "inancia! it is important that the "inancia! manager understand them since they ha e certain .ui!t@in "inancia! costs. *he di""erent techni4ues o" in entory contro! may .e summari(ed as "o!!owsK )53nAen%or' leAel Te*,n F#e *he main o.%ecti e o" stoc$ contro! is to determine and maintain the optimum !e e! o" stoc$ so that there is neither shortage o" any materia! nor unnecessary in estment in in entory. 'or this purpose# determination o" maximum and minimum !imits o" in entory and ordering !e e! is necessary. )=MaD 5#5 &%o*6 L 5 %; *his represents the 4uantity o" in entory a.o e which it shou!d not .e a!!owed to .e $ept. *he main o.%ect o" "ixing this !imit is to ensure that unnecessary wor$ing capita! is not .!oc$ed in stores. *he 4uantity is "ixed $eeping in disad antages o" o erstoc$ing. iew the

T,e . &a.Aan%age& o1 oAer&%o*6 ng are;

5. =. H. N. 9. 2apita! is .!oc$ed up unnecessari!y in stores so there wi!! .e !oss o" interest. More godown space is needed so more rent wi!! ha e to .e paid. *here are chances o" deterioration in 4ua!ity .ecause !arge stoc$s wi!! re4uire more time "or use is the "actory. *here is the possi.i!ity o" !oss due to o.so!escence. *here is danger o" depreciation in mar$et a!ues.

T,e 5aD 5#5 &%o*6 leAel & 1 De. $' %a6 ng n%o a**o#n% %,e 1ollow ng 1a*%or&;
)5- Amount o" capita! a ai!a.!e "or maintaining stores. )=- Godown space a ai!a.!e. )H- Rate o" consumption o" the materia!. )N- *he time !ag .etween indenting and recei ing o" the materia!. )9- Length and technica! nature o" the production process. ):- ,ossi.i!ity o" !oss in stores .y deterioration# e aporation etc. *here are certain stores# which deteriorate in 4ua!ity i" they are "or !onger period. )7- 2ost o" maintaining stores. stored

)8- Li$e!y "!uctuation in prices. 'or instance# i" there is a possi.i!ity o" a su.stantia! increase in prices in the coming period# a comparati e!y !arge maximum stoc$ !e e! wi!! .e "ixed. 1n the other hand# i" there is the possi.i!ity o" decrease in price in the near "uture# stoc$s are $ept at a much reduced !e e!. )6- *he seasona! nature o" supp!y o" materia!. 2ertain materia!s are a ai!a.!e on!y during speci"ic periods o" year. So these ha e to .e stoc$ed hea i!y during these periods. )5F-Restrictions imposed .y the go ernment or !oca! authority in regard to materia!s which there are inherent ris$s# e.g. "ire and exp!osion. )55-Ris$ o" o.so!escence# i.e.# possi.i!ity o" change in "ashion and ha.it which wi!! necessitate change in re4uirements o" materia!s.

T,e 1ollow ng 1or5#la 5a' $e a//l e. %o *al*#la%e %,e 5aD 5#5 &%o*6;
)5- Maximum Stoc$ A Minimum In entory Q Lot si(e )=- Maximum Stoc$ A Reorder Le e! @ Minimum consumption during Minimum !ead time Q Lot si(e

M n 5#5 S%o*6 L 5 % (Sa1e%' or 2#11er &%o*6(

*his represents the 4uantity .e!ow which stoc$ shou!d not .e a!!owed to "a!!. It is maintained to sa e "rom the situation o" stoc$ out in the e ent o" a.norma! increase in materia! usage rate andEor de!i ery period. In "act determination o" this 4uantity is signi"icant .ecause o" uncertainty in respect to materia! usage rate and de!i ery period. *he main purpose o" this !e e! is to ensure that production is not he!d up due to shortage o" any materia!. *his !e e! is "ixed "or a!! items o" stores and "o!!owing "actors are ta$en into account "or the "ixation o" this !e e!K )a).(*( Lea. % 5e i.e. time !ag .etween intending and recei ing the materia!. Ra%e o1 *on&#5/% on o" the materia! during the !ead time. Re9or.er LeAel *he "o!!owing "ormu!a is app!ied to ca!cu!ate Minimum Stoc$K M n 5#5 S%o*6 G Re9or.er LeAel 9 Nor5al #&age .#r ng Nor5al Lea. % 5e But i" norma! usage and norma! !ead time is not $nown then a erage usage wi!! .e treated as norma! usage and a erage re@order wi!! .e treated as norma! re@order period.

Re9or.er ng LeAel (Or.er ng LeAel(

It is the point at which i" the stoc$ o" the materia! in stores reaches# the store$eeper shou!d initiate the purchase re4uisition "or "resh supp!y o" materia!. *his !e e! is "ixed somewhere .etween maximum and minimum !e e! is such a way that the di""erence o" 4uantity o" the materia! .etween the reordering !e e! and the minimum !e e! wi!! .e su""icient to meet re4uirements o" production up to the time o" "resh supp!y o" the materia!. It is "ixed a"ter ta$ing into consideration the "o!!owing "actorsK )aRa%e o1 5a%er al #&ageK Genera!!y this rate is "ound out as usage rate per day# pre wee$ or per month. *he 4uantity o" production "!uctuates according to demand o" the product which resu!ts in ariation in usage rate.

-en*e! %,e 1ollow ng %,ree 1a*%or&;

)i)iiMaD 5#5 #&age ra%e; It imp!ies 4uantity o" materia! re4uired at maximum capacity production. M n 5#5 #&age ra%e; It imp!ies 4uantity o" materia! re4uired at capacity production in most un"a ora.!e .usiness conditions. )iii- Nor5al or aAerage 7&age Ra%e; It imp!ies 4uantity o" materia! re4uired at capacity production under norma! .usiness conditions. ).Or.er ng 0er o.K *he time ta$en in preparing the order "or purchase o" materia! is ca!!ed ordering period. In some concerns this period may .e signi"icant .ut in !arge concerns this period is signi"icant .ecause .e"ore p!acing the order the purchase manager has to trace out the .est supp!iers# a"ter that on!y he p!aces the order.

R Del Aer'! Lea. or 0ro*#re5en% T 5e; *he time ta$en "rom the date o" p!acing the order
to the date o" de!i ery .y the supp!iers is ca!!ed procurement time. *he maximum# minimum and a erage procurement time shou!d a!so .e determined. )3- M n 5#5 S%o*6 LeAel; *his is the !e e! o" stoc$ .e!ow which stoc$s shou!d norma!!y not .e a!!owed to "a!!.

Cal*#la% on o1 Re9or.er 0o n%;

A"ter ta$ing into account the a.o e "acts re@order 4uantity is ascertained. 'or this purpose# the "o!!owing "ormu!a is app!iedK

S %#a% on>;
When rate o" usage and !ead time are $nown with certaintyJ Re9or.er /o n% G Rate o" usage x !ead time.

S %#a% on2;
When rate o" usage is $nown with certainty and !ead time is a!so $nown .ut is aria.!eK

)i-

Re9or.er /o n% A Minimum In entory Q A erage usage during &orma! !ead *ime.

)ii-

Re9or.er /o n% G Rate o" usage x Maximum Lead *ime.

S %#a% on3;
When rate o" usage and !ead time is $nown .ut aria.!e and !ead time is $nown with certaintyK (( during !ead time. ( ( Re9or.er /o n% A Maximum <sage rate x Lead time. Re9or.er /o n% A Minimum In entory Q A erage usage

S %#a% on=;
When the rate o" usage and !ead time are $nown and are aria.!eJ )i)iiRe9or.er /o n% A Minimum In entory Q A erage usage during !ead period. Re9or.er /o n% A Maximum <sage rate x Maximum Lead time.

