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Submitted By: Padam Nabh

Roll No.9929

Master of Management (Batch 2009-11)


Dr. Bimal Anjum, H.O.D.Business

I have prepared this study paper for the “Inventory

Management System – A Study of Johnson & Johnson Ltd”. I

have derived the contents and approach of this study paper

through discussions with company executives and internet as well

as with the help of various Books, Magazines and Newspapers etc.

I would like to give my sincere thanks to a host of Company

Executive, friends and the teachers who, through their guidance,

enthusiasm and counseling helped me enormously as I think there

will be always need for improvement. Apart from this, I hope this

study would stimulate the need of thinking and discussion on the

topics like this one.


*Objective of the Study

*Introduction of Company

* Company Profile

* History

* Board of Directors

* Awards

* Products

* Guiding Principles of Company

* Structure of the Company

* Research Methodology

* Introduction of the Topic


* Data Collection

* Financial Statements

* Data Analysis and Interpretation

* Problems and Suggestions

* Conclusions

* Bibliography

Inventories constitute the principal item in the working capital of

the majority of trading and industrial companies. In inventory,
we include raw materials, finished goods, work in progress,
supplies and other accessories. To maintain the continuity in the
operations of business enterprise, a minimum stock of inventory

However, the physical control of inventory is the operating

responsibility of stores superintendent and financial personnel
have nothing to do about it but the financial control of these
inventories in all lines of activity in which they comprise a
substantial part of the current assets is a frequent problem in
the management of working capital. Management of inventory is
designed to regulate the volume of investment in goods on
hand, the types of goods carried in stock to meet the needs of
production and sales while at the same time, the investment in
them is to kept at a reasonable level.
Company Profile
Johnson & Johnson and its subsidiaries have approximately 115,500
employees worldwide engaged in the research and development,
manufacture and sale of a broad range of products in the health care field.
Johnson &Johnson is a holding company, which has more than 250
operating companies conducting business in virtually all countries of the
world. Johnson & Johnson’s primary focus has been on products related to
human health and wellbeing.
Johnson & Johnson was incorporated in the State of New Jersey in 1887.
The Company’s structure is based on the principle of decentralized
management. The Executive Committee of Johnson & Johnson is the
principal management group responsible for the operations and allocation
of the resources of the Company. This Committee oversees and coordinates
the activities of the Consumer, Pharmaceutical and Medical Devices and
Diagnostics business segments. Each subsidiary within the business
segments is, with some exceptions, managed by citizens of the country
where it is located. . Johnson & Johnson is known for its corporate
reputation, consistently ranking at the top of Interactive National Corporate
Reputation Survey ranking as the world's most respected company by
Barron's Magazine, and was the first corporation awarded the Benjamin
Franklin Award for Public Diplomacy by the U.S. State Department for its
funding of international education programs. Johnson & Johnson is known
for its corporate reputation, consistently ranking at the top of Interactive
National Corporate Reputation Survey ranking as the world's most
respected company by Barron's Magazine, and was the first corporation
awarded the Benjamin Franklin Award for Public Diplomacy by the U.S.
State Department for its funding of international education programs

The corporation's headquarters is located in New Brunswick, New Jersey,

United States. Its consumer division is located in Skillman, New Jersey. The
corporation includes some 250 subsidiary companies with operations in
over 57 countries. Its products are sold in over 175 countries. J&J had
worldwide pharmaceutical sales of $24.6 billion for the full-year 2008.
Segments of Business
Johnson & Johnson’s operating companies are organized into three business
segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.
The Consumer segment includes a broad range of products used in the baby
care, skin care, oral care, wound care and women’s health care fields, as
well as nutritional and over-the-counter pharmaceutical products, and
wellness and prevention platforms. The Baby Care franchise includes the
JOHNSON’S Baby line of products. Major brands in the Skin Care franchise
include the AVEENO; CLEAN & CLEAR; JOHNSON’S Adult;
NEUTROGENA; RoC; LUBRIDERM; Dabao; and Vendôme product lines.
The Oral Care franchise includes the LISTERINE and REACH oral care lines
of products. The Wound Care franchise includes BAND-AID brand adhesive
bandages and PURELL instant hand sanitizer products. Major brands in the
Women’s Health franchise are the CAREFREE Pantiliners; STAYFREE
sanitary protection products; and Vania Expansion products. The nutritional
and over-the-counter lines include SPLENDA , No Calorie Sweetener; the
broad family of TYLENOL acetaminophen products; SUDAFED cold, flu
and allergy products; ZYRTEC allergy products; MOTRIN IB ibuprofen
products; and PEPCID AC Acid Controller from Johnson & Johnson • Merck
Consumer Pharmaceuticals Co. These products are marketed to the general
public and sold both to retail outlets and distributors throughout the world.

The Pharmaceutical segment includes products in the following therapeutic
areas: anti-infective, antipsychotic, cardiovascular, contraceptive,
dermatology, gastrointestinal, hematology, immunology, neurology,
oncology, pain management, urology and virology. These products are
distributed directly to retailers, wholesalers and health care professionals
for prescription use. Key products in the Pharmaceutical segment include:
REMICADE (infliximab), a biologic approved for the treatment of a number
of immune mediated inflammatory diseases; PROCRIT (Epoetin Alfa, sold
outside the U.S. as EPREX), a biotechnology-derived product that
stimulates red blood cell production;
LEVAQUIN (levofloxacin) in the anti-infective field; RISPERDAL CONSTA
(risperidone), a long-acting inject able for the treatment of schizophrenia;
CONCERTA (methylphenidate HCl), a product for the treatment of
attention deficit hyperactivity disorder; ACIPHEX /PARIET , a proton
pump inhibitor co-marketed with Eisai
Inc.; DURAGESIC /Fentanyl Transdermal (fentanyl transdermal system,
sold outside the U.S. as DUROGESIC ), a treatment for chronic pain that
offers a novel delivery system; VELCADE (bortezomib), a product for the
treatment for multiple myeloma; PREZISTA (darunavir) for the treatment
of HIV/AIDS patients; and INVEGA (paliperidone), a once-daily atypical