Danger LeAel
*his means a !e e! at which norma! issues o" the materia! are stopped and issues made on!y under speci"ic instructions. *he purchase o""icer wi!! ma$e specia! arrangements to procure the materia!s reaching at their danger !e e!s so that the production may not stop due to shortage o" materia!s. It is determined as "o!!owsK Danger leAel G AAerage Con&#5/% on D MaD 5#5 Re9or.er /er o. 1or E5ergen*' 0#r*,a&e

ECONOM3C ORDER E7ANT3T8 TEC-N3E7E

1ne o" the ma%or in entory management pro.!ems to .e reso! ed is how much in entory shou!d .e added when in entory is rep!enished. I" the "irm is .uying raw materia!s# it has to decide !ost in which it has to .e purchased on rep!enishment. I" the "irm is p!anning a production run# the issue is how much production to schedu!e )or how much to ma$e-. *hese pro.!ems are ca!!ed or.er F#an% %' /ro$le5&! and the tas$ o" the "irm is to determine the optimum or economic order 4uantity )or e*ono5 * lo% & Ce-. 3etermining an optimum in entory !e e! in o! es two type o" costsK )a- ordering costs and ).- carrying costsK *he economic order 4uantity is that in entory !e e! that minimi(e the tota! o" ordering and carrying costs.

Or.er ng *o&%&; the term ordering costs is used in case o" raw materia!s )or supp!ies- and inc!udes the entire costs o" ac4uiring raw materia!s. *hey inc!ude costs incurred in the "o!!owing acti itiesK re4uisitioning# purchase ordering# transporting# recei ing# inspecting and storing )store p!acement-. 1rdering costs increase in proportion to the num.er o" order p!aced. 1rdering costs increase with the num.er o" orderJ thus the more "re4uent!y in entory is ac4uired# the higher the "irm/s ordering costs. 1rdering costs decrease with increasing si(e o" in entory.

Carr' ng *o&%&; 2osts incurred "or maintaining a gi en !e e! o" in entory are ca!!ed carrying costs. *hey inc!ude storage# insurance# taxes# deterioration and o.so!escence. *he storage costs comprise cost o" storage space )warehousing cost-# stores handing costs and c!erica! and sta"" ser ice costs )administrati e costs-.

Ta$le; Or.er ng an. Carr' ng Co&%&

Or.er ng Co&%& )5-Re4uisitioning (2(1rder p!acing )H- *ransportation )9- 2!erica! and sta"" Carr' ng Co&%& (>( Warehousing (2( Hand!ing (3( 2!erica! and sta"" (5( 3eterioration 1.so!escence 2arrying costs ary with in entory si(e. *he economic si(e o" in entory wou!d thus depend on trade@o"" .etween carrying costs and ordering costs.

)N- Recei ing inspecting and storing (=( Insurance

Or.er ng an. Carr' ng Co&%& %ra.e9o11; *he optimum in entory si(e is common!y
re"erred to as e*ono5 * or.er F#an% %'. It is that order si(e at which annua! tota! costs o" ordering and ho!ding are the minimum. We can "o!!ow three approaches@the tria! and error approach# the "ormu!a approach and the graphic approach@to determine the economic order 4uantity (EOE(.

Tra l an. Error A//roa*,; *he trai! and error# or ana!ytica!# approach to reso! e the order
4uantity pro.!em can .e i!!ustrated with the he!p o" a simp!e examp!e. Let us assume the "o!!owing data "or a "irm. ;stimated annua! re4uirements# A ,urchasing cost )per order-# )Rs1rdering cost )per order-# )Rs.2arrying cost per unit# )Re5#=FF units 9F H7.9F 5

A erage in entory @ )5=FF Q F-E= A :FF units A erage a!ue @ Rs HF#FFF ):FF0Rs9FI" we choose the mu!tip!e order than we order 5FFunits on month!y .asis A erage in entory @ )5FFQF-E= A 9FunitsA erage a!ue @ 9F 0 Rs 9F A =# 9FF Many other possi.i!ities can .e wor$ed out in the same manner. 5=FF 5FFF 8FF DE= :FF stoc$ =FF 9F F = N : *ime In entory !e e! o er time Or.er9 1or5#la a//roa*,; *he tria! error# or ana!ytica!# approach is somewhat tedious to ca!cu!ate the ;1D. An easy way to determine ;1D is to use the order@"ormu!a approach. Let us i!!ustrate this approach. Suppose the ordering cost per order# 1# is "ixed. *he tota! order costs wi!! .e num.er o" orders during .eK the year mu!tip!ied .y ordering cost per order. I" a represents tota! annua! re4uirements and D the order si(e# the num.er o" orders wi!! .e AED and tota! order costs wi!! 8 5F 59 NFF

*ota! ordering cost A (Ann#al reF# re5en% : 0er or.er *o&%( Or.er & Ce TOC G AOE E Let us "urther assume the carrying cost per unit# c# is constant *he tota! carrying costs wi!! .e the product o" the a erage in entory units and the carrying cost per unit. I" D is the order si(e and usage is assumed to .e steady# the a erage in entory wi!! .e.

AAerage nAen%or' G or.er & Ce G E 2 2

And tota! carrying costs wi!! .eK *ota! carrying cost A A erage in entory 0 ,er unit carrying cost TCC G E* 2 *he tota! in entory cost# then# is the sum o" tota! carrying and ordering costsK *ota! cost A *ota! carrying cost Q *ota! order cost *2 A Dc Q A1 = D

;4uation )N- re ea!s that "or a !arge order 4uantity# D# the carrying cost wi!! increase# .ut the ordering costs wi!! decrease. 1n the other hand# the carrying costs wi!! .e !ower and ordering cost wi!! .e higher with the order 4uantity. *hus# the tota! cost "unction represents a trade@o"" .etween the carrying costs and ordering costs "or determining the ;1D. *o o.tain the "ormu!a "or ;1D# ;4uation )N-is di""erentiated with respect to D and setting the deri ati e e4ua! to (ero# we o.tainK

;conomic order 4uantity A =0 4uantity re4uired 0 ordering cost 2arrying cost ;1D A =A1 2

Gra/, * a//roa*,;
*he economic order 4uantity can a!so .e "ound out graphica!!y. 'igure i!!ustrates the ;1D "unction. In the "igure# costs@carrying# ordering and tota!@ are p!otted on ertica! axis and hori(onta! axis is used to represent the order si(e. We note that tota! carrying costs increase as the order si(e increasers# .ecause# on an a erage# a !arger in entory !e e! wi!! .e maintained# and ordering costs dec!ine with increase in order si(e means !ess num.er o" orders. *he .eha iors o" tota! costs !ine is noticea.!e since it is a sum o" two types o" cost which .eha e di""erent!y with order si(e. *he tota! costs dec!ine in the "irst instance# .ut they start rising when the decrease in a erage ordering cost is more than o""set .y the increase in carrying costs. *he economic order 4uantity occurs at the point D0 where the tota! cost is minimum. *hus# the "irm/s operating pro"it is maximi(ed at point D0.

Minimum tota! 2ost 2arrying cost 2osts ordering cost

D0

order si(e )D-

E*ono5 * or.er F#an% %'

O/% 5#5 /ro.#*% on& r#n;

*he use o" the ;1D approach can .e extended to production runs to determine the optimum si(e o" manu"acture. *wo costs in o! ed are set@up costs and carrying costs. Set@up costs inc!ude costs on the "o!!owing acti itiesK preparing and processing the stoc$ orders# preparing drawings and speci"ications# too!ing machines set@up# hand!ing machines# too!s# e4uipment and materia!s# o er time etc. ,roduction runs .ut carrying costs wi!! increase as !arge stoc$s o" manu"actured in entories wi!! .e he!d. *he e*ono5 * /ro.#*% on & Ce wi!! .e the one where the tota! o" set@up and carrying costs is minimum. Reor.er 0o n%; *he pro.!em# how much to order# is so! ed .y determining the economic order 4uantity# yet answer shou!d .e sought to .e second pro.!em# when to order. *his is a pro.!em o" determining the reorder point. *he reor.er /o n% is that in entory !e e! at which an order shou!d .e p!aced to rep!enish the in entory. *o determine the reorder point under certainty# we shou!d $nownK )a!ead time ).- a erage usage# and )c- economic order 4uantity. Lea. % 5e is the norma!!y ta$en is rep!enishing in entory a"ter the order has .een p!aced. By certainty we mean that usage and !ead time do not "!uctuate. <nder such a situation# reorder point is simp!y that in entory !e e! which wi!! .e maintained "or consumption during the !ead time. *hat isK Reorder point A Lead 0 A erage usage Sa1e%' &%o*6; *he demand "or in entory is !i$e!y to "!uctuate "rom time to time. In particu!ar# at certain points o" time the demand may exceed the anticipated !e e!. In other words# a discrepancy

.etween the assumed )anticipatedEexpected- and the actua! usage rate o" in entory is !i$e!y to occur in practice. *he e""ect o" increased usage andEor s!ower de!i ery wou!d .e shortage o" in entory. *hat is# the "irm wou!d disrupt production schedu!e and a!ienate the customers. *he "irm wou!d# there"ore# .e wi!! ad ised to $eep a su""icient sa"ety margin .y ha ing additiona! in entory to guard against stoc$@out situation. Such stoc$s are ca!!ed sa"ety stoc$s. *his wou!d act as a .u""erEcushion against a possi.!e shortage o" in entory. Sa1e%' &%o*6 5a'! %,#&! $e .e1 ne. a& 5 n 5#5 a.. % onal nAen%or' %o &erAe a& &a1e%' 5arg nH$#11erH*#&, on %o 5ee% #nan% * /a%e. n*rea&e n #&age re&#l% ng 1or5 #n#&#all' , g, .e5an. an.Hor #n*on%rolla$le la%e re*e /% o1 n*o5 ng nAen%or'.

*he carrying costs are the costs associated with the maintenance o" in entory. Since the "irm is reF# re. to maintain additiona! in entory# in excess o" the norma! usage# additiona! carrying costs are in o! ed. *he stoc$@out and carrying costs are counter.a!ancing. *he !arger the sa"ety stoc$# the !arger the carrying costs and A *e Aer&a. 2on erse!y# the !arger the sa"ety stoc$# the sma!!er the stoc$@out costs.

max. in entory a erage usage ;1D

a g. in entory@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ re@order point@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ max.usage sa"ety stoc$ @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@

wee$s

!ead time

re@order point under sa"ety stoc$

4ED Anal'& &; *he V;3 ana!ysis is used genera!!y "or spare parts. *he re4uirement and urgency o" spare parts is di""erent "rom that o" materia!s. A@B@2 ana!ysis may not .e proper!y used "or spare parts. *he demand "or spares depends upon the per"ormance o" the p!ant and machinery. Spare parts are c!assi"ied asK Vita! )V-# ;ssentia! );- and 3esira.!e )3-. *he ita! spares are a must "or running the concern smooth!y and these must .e stored ade4uate!y. *he non@a ai!a.i!ity o" ita! spares wi!! cause ha oc in the concern. *he ; types o" spares are a!so necessary .ut their stoc$s may .e $ept at !ow "igures. *he stoc$ing o" 3 types o" spares may .e a oided at times. I" the !ead time o" these spares is !ess# then stoc$ing o" these spares can .e a oided. *he c!assi"ication o" spares under three categories is an important decision. A wrong c!assi"ication o" any spare wi!! create di""icu!ties "or production department. *he c!assi"ication o" spares shou!d .e !e"t to the technica! sta"" .ecause they $now the need# urgency and use o" these spares.

A&&#5/% on&; In app!ying ;1D "ormu!a# it is assumed thatK

)i)ii)iii*ota! demand is $nown with certainty. *he usage rate o" materia! is steady. 1rders "or rep!enishment on in entory are p!aced exact!y when in entories reach

ordering !e e!.

)i -

*he ordering cost per order and ho!ding cost per unit are constant.

EOE an. To%al 3nAen%or' Co&%; At ;1D !e e! tota! in entory cost is minimum. *ota! in entory cost is the sum o" materia! purchase cost# ordering cost and carrying cost As per the "ormu!aK *ota! In entory 2ost )*I2- A Materia! ,urchase 2ost Q *ota! 2arrying 2ost A )R x ,- Q )RE,o x 2p- Q )DoE= x 2hD &*o#n% O11er an. E*ono5 * Or.er E#an% %'; Sometimes supp!ier o""ers di""erent discounts on orders o" !arge 4uantity. In such a situation# at "ist we shou!d ca!cu!ate ;1D and "ind out *I2 without considering discount o""er. *hen we shou!d ca!cu!ate *I2 o" each a!ternati e o""er. *hat 4uantity wi!! .e ;1D at *I2 is the !owest. 1rdering 2ost Q *ota!

0ER0ET7AL 3N4ENTOR8 CONTROL TEC-N3E7E ,erpetua! in entory system imp!ies maintenance o" up@to@date stoc$ records and in its .road sense it co ers .oth continuous stoc$ ta$ing as we!! as up@to@date recording stores .oo$s. According to We!don# It may .e de"ined as Sa method o" recording stores .a!ances a"ter e ery receipt and issue to "aci!itate regu!ar chec$ing and to o. iate c!osing down "or

soc$@ta$ingT. *he .asic o.%ect o" this system is to ma$e a ai!a.!e detai!s a.out the 4uantity and a!ue o" stoc$ o" each item at a!! times. *he system thus pro ides a rigid contro! o er stoc$ o" each item o" store can regu!ar!y .e eri"ied with the stoc$ records in the .in cards $ept in the stores and stores !edger maintained in cost o""ice.

A.Aan%age& o1 0er/e%#al 3nAen%or' &'&%e5;

5. con enience. =. random chec$ing. H. 4er 1 *a% on o1 Error&; ;rrors are easi!y !ocated and recti"ied. *his gi es an opportunity "or pre enting a recurrence in many cases. N. Do#$le *on%rolK 3ue to separate records in Bin card and stores !edger# dou.!e contro! is maintained. 9. O/% 5#5 & Ce o1 5a%er al; 1 erstoc$ing and under stoc$ing can .e a oided .ecause perpetua! in entory system co ers eri"ication o" stoc$ with regards to maximum# minimum and other !e e!s. :. La*6 o1 5 &#&e o1 Ma%er al; <nder this system# e""ecti e contro! on issue o" materia! is possi.!e# thus misuse o" materia! can .e a oided. Arrange5en% o1 /ro/er Aer 1 *a% on; In this system a detai!ed and more re!ia.!e chec$ing o" the store is exercised .ecause o" the continuous and SaA ng n % 5eK *he !ong and cost!y wor$ o" stoc$ta$ing is a oided. Hence# interim and "ina! "inancia! accounts can .e prepared with greater

7. committing dishonesty. 8.