Medical Devices and Diagnostics

The Medical Devices and Diagnostics segment includes a broad range of
products distributed to wholesalers, hospitals and retailers, used principally
in the professional fields by physicians, nurses, therapists, hospitals,
diagnostic laboratories and clinics. These products include Cordis’
circulatory disease management products;DePuy’s orthopaedic joint
reconstruction, spinal care and sports medicine products; Ethicon’s
surgical care, aesthetics and women’s health products; Ethicon Endo-
Surgery’s minimally invasive surgical products; LifeScan’sblood glucose
monitoring and insulin delivery products; Ortho-Clinical Diagnostics’
professional diagnostic products; and Vistakon’s disposable contact lenses.
Distribution to these health care professional markets is done both directly
and through surgical supply and other dealers.

Geographic Areas
The international business of Johnson & Johnson is conducted by
subsidiaries located in 59 countries outside the United States, which are
selling products in virtually all countries throughout the world. The products
made and sold in the international business include many of those
described above under “— Segments of Business — Consumer,”“—
Pharmaceutical” and “— Medical Devices and Diagnostics.” However, the
principal markets, products and methods of distribution in the international
business vary with the country and the culture. The products sold in
international business include not only those developed in the United
States, but also those developed by subsidiaries abroad.
Investments and activities in some countries outside the United States are
subject to higher risks than comparable U.S. activities because the
investment and commercial climate is influenced by restrictive economic
policies and political uncertainties.
Raw Materials
Raw materials essential to Johnson & Johnson’s operating companies’
businesses are generally readily available from multiple sources.

Patents and Trademarks

Johnson & Johnson and its subsidiaries have made a practice of obtaining
patent rotection on their products and processes where possible. They own
or are licensed under a number of patents relating to their products and
manufacturing processes, which in the aggregate are believed to be of
material importance to Johnson & Johnson in the operation of its businesses.
Sales of the Company’s largest product, REMICADE ® (infliximab),
accounted for approximately 7% of Johnson & Johnson’s total revenues for
fiscal 2009. Accordingly, the patents related to this product are believed to
be material to Johnson & Johnson. During 2007 through 2009, RISPERDAL ®
(risperidone) oral and TOPAMAX ® (topiramate) lost basic patent protection
and market exclusivity and became subject to generic competition in the
United States and international markets. RISPERDAL ® oral sales declined
by 57.7% and 37.8% in 2009 and 2008, respectively. TOPAMAX ® lost
market exclusivity in March 2009 and sales declined by 57.9% as compared
to 2008. The next significant patent scheduled to expire on December 20,
2010 is for LEVAQUIN ® (levofloxacin), which accounted for 2.5% of the
Company’s 2009 sales. A pediatric extension for LEVAQUIN ® was granted
by the U.S. Food and Drug
Administration (“FDA”), which extends market exclusivity in the United
States through June 20, 2011. Johnson & Johnson’s operating companies
have made a practice of selling their products under trademarks and of
obtaining protection for these trademarks by all available means. These
trademarks are protected by registration in the United States and other
countries where such products are marketed. Johnson & Johnson considers
these trademarks in the aggregate to be of material importance in the
operation of its businesses.
In all of their product lines, Johnson & Johnson’s operating companies
compete with companies both large and small, and both local and global,
located throughout the world. Competition exists in all product lines without
regard to the number and size of the competing companies involved.
Competition in research, involving the development and the improvement
of new and existing products and processes, is particularly significant. The
development of new and innovative products is important to Johnson &
Johnson’s success in all areas of its business. This also includes protecting
the Company’s portfolio of intellectual property. The competitive
environment requires substantial investments in continuing research and in
maintaining sales forces. In addition, the development and maintenance of
customer demand for the Company’s consumer products involves
significant expenditures for advertising and promotion.

Research and Development

Research activities represent a significant part of Johnson & Johnson’s
subsidiaries’ businesses. Major research facilities are located not only in the
United States, but also in Belgium, Brazil, Canada, China, France, Germany,
India, Israel, Japan, the Netherlands, Singapore and the United Kingdom.
The costs of worldwide Company sponsored research activities relating to
the development of new products, improvement of existing products,
technical support of products and compliance with governmental
regulations for the protection of consumers and patients (excluding
purchased in-process research and development charges for fiscal 2008 and
2007), amounted to $7.0 billion, $7.6 billion and $7.7 billion for fiscal years
2009, 2008 and 2007, respectively. These costs are harged directly to
expense, or directly against income, in the year in which incurred.

Johnson & Johnson’s operating companies are subject to a variety of U.S.
and international environmental protection measures. Johnson & Johnson
believes that its operations comply in all material respects with applicable
environmental laws and regulations. Johnson & Johnson’s compliance with
these requirements did not during the past year, and is not expected to,
have a material effect upon its capital expenditures, cash flows, earnings or
competitive position.