Moral C,e*6 on S%ore& &%a11; 3ue to continuous chec$ing# this system ser es as a mora! chec$ on the stores sta"". *hey are discouraged "rom

Lo&& o1 &%o*6 .#e %o o$&ole&*en*e; It is detected at an ear!y stage and so time!y action can .e ta$en to pre ent recurrence.

T-E SELECT34E 3N4ENTOR8 CONTROL OR A2C S8STEM O) CONTROL Most manu"acturing "irms "ind themse! es con"ronted with irtua!!y thousands o"

di""erent in entory items. Most o" these items are re!ati e!y inexpensi e# whi!e other items are 4uite expensi e and account "or a !arge portion o" the "irm/s in estment. Some in entory items# a!though not expensi e# turno er s!ow!y and there"ore# they re4uire a high a erage in estment. *he "irm shou!d c!assi"y them into A.B.2 category items. 2ategory A wi!! inc!ude more expensi e items )in cost o" product- with high in estment and it wi!! re4uire more intensi e contro!. *he >B/ group wi!! consist o" the items accounting "or the next !argest in estment. *he >2/ group wi!! consist o" a !arge num.er o" items o" in entory accounting "or sma!! in estment. *he >A/ items re4uire intensi e in entory contro! and most sophisticated in entory contro! techni4ues shou!d .e app!ied to these items.

*he >B/ items can .e contro!!ed using !ess sophisticated techni4ue# and their !e e! can .e iewed !ess "re4uent!y than >A/ items. *he >2/ items can recei e the minimum attentionK they wi!! pro.a.!y .e ordered in !arge 4uantities in order to o.tain them at the !owest price. *hough the AB2 techni4ue is a good techni4ue .ut it cannot .e uni ersa!!y app!ied. 2ertain items o" in entory may .e inexpensi e .ut may .e critica! to the product in process and cannot .e easi!y o.tained. *here"ore# they may re4uire specia! attention.

*hese types o" items must .e treated as SAT c!ass items e en though# using the .road "ramewor$# they wou!d .e SBT or S2T c!ass items. A!though# not per"ect# the AB2 system is an exce!!ent method "or determining the degree o" in entory contro! e""orts re4uired to expand each item o" in entory. *he "o!!owing points shou!d .e $ept in mind "or AB2 ana!ysisK )5"or each other# they shou!d .e pre"era.!y treated as one item. )=)HMore emphasis shou!d .e gi en A!! the items consumed .y an to the a!ue o" consumption and not to price per unit o" the item. organi(ation shou!d .e considered together "or c!assi"ying as A# B or 2 instead o" ta$ing item as spare# raw materia!s# semi@"inished and "inished items and then c!assi"ying as A# B and 2. *here can .e more then three c!asses and the period o" consumption need not necessari!y .e one year Where items can .e su.stituted

A//l *a% on o1 A2C Anal'& &; AB2 ana!ysis can .e e""ecti e!y used in Materia! Management. *he arious stages where it can .e app!ied areK )5re4uire higher degree o" contro!. )=strategy. )H)Nitems. )9items. ):)7Stores !ayout. Va!ue ana!ysis. 3etermination o" sa"ety stoc$ Stoc$ records. ,riority treatment to di""erent *o e o! e use"u! re@ordering In"ormation o" items which

(2( "#&%9 n9% 5e ("3T( S'&%e5; +apanese "irms popu!ari(ed the @#&%9 n9% 5e ("3T( &'&%e5 in the wor!d. In a +I* system materia! or the manu"actured components and part arri e to the manu"acturing sites or stores %ust "ew hours .e"ore they are put to use. *he de!i ery o" materia! is synchroni(ed with the manu"acturing cyc!e and speed. +I* system e!iminates the necessity o" carrying !arge in entories# and thus# sa es carrying and other re!ated costs o" manu"acturer. *he system re4uires per"ect understanding and coordination .etween the manu"acturer and supp!ier in terms o" the timing o" de!i ery and 4ua!ity o" the materia!. ,oor 4ua!ity materia! or comp!ements cou!d ha!t the production. *he +I* in entory system comp!ements the tota! F#al %' 5anage5en% (TEM(. *he success o" the system depends on how we!! a company manages its supp!iers. *he system puts tremendous pressure on supp!iers. *hey wi!! ha e to de e!op ade4uate system and procedures to satis"actory meet the needs o" manu"acturers.

S'&%e5 o1 A**o#n% ng 1or Ma%er al 3&&#e.H3nAen%or' S'&%e5&

;ither the periodic in entory system or the perpetua! in entory

system may .e used to

account "or materia!s issued to production and ending materia!s in entory.

0er o. * 3nAen%or' S'&%e5

<nder the periodic in entory system# the purchase o" materia!s is recorded in 0#r*,a&e o1 Raw Ma%er al& A**o#n%. *he openingE.eginning in entory# i" any# is

recorded in a separate Ma%er al& 3nAen%or'9 O/en ng A**o#n%. *he materia!s a ai!a.!e "or use during a period e4ua! purchases p!us opening in entory. A physica! count is made o" the materia!s on hands at the end o" the period to arri e at the c!osingEending materia!s in entory. *he cost o" materia!s "or the period is determined as shown in ;xhi.itK

Co&% o1 Ma%er al& 3&&#e.

Materia!s in entory@opening Q ,urchases A Materia!s a ai!a.!e "or use @ Materia!s in entory@c!osing ).ased on physica! countA 2ost o" materia!s issued

*he entire .oo$ in entory is eri"ied at a gi en date .y an actua! count o" materia!s on hand. *his physica! in entory is usua!!y ta$en near the end o" the accounting yearEperiod. *his method pro ides "or the recording o" the purchases on a dai!y .asis .ut does not pro ide "or a continuous in entory@ta$ing. &either a physica! count is made o" the 4uantity o" goods on hand# nor the a!ue o" the in entory in determined .y using an appropriate pricing method and attaching costs to units counted. It is assumed that goods not on hand at the end o" the period ha e .een so!d. *here is no system and accounting period# and they can .e disco ered on!y at the end.

3N4ENTOR8 T7RNO4ER RATE TEC-N3E7E

1ne important techni4ue o" in entory contro! is to use in entory turn o er ratios. *hese ratios are ca!cu!ated to asses the e""iciency in use o" in entories. 'o!!owing contro! ratios can .e computed "or in entory ana!ysisK

)i-

3nAen%or' T#rnoAer Ra% o G 2ost o" goods so!dE A erage In entory W,ere AAerage 3nAen%or' G )1pening In entory Q 2!osing In entory-E= In entory *urno er Ratios ca .e ca!cu!ated separate!y "or raw materia!s and "inished goods.

)A-

Raw Ma%er al T#rnoAer Ra% o A Raw Materia! 2onsumedE A erage stoc$ o" Raw materia!.

)BGoods

) n &,e. Goo.& T#rnoAer Ra% o A 2ost o" Goods So!dE A erage Stoc$ o" 'inished

A erage Age o" in entory o" in entory *urno er in 3ays A 3ays during the periodE In entory *urno er Ratio )iiAAerage nAen%or' %o %o%al *o&% o1 /ro.#*% on A )A erage In entoryE tota! cost o" production- x 5FF )iiiSlow MoA ng S%ore& %o To%al 3nAen%or' A A erage 2ost o" S!ow Mo ing StoresEA erage In entory )i 3nAen%or' 0er1or5an*e 3n.eD A )Actua! Materia! *urno er RatioE Standard Materia! *urno er Ratio- x 5FF

*hese ratios pro ide a .road "ramewor$ "or the contro! and pro ide the .asis "or "uture decisions regarding in entory contro!. *he ratios pro ide a tough indication o" when In entory !e e!s are going to .e high. ; en i" it appears "rom the ratio that the !e e!s are too high there might .e a per"ect!y good reason why the !e e! o" In entory is .eing maintained. *he ratios a!so indicate the situation and trend. Howe er# the !imitation o" ratios shou!d .e

$ept in mind. *hey are not an end themse! es# .ut on!y too!s o" sound In entory Management.