Most of Johnson & Johnson’s businesses are subject to varying degrees of
governmental regulation in the countries in which operations are conducted,
and the general trend is toward increasingly stringent regulation. In the
United States, the drug, device, diagnostics and cosmetic industries have
long been subject to regulation by various federal and state agencies,
primarily as to product safety, efficacy, manufacturing, advertising, labeling
and safety reporting. The exercise of broad regulatory powers by the FDA
continues to result in increases in the amounts of testing and
documentation required for FDA clearance of new drugs and devices and a
corresponding increase in the expense of product introduction. Similar
trends are also evident in major markets outside of the United States. The
costs of human health care have been and continue to be a subject of
study, investigation and regulation by governmental agencies and
legislative bodies around the world. In the United States, attention has been
focused on drug prices and profits and programs that encourage doctors to
write prescriptions for particular drugs or recommend, use or purchase
particular medical devices. Payers have become a more potent force in the
market place and increased attention is being paid to drug and medical
device pricing, appropriate drug and medical device utilization and the
quality and costs of health care. The regulatory agencies under whose
purview Johnson & Johnson’s operating companies operate have
administrative powers that may subject those companies to such actions as
product withdrawals, recalls, seizure of products and other civil and criminal
sanctions. In some cases, Johnson & Johnson’s operating companies may
deem it advisable to initiate product recalls. In addition, business practices
in the health care industry have come under increased scrutiny, particularly
in the United States, by government agencies and state attorneys general,
and resulting investigations and prosecutions carry the risk of significant
civil and criminal penalties.

Johnson & Johnson and its subsidiaries operate 143 manufacturing facilities
occupying approximately 21.4 million square feet of floor space. The
manufacturing facilities are used by the industry segments of Johnson &
Johnson’s business approximately as follows:

Available Information
Square Feet
(in Segment thousands)
Consumer 6,825
Pharmaceutical 6,369
Medical Devices and Diagnostics 8,251
Worldwide Total 21,445

Within the United States, 7 facilities are used by the Consumer segment, 12
by the Pharmaceutical segment and 37 by the Medical Devices and
Diagnostics segment. Johnson & Johnson’s manufacturing operations
outside the United States are often conducted in facilities that serve more
than one business segment.
The locations of the manufacturing facilities by major geographic areas of
the world are as follows:

Geographic Area Number of Facilities (Square Feet in thousands)

United States 56 7,489
Europe 38 7,336
Western Hemisphere, excluding U.S. 16 3,372
Africa, Asia and Pacific 33 3,248
Worldwide Total 143 21,445


Listed below are the executive officers of Johnson & Johnson as of February
8, 2010, each of whom, unless otherwise indicated below, has been an
employee of the Company or its affiliates and held the position indicated
during the past five years. There are no family relationships between any of
the executive officers, and there is no arrangement or understanding
between any executive officer and any other person pursuant to which the
executive officer was selected. At the annual meeting of the Board of
Directors, the executive officers are elected by the Board to hold office for
one year and until their respective successors are elected and qualified, or
until earlier resignation or removal.
Information with regard to the directors of the Company, including those of
the following executive officers who are directors, is incorporated herein by
reference to the material captioned “Election of Directors” in the Proxy
Name & Position
Dominic J. Caruso
Member, Executive Committee; Vice President, Finance; Chief
Financial Officer (a)

Russell C. Deyo
Member, Executive Committee; Vice President, Human
Resources and General Counsel (b)
Colleen A. Goggins

Member, Executive Committee; Worldwide Chairman,

Consumer Group(c)

Alex Gorsky
Member, Executive Committee; Worldwide Chairman, Medical
Devices and Diagnostics Group (d)

Sherilyn S. McCoy
Member, Executive Committee; Worldwide Chairman,
Pharmaceuticals Group (e)

William C. Weldon
Chairman, Board of Directors; Chairman, Executive
Committee; Chief Executive Officer

Robert Wood Johnson, inspired by a speech by antisepsis advocate
Joseph Lister, joined brothers James Wood Johnson and Edward Mead
Johnson to create a line of ready-to-use surgical dressings in 1885. The
company produced its first products in 1886 and incorporated in 1887.

Robert Wood Johnson served as the first president of the company. He

worked to improve sanitation practices in the nineteenth century, and lent
his name to a hospital in New Brunswick, New Jersey. Upon his death in
1910, he was succeeded in the presidency by his brother James Wood
Johnson until 1932, and then by his son, Robert Wood Johnson II.

RWJ's granddaughter, Mary Lea Johnson Richards, was the first baby to
appear on a J&J baby powder label. His great-grandson, Jamie Johnson,
made a documentary called Born Rich about the experience of growing up
as the heir to one of the world's greatest fortunes.
Since the 1900s, the company has pursued steady diversification. It
added consumer products in the 1920s and created a separate division for
surgical products in 1941 which became Ethicon. It expanded into
pharmaceuticals with the purchase of McNeil Laboratories, Inc., Cilag, and
Janssen Pharmaceutical, and into women's sanitary products and toiletries
in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded
into such diverse areas as biopharmaceuticals, orthopedic devices, and
Internet publishing. Recently, Johnson & Johnson has purchased Pfizer's
Consumer Healthcare department. The transition from Pfizer to Johnson and
Johnson was completed December 18, 2006.

Johnson & Johnson has been consistently named one of the 100 Best
Companies for Working Mothers by Working Mother.

Along with Gatorade, Johnson & Johnson is one of the founding sponsors of
the National Athletic Trainers' Association.

About Ethicon (Brand Name)

Our company was founded 80 years ago on the pillars of research,
vision, innovation, and a commitment to improving the quality of patients’
lives. The first group of Ethicon scientists and researchers, who thought
about healing in a new way - and in doing so, pioneered our sutures to
enhance the work of surgeons and the lives of patients - recognized the
opportunity for limitless innovation.

Almost a century later, Ethicon produces much more than sutures. We have
continuously introduced innovations in all areas where we focus our
expertise including: wound closure; general surgery; biosurgery; women’s
health, and aesthetic medicine. While a lot has changed in healthcare, one
thing has not: Ethicon remains committed to developing the best surgical
solutions to help doctors heal both the wounds you can see and the ones
you can’t. Innovations that Restore Bodies...and Lives. How do we do it?
How do we stay on the cutting edge of science? By way of our greatest
asset: the talented, highly educated, experienced group of professionals
who work at ETHICON - 8,500 gifted professionals around the world come
together every day to advance, innovate, and respond to their customers’
needs. Our commitment to fulfilling the needs of surgeons and their
patients, of transforming surgery, of helping patients heal faster and more
safely is never ending. And so our work must be, too.
Ethicon has a legacy all its own. But we’re part of a broader heritage,
too. As a member of the Johnson & Johnson Family of Companies, we’re
guided by Our Credo: company values that empower all of our employees to
consider first the needs of our customers and patients we serve and to
improve the health, education, and quality of life in the communities where
we work and live.

Caring for the world, one person at a time… inspires and unites the
people of Johnson & Johnson. We embrace research and science - bringing
innovative ideas, products and services to advance the health and well-
being of people. Our 119,400 employees at more than 250 Johnson &
Johnson companies work with partners in healthcare to touch the lives of
over a billion people every day, throughout the world.

Suture Manufacturing Plants in



Growth & Expansion Of

Johnson & Johnson
Since our founding in 1886, we have grown to meet the health care
needs of people worldwide. Through mergers, acquisitions and the
formation of new companies, we have become the world’s largest and
most broadly based health care company. Here are some highlights of
our historical growth.

1886 – 1926: Johnson & Johnson Founded With Surgical

and Wound Care Products

In 1886, our founders – Robert Wood Johnson, James Wood Johnson

and Edward Mead Johnson – started a small medical products company
in New Brunswick, New Jersey. They made the first-ever commercial
sterile surgical dressings, which helped save the lives of patients.
• We introduced dental floss, the first Aid kits, sanitary napkins for
women, sterile sutures, JOHNSON’S Baby Powder, and BAND-AID
Brand Adhesive Bandages.
• Our international expansion began with Canada in 1919 and
England in 1924.
• Our disaster relief program began in 1906 when, within hours of
the San Francisco earthquake and fire, we sent trainloads of our
products to the city to help survivors.

1926 – 1946: Growth of Product Lines and Expansion

Overseas Help Johnson & Johnson Go Public

In 1943 our chairman Robert Wood Johnson wrote Our Credo, outlining
our responsibilities to doctors, nurses, patients, consumers,
employees, and the community. During this period we also continued
our overseas growth and began to broaden our efforts in
pharmaceuticals and medical products.
• We expanded into Mexico, South Africa, Australia, France,
Belgium, Ireland, Switzerland, Argentina, and Brazil.
• We introduced MODESS sanitary napkins and JOHNSON’S Baby Oil
and Baby Lotion. We also launched the first U.S. prescription birth
control product, ORTHO GYNOL Gel, in 1931.
• In 1944 we became a publicly traded company.

1946 – 1966: Continued Product Growth and Our Credo

Position Johnson & Johnson as Responsible Industry

We steadily continued our growth during these decades.
• We expanded to Zimbabwe, Austria, Sweden, the Philippines,
Colombia, Puerto Rico, the Netherlands, India, Scotland,
Pakistan, Zambia, Venezuela, Italy, Malaysia and Portugal.
• New companies formed or acquired included:
• ETHICON, Inc., Personal Products Company (products related
to women’s health);
• McNeil Laboratories, Inc. (bringing us TYLENOL
• European pharmaceutical companies Cilag Chemie, A.G. and
Janssen Pharmaceutical, and Codman & Shurtleff, Inc.
(medical and surgical instruments).
• In 1963 Ortho Pharmaceutical began marketing its first birth
control pill, ORTHO-NOVUM 10 mg.

1966 – 1986: Medical Advances Create Groundbreaking


Our operating companies pioneered several important medical

advances during this period. The acquisition of Frontier Contact Lenses
would grow into our vision care business, the pioneer in disposable
contact lenses. In 1985 we expanded to China. We introduced a wide
range of groundbreaking products during these decades including:
• RhoGAM a life saving treatment for hemolytic disease in
• HALDOL (haloperidol), the gold standard for treating
schizophrenia for over 25 years.
• MONISTAT (miconazole nitrate) Cream, a milestone product for
women’s health.
• VICRYL Synthetic absorbable sutures, an important new tool for
• The PROXIMATE Linear Stapler, a new way to close surgical
incisions without sutures.
• ORTHOCLONE OKT3, the first therapeutic monoclonal antibody to
treat the rejection of transplanted organs.
1986 – 2008: Industry Leadership Enhanced by Acquisitions
and Internal Development

From the 1980s to the present, we continue to grow through

acquisitions and internally developed businesses that give us
leadership positions in a number of areas.
• We acquired Life Scan, Inc. (blood glucose monitors for diabetics),
Neutrogena Corporation, and skin care brands such as CLEAN &
• The acquisition of DePuy, Inc. made us a world leader in
• We formed Ortho Biotech Products, LP (a biotechnology pioneer)
and Ethicon Endo-Surgery, Inc. (minimally invasive surgery) out of
internal businesses.
• We merged with Centocor, Inc. which brought us REMICADE
• Through our operating companies, we introduced the first mass
market disposable contact lenses, the first coronary stent and the
first drug eluting stent.
• Prescription medications we introduced during this period include:
• PROCRIT/EPREX (Epoetin Alfa)
• RISPERDAL (risperidone)
• RAZADYNE (galantamine hydro bromide)
• PREZISTA (darunavir)
• INVEGA (paliperidone) Extended Release Tablets
• INTELENCE (etravirine)

Looking to the Future

Johnson & Johnson is dedicated to advancing the health and well-being

of people around the world. Our people come to work each day
inspired by their personal knowledge that their caring transforms
people's lives. Our whole history has been based on their passion for
making a difference in this world and we aspire, in the years to come,
to take human health and well-being to new levels. We are arguably
the best-positioned company to do this because of our breadth,
financial strength and collaborative nature.