)3NANC3AL MANAGERIS ROLE 3N 3N4ENTOR8 MANAGEMENT In entory represents a !arge in estment .y manu"acturing concernK there"ore# great emphasis must .e p!aced on its e""icient management. *hough# the operati e responsi.i!ity "or In entory management !ies with the in entory manager# the "inancia! manager must a!so .e concerned with a!! types o" in entories@ raw materia!s# wor$@in@progress and "inished goods. He must monitor In entory !e e!s and see that on!y an optimum amount is in ested in In entory. He shou!d .e "ami!iar with the In entory contro! techni4ues and ensure that In entory is managed we!!. He shou!d try to reso! e the con"!icting iew points o" a!! the departments in order to ha e e""icient in entory management. He has to act as a care"u! inspector !e e!s. He shou!d introduce the po!icies which reduce the !ead time# regu!ate usage and thus# minimi(e sa"ety stoc$. A!! these techni4ues o" In entory management !ead to the goa! o" wea!th maximi(ation. 4AL7AT3ON O) 3N4ENTOR3ES O2"ECT34E; A primary issue in accounting "or in entories is the determination o" the a!ue at which in entories are carried in the "inancia! statements unti! the re!ated re enues are recogni(ed. *his statement dea!s with the determination o" such a!ue# inc!uding the ascertainment o" cost o" in entories and any write@down thereo" to net rea!i(a.!e a!ue. 5. *his statement shou!d .e app!ied in accounting "or in entories other thanK

)a- Wor$@in@progress arising under construction contacts# inc!uding direct!y re!ated ser ice contracts.

).- Wor$@in@progress arising in the ordinary course o" .usiness o" ser ice pro iders. )c- Shares# de.entures and other "inancia! instruments he!d as stoc$@in@trade. )d- ,roducer/s in entories o" !i estoc$# agricu!tura! and "orest products and minera! oi!s# ores and gases to the extent that they are measured at net rea!i(a.!e a!ue in accordance with we!! esta.!ished practices in those industries.

=.

*he in entories re"erred are measured at net rea!i(a.!e a!ue at certain stages o" production. *his occurs# "or examp!e# when agricu!tura! crops ha e .een har ested or minera! oi!s# ores and gases ha e .een extracted and sa!e is assured under a "orward contract or a go ernment guarantee or when a homogenous mar$et exists and there is a neg!igi.!e ris$ o" "ai!ure to se!!. *hese In entories are exc!uded "rom the scope o" this statement.

DE)3N3T3ONS *he "o!!owing terms are used in this statement with the meanings speci"iedK In entories are assetsK )a).)cHe!d "or sa!e in the ordinary course o" .usiness. In the process o" production "or such sa!e# or In the "orm o" materia!s or supp!ies to .e consumed in the production process or in the rendering o" ser ices. 5. In entories encompass goods purchased and he!d "or resa!e# "or examp!e# merchandise purchased .y a retai!er and he!d "or resa!e# computer so"tware he!d "or resa!e# or !and and

other property he!d "or resa!e. In entories a!so encompass "inished goods produced# or wor$@ in@progress .eing produced# .y the enterprise and inc!ude materia!s# maintenance supp!ies# consuma.!es and !oose too!s awaiting use in the production process. In entories do not inc!ude machinery spares which can .e used on!y in connection with an item o" "ixed asset and whose use is expected to .e irregu!arJ such machinery spares are accounted "or in accordance with Accounting Standard )AS- 5F# Accounting "or 'ixed Assets.

=. In entories shou!d .e a!ued at !ower o" cost net rea!i(a.!e a!ue. 3. Co&% o1 3nAen%or e& *he cost o" in entories shou!d comprise a!! costs o" purchase# costs o" con ersion and other costs incurred in .ringing the in entories to their present !ocation and condition.

=. Co&%& o1 0#r*,a&e *he costs o" purchase consist o" the purchase price inc!uding duties and taxes )other than those su.se4uent!y reco era.!e .y the enterprise "rom the taxing authorities-# "reight# inwards and other expenditure direct!y attri.uta.!e to the ac4uisition. *rade discounts# re.ates# duty draw.ac$s and other simi!ar items are deducted in determining the costs o" purchase.

5. Co&%& o1 ConAer& on *he costs o" con ersion o" in entories inc!ude costs direct!y re!ated to the units o" production# such as direct !a.our. *hey a!so inc!ude a systematic a!!ocation o" "ixed and aria.!e production o erheads that are incurred in con erting materia!s into "inished goods. 'ixed production o erheads are those indirect costs o" production that remain re!ati e!y constant regard!ess o" the o!ume o" production# such as depreciation and maintenance o"

"actory .ui!dings and the cost o" "actory management and administration. Varia.!e production o erheads are those indirect costs o" production that ary direct!y# or near!y with the o!ume o" production such as indirect materia!s and indirect !a.our.

:. *he a!!ocation o" "ixed production o erheads "or purpose o" their inc!usion in the costs o" con ersion is on .ased on the norma! capacity o" the production "aci!ities. &orma! capacity is the production expected to .e achie ed on an a erage o er a num.er o" periods or seasons under norma! circumstances# ta$ing into account the !oss o" capacity resu!ting "rom p!anned maintenance. *he actua! !e e! o" production may .e used i" it approximates norma! capacity. *he amount o" "ixed production o erheads a!!ocated to each unit o" production is not increased as a conse4uence o" !ow production or id!e p!ant. <na!!ocated o erheads are recogni(ed as an expense in the period in which they are incurred. In periods o" a.norma!!y high production# the amount o" "ixed production o erheads a!!ocated to each unit o" production is decreased so that in entories are not measured a.o e cost. Varia.!e production o erheads are assigned to each unit o" production on the .asis o" the actua! use o" the production "aci!ities. 7. A production process may resu!t in more than one product .eing produced simu!taneous!y. *his is the case# "or examp!e# when %oint products are produced or when there is a main product and a .y@ product. When the costs o" con ersion o" each product are not separate!y identi"ia.!e# they are a!!ocated .etween the products on a rationa! and consistent .asis. *he a!!ocation may .e .ased# "or examp!e# on the re!ati e sa!es a!ue o" each product either at the stage in the production process when the products .ecome separate!y identi"ia.!e# or at the comp!etion o" production. Most .y@ products as we!! as scrap or waste materia!s# .y their nature# are immateria!. When this is the case# they are o"ten measured at net rea!i(a.!e a!ue and this a!ue is deducted "rom the cost o" the main product. As a resu!t# the carrying amount o" the main product is not materia!!y di""erent "rom its cost.

8. 1ther costs are inc!uded in the costs o" in entories on!y to the extent that they are incurred in .ringing the in entories to their present !ocation and condition. 'or examp!e# it may .e appropriate to inc!ude o erheads other than production o erheads or the costs o" designing product "or speci"ic customers in the cost o" in entories.

6. Interest and other .orrowing costs are usua!!y considered as not re!ating to .ringing the in entories to their present !ocation and condition and are# there"ore# usua!!y not inc!uded in the cost o" in entories. >0. ED*l#& on& 1ro5 %,e *o&% o1 3nAen%or e& In determining the cost o" in entories in accordance with paragraph H. It is appropriate to exc!ude certain costs and recogni(e them as expenses in the period in which they are incurred. ;xamp!es o" such costs areJ

5. A.norma! amounts o" wasted materia!s# !a.our# or other production costs. =. Storage costs# un!ess those costs are necessary in the production process prior to a "urther production stage. H. Administrati e o erheads that do not contri.ute to .ringing the in entories to their present !ocation and condition# and N. Se!!ing and distri.ution costs.