Johnson & Johnson Ltd. act upon the rules & regulations of the
Companies Act, 1948. The company has well defined structure
.It have the following departments:

1. HR/ Personnel department

2. Accounts departments

3. Purchase departments

4. Store department

5. Quality Assurance & Quality Control

6. IT department

7. R&D Department

8. Sales & Excise department

Research methodology is the way to systematically solve
the research problem. Objective of research study is Analysis of
inventory of Johnson & Johnson Ltd. Analyzing of inventory, we
determining following inventories-1. Raw materials inventory.

2. Work in progress inventory.

3. Finished goods inventory &

4. Supplies inventory.

In this section of inventories, we should analyze the annual

investment in inventories, Valuation of inventory after closing
balance of items in inventory. In this manner, we calculate
reorder point, safety stock levels, minimum & maximum levels of

Working hypothesis of the objective is that inventories are the

stock piles of goods .The all organization on their inventories. J&J
invests about 60%of total assets inventory should be analyzed
their records.

The analysis of inventory according to their data available in

the company. The data collection of inventory for analysis by the
direct store department. We should record primary and
secondary data by the helps of assistants ledger books M R N
etc. We went to the all inventories as raw material, work in
progress inventory, finished goods inventory by the proper
observation of data’s of the company.



Inventories constitute the most significant part of current

assets of a large majority of companies in India. On an
average, inventories are approximately 60% of current assets
in public limited companies in India. Because of the large size
of inventories maintained by firms, a considerable amount of
feuds is required to be committed to them. It is therefore,
absolutely imperative to ménage inventories efficiently and
efficiently in order to avoid unnecessary investment. A firm
neglecting the management of inventories will be jeopardizing
its long run profitability and may fail ultimately. It is possible
for fore a company to reduce its levels of inventories to a
considerable degree e.g. 10 to 20 percent, without any
adverse effect on production and sales, by using simple
inventory planning and control techniques. The reduction in
excessive inventory carries a favorable impact on a
company’s profitability.


Inventory is the physical stoke of goods maintained in an

organization for its smooth sunning. In accounting language it may
mean stock of finished goods only. In a manufacturing concern, it
may include raw materials, work-in-progress and stores etc. In the
form of materials or supplies to be consumed in the production
process or in the rendering of services. In brief, Inventory is
unconsumed or unsold goods purchased or manufactured.


Inventories are stock of the

product a company is manufacturing for sale and components that
make up the product. The various forms in which inventory exist in
a manufacturing company are raw materials, work in progress and
finished goods.

Raw materials are those inputs that are converted
into finished product though the manufacturing process. Raw
materials inventories are those units which have been purchased
and stored for future productions.


These inventories are semi manufactured products.

They represent products that need more work before they become
finished products for sales.


Finished goods inventories are those completely

manufactured products which are ready for sale. Stock of raw
materials and work in progress facilitate production. While stock of
finished goods is required for smooth marketing operation. Thus,
inventories serve as a link between the production and
consumption of goods.

The levels of three kinds of inventories for a firm depend on

the nature of its business. A manufacturing firm will have
substantially high levels of all three kinds of inventories, while a
retail or wholesale firm will have a very high and no raw material
and work in progress inventories. Within manufacturing firms,
there will be differences. Large heavy engineering companies
produce long production cycle products, therefore they carry large
inventories. On the other hand, inventories of a consumer product
company will not be large, because of short production cycle and
fast turn over. Firms also maintain a fourth kind of inventory,
supplies or stores and spares.


It includes office and plant cleaning materials like

soap, brooms, oil, fuel, light, bulbs etc. These materials do not
directly enter production, but are necessary for production
process. Usually, these supplies are small part of the total
inventory and do not involve significant investment. Therefore, a
sophisticated system of inventory control may not be maintained
for them.


The basic managerial objectives of inventory control are two-

fold; first, the avoidance over-investment or under-investment in
inventories; and second, to provide the right quantity of
standard raw material to the production department at the right
time. In brief, the objectives of inventory control may be
summarized as follows:
A.Operating Objectives:
(1) Ensuring Availability of Materials: There should
be a continuous availability of all types of raw materials in the
factory so that the production may not be help up wants of any
material. A minimum quantity of each material should be held in
store to permit production to move on schedule.

(2) Avoidance of Abnormal Wastage: There should be

minimum possible wastage of materials while these are being
stored in the godowns or used in the factory by the workers.
Wastage should be allowed up to a certain level known as
normal wastage. To avoid any abnormal wastage, strict control
over the inventory should be exercised. Leakage, theft,
embezzlements of raw material and spoilage of material due to
rust, bust should be avoided.

(3) Promotion of Manufacturing Efficiency: If the right

type of raw material is available to the manufacturing
departments at the right time, their manufacturing efficiency is
also increased. Their motivation level rises and morale is

(4) Avoidance of Out of Stock Danger: Information about

availability of materials should be made continuously available
to the management so that they can do planning for
procurement of raw material. It maintains the inventories at the
optimum level keeping in view the operational requirements. It
also avoids the out of stock danger.

(5) Better Service to Customers: Sufficient stock of finished

goods must be maintained to match reasonable demand of the
customers for prompt execution of their orders.
(6)Highlighting slow moving and obsolete items of

(7) Designing poorer organization for inventory

management: Clear cut accountability should be fixed at
various levels of organization.

B. Financial Objectives:

(1) Economy in purchasing: A proper inventory control

brings certain advantages and economies in purchasing also.
Every attempt has to make to effect economy in purchasing
through quantity and taking advantage to favorable markets.
(2) Reasonable Price: While purchasing materials, it is to be
seen that right quality of material is purchased at reasonably
low price. Quality is not to be sacrificed at the cost of lower
price. The material purchased should be of the quality alone
which is needed.

(3) Optimum Investing and Efficient Use of capital: The

basic aim of inventory control from the financial point of view is
the optimum level of investment in inventories. There should be
no excessive investment in stock, etc. Investment in inventories
must not tie up funds that could be used in other activities. The
determination of maximum and minimum level of stock attempt
in this direction.