55. *he cost o" in entories o" items that are not ordinari!y interchangea.!e and goods or ser ices produced and segregated "or speci"ic pro%ects shou!d .e assigned .y speci"ic identi"ication o" their indi idua! costs. 5=. Speci"ic identi"ication o" cost means that speci"ic costs are attri.uted to identi"y items o" in entory. *his is an appropriate treatment "or items that are segregated "or a speci"ic pro%ect# regard!ess o" whether they ha e .een purchased or produced. Howe er# when there are !arge num.ers o" items o" in entory which are ordinari!y interchangea.!e# speci"ic identi"ication o" costs is inappropriate since# in such circumstances# an enterprise cou!d o.tain predetermined e""ects on the net pro"it or !oss "or the period .y se!ecting a particu!ar method o" ascertaining the items that remain in in entories.

5H.

*he cost o" in entories# other than those dea!t with in paragraph 55# shou!d .e assigned

.y using the "irst@in# "irst@out )'I'1-# or weighted a erage cost "ormu!a. *he "ormu!a used shou!d re"!ect the "airest possi.!e approximation to the cost incurred in .ringing the items o" in entory to their present !ocation and condition.

5N. A ariety o" cost "ormu!as is used to determine the cost o" in entories other than those "or which speci"ic identi"ication o" indi idua! costs is appropriate. *he "ormu!a used in determining the cost o" an item o" in entory needs to .e se!ected with a iew to pro iding the "airest possi.!e approximation to the cost incurred in .ringing the item to its present !ocation and condition. *he 'I'1 "ormu!a assumes that the items o" in entory which were purchased or produced "irst are consumed or so!d "irst# and conse4uent!y the items remaining in in entory at the end o" the period are those most recent!y purchased or produced. <nder the weighted a erage costs "ormu!a# the cost o" each item is determined "rom the weighted a erage o" the cost o" simi!ar items at the .eginning o" a period and the cost o" simi!ar items purchased or produced

during the period. *he a erage may .e ca!cu!ated on a periodic .asis or as each additiona! shipment is recei ed# depending upon the circumstances o" the enterprise.

59. *echni4ues "or the measurement o" the cost o" in entories# such as the standard cost method or the retai! method# may .e used "or con enience i" the resu!ts approximate the actua! cost. Standard costs ta$e into account norma! !e e!s o" consumption o" materia!s and supp!ies# !a.our# e""iciency and capacity uti!i(ation. *hey are regu!ar!y re iewed and i" necessary# re ised in the !ight o" current conditions. 5:. *he retai! method is o"ten used in the retai! trade "or measuring in entories o" !arge

num.ers o" rapid!y changing items that ha e simi!ar margins and "or which is impractica.!e to use other costing methods. *he cost o" the in entory is determined .y reducing "rom the sa!es a!ue o" the in entory the appropriate percentage gross margin. *he percentage used ta$es into consideration in entory which has .een mar$ed down to .e!ow its origina! se!!ing price. An a erage percentage "or each retai! department is o"ten used.

57. *he cost o" in entories may not .e reco era.!e i" those in entories are damaged# i" they ha e .ecome who!!y or partia!!y o.so!ete# or i" their se!!ing prices ha e dec!ined. *he cost o" in entories may a!so not .e reco era.!e i" the estimated costs o" comp!etion or the estimated costs necessary to ma$e the sa!e ha e increased. *he practice o" writing down in entories .e!ow cost to net rea!i(a.!e a!ue is consistent with the iew that assets shou!d not .e carried in excess o" a amounts expected to .e rea!i(ed "rom their sa!e or use. 58. In entories are usua!!y written down to net rea!i(a.!e a!ue on an item@.y@item .asis. In some circumstances# howe er# it may .e appropriate to group simi!ar or re!ated items. *his may .e the case with items o" in entory re!ating to the same product !ine that ha e simi!ar

purposes or end uses and are produced and mar$eted in the same geographica! area and cannot .e practica.!y e a!uated separate!y "rom other items in that product !ine. It is not appropriate to write down in entories .ased on a c!assi"ication o" in entory# "or examp!e# "inished goods# or a!! the in entories in a particu!ar .usiness segment.

56.

;stimates o" net rea!i(a.!e a!ue are .ased on the most re!ia.!e e idence a ai!a.!e at the time the estimates are made as to the amount the in entories are expected to rea!i(e. *hese estimates ta$e into consideration "!uctuations o" price or cost direct!y re!ating to e ents occurring a"ter the .a!ance sheet date to the extent that such e ents con"irm the conditions existing at the .a!ance sheet date.

=F.

;stimates or net rea!i(a.!e a!ue a!so ta$e into consideration the purpose "or which the in entory is he!d. 'or examp!e# the net rea!i(a.!e a!ue o" the 4uantity o" in entory he!d to satis"y "irm sa!es or ser ice contracts is .ased on the contract price. I" the sa!es contracts are "or !ess than the in entory 4uantities he!d# the net rea!i(a.!e a!ue o" the excess in entory is .ased on genera! se!!ing prices.

2ontingent !osses on "irm sa!es contracts in excess o" in entory 4uantities he!d and contingent !osses on "irm purchase contracts are dea!t with in accordance with the princip!es enunciated in Accounting Standard )A.S- N# contingencies and e ents occurring a"ter the .a!ance sheet date. =5. Materia!s and other supp!ies he!d "or use in the production o" in entories are not written down .e!ow cost i" the "inished products in which they wi!! .e incorporated are expected to .e so!d at or a.o e cost. Howe er# when there has .een a dec!ine in the price o" materia!s and it is estimated that the cost o" the "inished products wi!! exceed net rea!i(a.!e a!ue# the materia!s are written down to net rea!i(a.!e a!ue. In such circumstances# the rep!acement cost o" the materia!s may .e the net a ai!a.!e measure o" their net rea!i(a.!e a!ue. An assessment is made o" net rea!i(a.!e a!ue as at each .a!ance sheet date.

22.

D &*lo&#re. *he "inancia! statements shou!d disc!oseK *he accounting po!icies adopted in measuring in entories# inc!uding the cost "ormu!a used# and *he tota! carrying amount o" in entories and its c!assi"ication appropriate to the enterprise. =N. In"ormation a.out the carrying amounts he!d in di""erent c!assi"ications o" in entories

and the extent o" the changes in these assets is use"u! to "inancia! statement users. 2ommon c!assi"ications o" in entories are raw materia!s and components# wor$ in progress# "inished goods# stores# spares and !oose too!s.

DATA COLLECTIO N

DATA COLLECT3ON In ana!ysis o" in entory o" +1L# We co!!ect the data .y the di""erent sources. We co!!ect the primary and secondary data. S;21&3ARI 3A*A M *he secondary data are those data the a!ready in presence "or

speci"ic purpose we use the secondary data a.out in entory to !oo$s o!d records o" the company .'or the dai!y in"ormation a.out the items We show the MR&# !edger register and dai!y issue s!ip o" materia!s the purchase register and other documentary e idence used "or the "indings. In the ana!ysis o" in entory the secondary data are not su""icient .then We co!!ect primary data. ,RIMARI 3A*A M ,rimary data are those data that are originated ery "irst time or "resh data .with the he!p o" primary data "ormu!ated the research o.%ecti es. are the accurate attaina.!e re!ia.!e and use"u! data. 5. In entory contro! techni4ues used .y the company =. In entory systems as perpetua! and periodic systems. H. Stoc$ !e e!s etc. N. 2ompanies we.site ,rimary data

FINANCIAL STATEMENTS

Profit ! Loss Acco"nt Partic"lars -r%ss Sales E+cise Net Sales D%(estic Sales Internati%nal Sales Other Inc%(e 0otal Income E12endit"re C%st %" (aterials Man#"act#rin * e+&enses Sellin*$ *eneral and ad(inistrative e+&enses 0otal E12endit"re P3I40A De&reciati%n P3I0 Interest PBDT P30 Ta+ #$ %&&' ./01023 ..8321 +(&(*,( 3.602. 737.21 .3/23 +(%(&,) #$ %&&( .045426 .65125 ++-&%,476.26 106.24 .//21 ++.'/,+ #$ %&&) 317/24 8/124 .(/%,& /56124 008425 3327 .'/+,( #$ %&&* 487523 4.327 -+*),) 7./.2. .34525 5325 -+-*,#$ %&&% /73820 /1321 (/).,. 14//25 ..8027 112. (//%,/

8.7823 .73426 5.042. +%..*,& %*'-,) 7.521 +.(),& .4024 0.3124 +'.+,* 53021

/.4424 .53121 067126 /'%',+ %%)*,& 58.21 +.'+,' 00621 06002/ +')+,% 15.2/

111524 ..4.26 .10/24 -&)+,) +'(&,+ 50/20 +*%*,/ 5742/ .03027 /'',* .4326

5/132. 3032/ .5.525 (./%,& +%.+,05427 +&)),% 16027 84320 ')+,./62/

5..827 81.21 ..7525 (++*,% .-/,07728 '%*,/ 1..2. 1/82/ %+%,. 9.321

PA0 Share %" Pr%"it : ;L%ss< in Ass%ciate Min%rity Interest PA0 after s5are of 2rofit 6 loss in associate and minority interest

+%..,/ 6266 428

+%&/,' 6266 9.424

-.-,* 9823 126

).+,+ 9625 6266

%*%,% 6266 6266

+%/',-

++/+,/

-.%,)

).&,.

%*%,%

2ash '!ow #INAN7E 87ONSOLI4A0E4 7AS9 #LO: 8 ;"<ilant Organ, =7"rr> Rs in Million? %&&',* 7as5 #low S"mmary Cash and Cash E,#ivalents at Be*innin* %" the year Net Cash "r%( O&eratin* Activities Net Cash Used in Investin* Activities Net Cash Used in Financin* Activities Net Inc:;Dec< in Cash and Cash E,#ivalent Cash and Cash E,#ivalents at End %" the year 547241 .1.280 1/64215 7158251 6266 .5/123 004276 .../246 9 0737266 .144236 .182/6 547246 .6/204 8152.1 9 48/2/8 /6254 1257 004217 .6.214 15/266 9 ..0028 6 /3.2/6 6266 .6/204 %&&(&* %&&)&* %&&*&*

'inancia! Ratios Ratio De't = E,#ity Rati% C#rrent Rati% %r)in* Ca&ital Days 0URNOVER RA0IOS Assets Invent%ry De't%rs Interest C%ver Rati% Earnin* Be"%re Interest Ta+ and De&reciati%n Mar*in ;>< Pr%"it Be"%re Interest and Ta+ Mar*in ;>< Pr%"it Be"%re De&reciati%n and Ta+ Mar*in ;>< Net Pr%"it ;a"ter (in%rity interest< Mar*in ;>< Ret#rn %n Ca&ital E(&l%yed ;>< Ret#rn %n Net %rth ;>< #$ %&&' 6284 0255 36 6236 1285 /264 .6241 .7245 .0250 .1278 827/ .72.4 .3258 #$ %&&( 6241 .243 /. .20. /261 /2/5 8217 .32.4 .723. .4208 .6251 0127/ 55284 #$ %&&) 026. 025. 86 .20. /271 /267 5246 .320. .721. .7261 32./ 002.1 15233 #$ %&&* 0243 0216 87 .2./ 7208 8247 0273 .4234 .12/1 .0250 /241 062/. 542.8 #$ %&&% 5263 027. 81 .205 7244 4241 .270 .1243 .6213 4288 5236 04273 .42/5

DATA ANALYSIS AND INTERPRETATIO N

3N4ENTOR8 T7RN O4ER RAT3O@

*ota! sa!es In entory turn o er ratio A A erage in entory

*he sa!es o" +1L in year =FF7 is 7=F mi!!ion C its in estment on in entory is 5=: mi!!ion . *hen in entory turn o er ratio A 7=FE5=: A 9.75 +1L used Rs. : mi!!ion worth in entory "or operation. It cou!d generates additiona! sa!es# sa!es Sa!es A : mi!!ion 0 9.75 A HN.=: mi!!ion

I" +1L increases in estment more on their in entories # then company increases their sa!es.

In entory turn in year =FF:@ *ota! sa!es in =FF: A :7F mi!!ion In estment on in entories A 558 mi!!ion *urn o er ratio A :7FE558 A 9.:7

In entory turn o er in year =FF9@ *ota! sa!es in =FF9 A :=F mi!!ion In estment on in entories A 55F mi!!ion *urn o er ratio A :=FE 55F A 9.:H

In entory turn ratio in year =FFN *ota! sa!es in =FFN A :59 mi!!ion In estment on in entories A 5FF mi!!ion *urn o er ratio A :59 E 5FF A :.59

3nAe&%5en% o1 nAen%or e& J &ale& on war.& 200=9

year =FFN =FF9 =FF: =FF7

In estment on in entories in mi!!ion 5FF 55F 558 5=:

tota! sa!es in mi!!ion :59 :=F :7F 7=F

+u.i!ant 1rganosys Ltd. increases in estment on their in entories. ; ery year# then tota! sa!es increases year .y year.

7=F

Sa!es ;MB;3 ;xce!.2hart.8 Bs :N9

:7F

:59

=FFN

=FF9

=FF: Iears

=FF7

4AL7E 7NDER )3)O MET-OD @ 3ate Dty 2ost Va!ue Dty 2ost Va!ue Dty 2ost

Va!

+an 5 6 5= =7 'e. 5F 5: March H 57 =6 Apr N 58 =H May 5= =N +un 5F HF *ota! =FFF 56FF F =.F= =.56 NFNF N57F F 5:FF F @ H95N F =FFF =.FN NF8F 5FFF HFFF =.FF :FFF 5FFF =.NF =NFF =.NF =NFF 5FFF 5FFF =.=5 =.H5 ==5F =FFF =H5F NFFF =FFF =FFF NFFF =FFF =.N5 =.N5 =.=6 =.5N N8=F N8=F NFFF 65:F N=8F NFFF U 6HNF =.5F 8NFF =.5F 8NFF =.5F N=FF

5FFF F 55FF F 6FFF 5FFF F :FFF 8FFF 5FFF F :FFF 5FFF F 5=FF F :FFF F 5FFF F 6FFF 5=FF F 55FF F 5HFF F

=.5F @ @ @ @ @ @ @ @ @ @ @ @ @ @ @

=5F

=H=

56F =5H

5=6 577

==9

5N5 =HH

=7:

58=

==H

566 =96

=H9

=79

Where U is 5FFF 5FFF =FFF *ota! NFFF

=.=5 =.H5 =.N5 @

==5F =H5F N8=F 6HNF

3n%er/re%a% on 9
*he 'I'1 method o" a!uation o" in entory is .ased on the assumption that the in entory consumed in chrono!ogica! order . that is recei ed "irst are issued E consumed "irst and a!ue "ixed according!y . 'rom the ta.!e with an opening in entory o" 5FFFF units at rs =.5F# the "irst 5FFFF units issued are charged to the cost o" goods so!d at this opening in entory rate rs =.5F . the Apri! 58 issue or consignment o" NFFF units is costed on the .asis o" "irst recei ed o" the year . +anuary 6 #5FFF units at rs =.=5# +anuary =7 5FFF units at rs =.H5 # and 'e.ruary 5: #=FFF units at rs =.N5. the 5FFF each issued on May 5= and +une 5F are costed on the .asis o" the =FFF units recei ed on March H . there"ore the cost o" the 5HFFF in entory on +une HF is composed o" the recei ed o" March =6 Apri! N and =H #May =N and +une HF and the a!ue is the sum o" the cost o" these receipts.