1. Movement Inventories: - Movement inventories are also called

transit or pipeline inventories. Their existence owes to the fact that
transportation time is involved in transferring substantial amount of
2. Buffer inventories: -In Buffer inventories are held to protect against
the uncertainties of demand and supply. An organization generally knows the
average demand for various items that it needs. Prod.deptt. issue store
inspect receive supplier



Inventory in

Hand place




Net order issue receive tender

Quantity tenders quotation evaluations

Inventory cycle

3. Anticipation Inventories. Anticipation inventories are held for the

reason that future demand for the product is anticipated. Production of
specialized times like crackers well before dewily, umbrellas and raincoats
before taints set in, fans while summers are approaching; or the piling up of
inventory stocks when a strike is on the anvil, are all examples of
anticipation inventories.


Rigid control over materials are necessary not only to guard against theft,
but also to minimize waste and misuse from causes such as excessive
inventories, over issue, deterioration, spoilage, and obsolescence. There are
certain prerequisites to an effective control system for materials:

1. Materials of the desired quantity will be available when needed;

2. Materials will be purchased only when a need exists and in economical


3. Purchases of materials will be made at most favorable prices;

4. Vouchers for the payments of materials purchased will be approved only

if the materials have been received in good condition;

5. Materials will be protected against loss by proper physical control;

6. Issue of materials will be properly authorized and accounted for; and

7. All materials, at all times, will be charged, as the responsibility of some


The control of materials, as an element of cost of production, is illustrated

with reference to the purchase and issues procedures, inventory systems,
and inventory control techniques.

The importance or necessity of inventory control is well
explained in the terms of the objects of inventory control, which
are obtained through it. A proper inventory control lowers down
the cost of production and improves profitability of enterprise.

(1) Reduction in investment in inventory.

(2) Proper and efficient use of raw materials.

(3) No bottleneck in production.

(4) Improvement in production and sales.

(5) Efficient and optimum use of physical as well as financial


(6) Ordering cost can be reduced if a firm places a few large

orders in place of numerous small orders.

(7) Maintenance of adequate inventories reduces the set-up cost

associated with each production run.
Risk and cost Associated with
Holding of Inventories expose the firm to a number of risks and
Major risks are:
(a) Price decline: They may be due to increase in market supply of
the product, introduction of a new competitive product, price-cut
by the competitors etc.
(b) Product deterioration: This may due to holding a product for
too long a period or improper storage conditions.
(c) Obsolescence: This may due to change in customer’s taste,
new production technique, improvements in product design,
specifications etc.

The Costs of holding inventories are as follows:

(a) Material Cost: This include the cost of purchasing the goods,
transportation and handling charges less any discount allowed
by the supplier of goods.

(b) Ordering Cost: This includes the variables cost associated

with placing an order for the goods. The fewer the orders, the
lower will be the ordering costs for the firm.
(c) Carrying Cost: This includes the expenses for storing and
handling the goods. It comprises storage costs, insurance costs,
spoilage costs, cost of funds tied up in inventories etc.

For an efficient and successful inventory control there are
certain important conditions that are as follows:
(1) Classification and Identification of inventories: The
usual inventory of manufacturing firm includes raw-
material, stores, work-in-progress and component etc. To
facilitate prompt recording the dealing, each item of the
inventory must be assigned a particular code number and it
must be classified in suitable group or sub-divisions. ABC
analysis of material is very helpful in this context.
(2) Standardization and simplification of inventories:
In order to facilitate inventory control, the inventory line should
be simplified. It refers to the elimination of excess types and
sizes of items. Simplification leads to reduction in classification
of inventories and its carrying costs. Standardization, on the
other hand, refers to the fixation of standards of raw material to
be purchased and specification of the components and tools to
be used.
(3) Setting the Maximum and Minimum limits for each
part of inventory: The third step in this process is to set the
maximum and minimum limits of each item of the inventory. It
avoids the chances of over-investment as well as running a
short of any item during the cost of producing. Reordering point
should also be fixed beforehand.

(4) Economic Order Quantity: It is also a basic

inventory problem to determine the quantity as how much
to order at a time. In determining the EOQ, the problem is
one to set a balance between two opposite costs, namely,
ordering costs and carrying costs. This quantity should be
fixed beforehand.

(5)Adequate storage Facilities: To make the system of

inventory control successful and efficient one, it is also
essential to provide the adequate storage facilities. Sufficient
storage area and proper handling facilities should be

(6)Adequate Reports and Records: Inventory control

requires the maintenance of adequate inventory record and
reports. Various inventory records must contain information
to meet the needs of purchasing, production, sales and
financial staff. The typical information required about any
class of inventory may be relating to quantity on hand,
location, quantities in transit, unit cost, code for each item of
inventory, reorder point, safety level etc. Statements forms
and inventory records should be so designed that the clerical
cost of maintaining these records must be kept a minimum.

(7)Intelligent and Experienced Personnel: An important

requirement of successful inventory control system is the
appointment of qualified and experienced staff in purchase
and stores department. Mere establishment of procedures
and the maintenance of records would not give the desired
results as there is no substitute for sincere and devoted as
well as experienced hands. Hence, the whole inventory
control structure should be manned with trained, qualified,
experienced and devoted employees.

(8)Coordination: There must be proper coordination of all

departments involved in the process of inventory control,
such as purchase, finance, receiving, approving, storage and
accounting departments. These all departments have
different outlook and objects in inventory management but
financial manager has to coordinate them all.
(9)Budgeting: An efficient budgeting system is also required.
Preparation of budgets concerning materials, supplies and
equipment to ensure economy in purchasing and use of material
is also necessary.

(10)Internal Check: Operating of a system of internal check is

also vital in inventory management so that all transactions
involving material supplies and equipment purchase are
properly approved and automatically checked.

These factors can be put in two categories: General and


General Factors: These factors include those factors, which

affect directly or indirectly level of investment in any asset.
These are as follows:

(1) Nature of Business

(2) Size and scale of Business
(3) Expected Sales Volumes
(4) Price Level Changes
(5) Availability of Funds
(6) Management view Point

Specific Factors: These factors are directly related with

investment in stock. Following are the main factors:
(1) Seasonal Character of Raw Materials: If supply of
raw material used in the firm is seasonal, the firm will require
more funds for the purchase of raw material during season.
Usually, raw materials are available at cheaper rates during its
production season.
(2) Length and Technical Nature of the production
process: If production process is lengthy and of technical
nature, higher investment is required in raw material. In the
technical nature production process, quality control of raw
material is given more emphasis.
(3) Terms of Purchase: If some concessions or discount in
price or facilities of credit are provided by suppliers on purchase
of raw materials in huge quantity then the firm is inspired for
excessive purchase of goods and hence comparatively more
investment is required in inventory.
(4) Nature of End Product: Nature of end product also
influences investment in inventory. If the end product is a
durable good, high investment will be required because durable
goods can be stored for a long period. On the other hand,
perishable goods cannot be stored for a long period. Hence,
investment in inventory of such products is low.
(5) Supply Conditions: If the supply of raw material is regular
and there is no possibility of interruption in future, high
investment in inventories is not required.
(6) Time Factor: The lead time of raw material time token in
production process and sale of product also influence
investment in inventories. Longer the period, higher will be the
investment in inventories.
(7) Loan Facilities: If raw materials are purchased on credit or
loan from the bank or other financial institution can be obtained
on the security of raw material, lesser investment would be
required. In the absence of such loan facility, higher investment
would be required.
(8) Price Level Fluctuations: If there are expectations of price
rise in future then raw materials may be store in high quantity
and so more investment would be required. On the contrary, if
the prices of raw materials are expected to go down in future,
then comparatively lesser investment would be required.


In managing inventories, the firm’s objective should be in

consonance with the wealth maximization principle. To achieve
this, the firm should determine the optimum level of investment
in inventory. To deal with the problems of inventory
management effectively, it becomes necessary to be conversant
with the different techniques of inventory control. Although the
concepts involved in inventory management are production-
oriented and are not strictly financial it is important that the
financial manager understand them since they have certain
built-in financial costs. The different techniques of inventory
control may be summarized as follows:

(1) Inventory level Technique

The main objective of stock control is to determine and
maintain the optimum level of stock so that there is neither
shortage of any material nor unnecessary investment in
inventory. For this purpose, determination of maximum and
minimum limits of inventory and ordering level is necessary.
(2) Maximum stock Limit: This represents the quantity of
inventory above which it should not be allowed to be kept. The
main object of fixing this limit is to ensure that unnecessary
working capital is not blocked in stores. The quantity is fixed
keeping in view the disadvantages of overstocking.
The disadvantages of overstocking are:

1. Capital is blocked up unnecessarily in stores so there will be

loss of interest.
2. More godown space is needed so more rent will have to be
3. There are chances of deterioration in quality because large
stocks will require more time for use is the factory.
4. There is the possibility of loss due to obsolescence.
5. There is danger of depreciation in market values.

The maximum stock level is fixed by taking into account

the following factors:

(1) Amount of capital available for maintaining stores.

(2) Godown space available.

(3) Rate of consumption of the material.

(4) The time lag between indenting and receiving of the


(5) Length and technical nature of the production process.

(6) Possibility of loss in stores by deterioration, evaporation etc.

There are certain stores, which deteriorate in quality if they are
stored for longer period.
(7) Cost of maintaining stores.

(8) Likely fluctuation in prices. For instance, if there is a

possibility of a substantial increase in prices in the coming
period, a comparatively large maximum stock level will be fixed.
On the other hand, if there is the possibility of decrease in price
in the near future, stocks are kept at a much reduced level.

(9) The seasonal nature of supply of material. Certain materials

are available only during specific periods of year. So these have
to be stocked heavily during these periods.

(10)Restrictions imposed by the government or local authority in

regard to materials which there are inherent risks, e.g. fire and

(11)Risk of obsolescence, i.e., possibility of change in fashion

and habit which will necessitate change in requirements of

The following formula may be applied to calculate the

maximum stock:
(1) Maximum Stock = Minimum Inventory + Lot size

(2) Maximum Stock = Reorder Level - Minimum consumption

during Minimum lead time + Lot size

Minimum Stock Limit (Safety or Buffer stock)

This represents the quantity below which stock should not

be allowed to fall. It is maintained to save from the situation of
stock out in the event of abnormal increase in material usage
rate and/or delivery period. In fact determination of this quantity
is significant because of uncertainty in respect to material usage
rate and delivery period. The main purpose of this level is to
ensure that production is not held up due to shortage of any
material. This level is fixed for all items of stores and following
factors are taken into account for the fixation of this level:

(a) Lead time i.e. time lag between intending and receiving the

(b) Rate of consumption of the material during the lead time.

(c) Re-order Level
The following formula is applied to calculate Minimum
Minimum Stock = Re-order Level - Normal usage during
Normal Lead time

But if normal usage and normal lead time is not known then
average usage will be treated as normal usage and average re-
order will be treated as normal re-order period.

Re-ordering Level (Ordering Level)

It is the point at which if the stock of the material in stores
reaches, the storekeeper should initiate the purchase requisition
for fresh supply of material. This level is fixed somewhere
between maximum and minimum level is such a way that the
difference of quantity of the material between the reordering
level and the minimum level will be sufficient to meet
requirements of production up to the time of fresh supply of the
material. It is fixed after taking into consideration the following

(a) Rate of material usage: Generally this rate is found out as

usage rate per day, pre week or per month. The quantity of
production fluctuates according to demand of the product which
results in variation in usage rate.
Hence, the following three factors:

(i) Maximum usage rate: It implies quantity of material required

at maximum capacity production.
(ii) Minimum usage rate: It implies quantity of material required
at capacity production in most unfavorable business conditions.