4al#a% on #n.er /er/e%#al nAen%or' &'&%e59 3ate 5+an :+an 8+an 6+an 59+an =9+an =7+an H5+an Receipts D R @ @ @ @ 55FF 8.9F @ @ @ @ HFF 6 @ @ NFF 6.=F Issues Ba!ance A D R A D A @ @ @ @ =FF 5NFF @ 5FF 7 7FF 5FF 7FF 6H9F @ @ @ 5=FF 5FF9F @ =FF 8.9F 57FF 5FFF 8H9F @ NFF 8.9F HNFF :FF N69F =7FF @ @ @ 6FF 7:9F @ HFF 8.9F =99F HFF =NF HFF 6 =7FF F H:8F @ @ @ 7FF :F8F

*he a!ue o" in entory a"ter H5 +anuary is :F8F Ers

3n%er/re%a% on ;9 *he a!ue o" in entory under periodic C perpetua! in entory system is di""erent. *he a!ue o" in entory under perpetua! system is more than periodic system.

DETERM3NAT3ON O) STOCK LE4ELS

3ata o" concentrate at +1L is as "o!!ows M Maximum consumption Minimum consumption &orma! consumption Re@order period Re@order 4uantity &orma! re@order period A :9 units per day A 99 units per day A 96 units per day A 5F@59 days A 878 units A 5= days

Re@order !e e!

A Maximum consumption 0 Maximum Re@order period

Re@order !e e!

A A

:9 units 0 59 days 679 units

Minimum stoc$ !e e!

A re@order !e e! M )norma! consumption 0 &orma! re@order periodA 679 @ )96 units 0 5= daysA =:7 units A )re@order !e e! Q re@order 4uantity ) min. consumption M order period-

Maximum stoc$ !e e! @

A ) 679 units Q 878 units - @ )99 units 0 59 days-

A 5F=8 units A erage stoc$ !e e! A minimum stoc$ !e e! Q V o" Re@ordering Duantity A =:7 units Q V 0 878 units A =:7 units Q NH6 units A 7F: units

3n%er/re%a% on o1 re&#l% K @ 5. =. H. N. A"ter ca!cu!ation the re@order !e e! o" +1L is 679 units .ut the actua! re@order 4uantity is 878 units. *he minimum stoc$ !e e! o" +1L is =:7 units. *he maximum stoc$ !e e! o" +1L is 5F=8 units. *he a erage stoc$ !e e! must .e 7F: units.

Cal*#la% on o1 eD/e*%e. &%o*6 o#% *o&% K Sa"ety stoc$ !e e! 9FF NFF =9F 59F 5FF 9F HFF 59F N9F H9F =FF 9F NFF stoc$ out)unitsF 5FF =9F :FFF stoc$ out pro.. 1" stoc$ cost)NFEunit- out F NFFF 5FFFF F.F5 F.F= F F.F5 5FF 5=F 5:F =NF 58F 58F =8F =NF 8F 78F 98F expected stoc$ out expt. cost F NF ==F tota! S12 F NF

5:FFF F.F5 5=FFF F.F= :FFF F.FH 58FFF F.F5 5NFFF F.F= 8FFF F.FH =FFF F.FN

9FF NFF =9F 5FF 9F

=FFFF F.F5 5:FFF F.F= 5FFF NFFF =FFF

=FF H=F F.FH F.FN F.5F HFF 5:F =FF 558F

;xpected stoc$ out cost AA stoc$ out cost 0 pro.a.i!ity o" stoc$ out .

PRO8*EMS AN0 SUGGESTIO NS

0RO2LEMS )ACED 28 T-E ORGAN3T3ON +1L "aces the "o!!owing pro.!ems@ 5. +u.i!ant 1rganosys Ltd. "aces the pro.!em o" competition. =. 1rgani(ation "acing the pro.!em o" proper s$i!!ed emp!oyees in the production

department. H. *here is no proper se4uence Cac$now!edgement .oard "or certain items in store

department .It is not good when externa! auditing he!d in company. N. 1rgani(ation ha e no record o" wastage items. It is not company. 9. In organi(ation store assistants ha e no proper $now!edge a.out engineering goods C good "or operating pro"it o" the

raw materia!s.

:.

*here is no proper sta"" in HRE ,ersonne! department "or !istening grie ances o"

emp!oyees. So emp!oyees get rid o" the organi(ation without any notice. It is not good "or any organi(ation.

S7GGEST3ONS TO T-E ORGAN3SAT3ON; . 5. *he organi(ations gi e proper $now!edge C training "or uns$i!!ed emp!oyees a.out their wor$. =. In store department items shou!d p!aced their proper se4uence C ac$now!edgement. H. *here shou!d .e proper record o" wastage. It is good "or the company. N. Store manager gi e the proper $now!edge a.out engineering C raw materia!s. 9. 1rgani(ation shou!d ha e proper sta"" in HRE,ersonne! department. :. ,ersonne! manager shou!d !isten grie ances o" the emp!oyees personne! .So emp!oyees cou!d not !e"t the organi(ation.

CONC*USIO N

21&2L<SI1&
*he goa! o" the wea!th maximi(ation is a""ected .y the e""iciency with which in entory is managed. In entories constitutes a.out :FO o" current assets o" companies in India. *he manu"acturing companies ho!d in entories in the "orm o" raw materia!s # wor$ in progress and "inished goods. In entories "aci!itate smooth production and sa!es operation )transaction moti e-# to guard against the ris$ o" unpredicta.!e changes in usage rate and de!i ery time ) precautionary moti e - # C to ta$e ad antage o" price "!uctuations )specu!ati e moti e -.

In entories represent in estment o" a "irm/s "unds. *he o.%ecti es o" the in entory management shou!d .e the maximi(ation o" the a!ue o" the "irm. there"ore the "irm shou!d considerK 5. cost =. return H. ris$ "actors

In in entory maintenance two types o" costs are in o! ed carrying cost C ordering cost .the "irm shou!d minimi(e the tota! cost ) carrying p!us ordering cost -.*he "irm "o!!ows in entory contro! techni4ues as A@B@2 techni4ue ;1D C +I* techni4ues "or .etter ho!ding in entories.

232L3OGRA0-8
5. Ad anced Accountancy &inth ;dition S & Maheshwari # S L Maheshwari Vi$as ,u.!ishing House , t. Ltd.

=.

'inancia! Management &inth ;dition I M ,andey Vi$as ,u.!ishing House , t. Ltd

H.

Management Accounting *hird ;dition M I Lhan# , L +ain *ata Mc@Graw Hi!! ,u.!ishing 2ompany Ltd.

N.

,urchase # Sa!es Boucher C 1ther 3ocuments o" the 2ompany Moon Be erage Ltd. Sahi.a.ad