(iii) Normal or average Usage Rate: It implies quantity of

material required at capacity production under normal business

(b) Ordering Period: The time taken in preparing the order for
purchase of material is called ordering period. In some concerns
this period may be significant but in large concerns this period is
significant because before placing the order the purchase
manager has to trace out the best suppliers, after that only he
places the order.

© Delivery, Lead or Procurement Time: The time taken

from the date of placing the order to the date of delivery by the
suppliers is called procurement time. The maximum, minimum
and average procurement time should also be determined.
(D) Minimum Stock Level: This is the level of stock below
which stocks should normally not be allowed to fall.

Calculation of Re-order Point:

After taking into account the above facts re-order quantity is
ascertained. For this purpose, the following formula is applied:
When rate of usage and lead time are known with certainty;
Re-order point = Rate of usage x lead time.

When rate of usage is known with certainty and lead time is also
known but is variable:

(i) Re-order point = Minimum Inventory + Average usage during

Normal lead Time.
(ii) Re-order point = Rate of usage x Maximum Lead Time.
When rate of usage and lead time is known but variable and
lead time is known with certainty:
(i) Re-order point = Minimum Inventory +
Average usage during lead time.
(ii) Re-order point = Maximum Usage rate
x Lead time.

When the rate of usage and lead time are known and are

(i) Re-order point = Minimum Inventory + Average usage during

lead period.
(ii) Re-order point = Maximum Usage rate x Maximum Lead time.

Danger Level

This means a level at which normal issues of the material are

stopped and issues made only under specific instructions. The
purchase officer will make special arrangements to procure the
materials reaching at their danger levels so that the production
may not stop due to shortage of materials. It is determined as

Danger level = Average Consumption x Maximum Re-

order period for Emergency Purchase

One of the major inventory management problems to be

resolved is how much inventory should be added when inventory
is replenished. If the firm is buying raw materials, it has to decide
lost in which it has to be purchased on replenishment. If the firm is
planning a production run, the issue is how much production to
schedule (or how much to make). These problems are called
order quantity problems, and the task of the firm is to
determine the optimum or economic order quantity (or economic
lot size). Determining an optimum inventory level involves two
type of costs: (a) ordering costs and (b) carrying costs: The
economic order quantity is that inventory level that minimize the
total of ordering and carrying costs.

Ordering costs: the term ordering costs is used in case of raw

materials (or supplies) and includes the entire costs of acquiring
raw materials. They include costs incurred in the following
activities: requisitioning, purchase ordering, transporting,
receiving, inspecting and storing (store placement). Ordering costs
increase in proportion to the number of order placed.

Ordering costs increase with the number of order; thus the more
frequently inventory is acquired, the higher the firm’s ordering
costs. Ordering costs decrease with increasing size of inventory.

Carrying costs: Costs incurred for maintaining a given level of

inventory are called carrying costs. They include storage,
insurance, taxes, deterioration and obsolescence. The storage
costs comprise cost of storage space (warehousing cost), stores
handing costs and clerical and staff service costs (administrative

Table: Ordering and Carrying Costs

Ordering Costs Carrying Costs

(1)Requisitioning (1) Warehousing

(2)Order placing (2) Handling

(3) Transportation (3) Clerical and staff

(4) Receiving inspecting and storing (4) Insurance

(5) Clerical and staff (5) Deterioration

Carrying costs vary with inventory size. The economic size of
inventory would thus depend on trade-off between carrying costs
and ordering costs.

Ordering and Carrying Costs trade-off: The optimum

inventory size is commonly referred to as economic order
quantity. It is that order size at which annual total costs of
ordering and holding are the minimum. We can follow three
approaches-the trial and error approach, the formula approach
and the graphic approach-to determine the economic order
quantity (EOQ).

Trail and Error Approach: The trail and error, or analytical,

approach to resolve the order quantity problem can be illustrated
with the help of a simple example. Let us assume the following
data for a firm.

Estimated three month requirements, A

1,200 Dz.

Purchasing cost (per order), (Rs) 50

Ordering cost (per order), (Rs.) 37.50

Carrying cost per unit, (Re) 1

Average inventory - (1200 + 0)/2 = 600 units

Average value - Rs 30,000 (600*Rs50)

If we choose the multiple order than we order 100units on

monthly basis

Average inventory - (400+0)/2 = 150units)

Average value - 150 * Rs 50 = 7, 500

Many other possibilities can be worked out in the same manner.






Stock 400


0 2 4 6 8 10 15


Inventory level over time

Order- formula approach: The trial error, or analytical,

approach is somewhat tedious to calculate the EOQ. An easy
way to determine EOQ is to use the order-formula approach. Let
us illustrate this approach.

Suppose the ordering cost per order, O, is fixed. The total

order costs will be number of orders during the year multiplied
by ordering cost per order. If a represents total annual
requirements and Q the order size, the number of orders will be
A/Q and total order costs will be:

Total ordering cost = (Annual requirement * Per order cost)

Order size

Let us further assume the carrying cost per unit, c, is constant

The total carrying costs will be the product of the average

inventory units and the carrying cost per unit.

If Q is the order size and usage is assumed to be steady, the

average inventory will be.

Average inventory = order size = Q

2 2

And total carrying costs will be:

Total carrying cost = Average inventory

* Per unit carrying cost

TCC = Qc

The total inventory cost, then, is the sum of total carrying
and ordering costs:

Total cost = Total carrying cost + Total order cost

TC = Qc + AO

2 Q

Equation (4) reveals that for a large order quantity, Q, the carrying
cost will increase, but the ordering costs will decrease. On the
other hand, the carrying costs will be lower and ordering cost will
be higher with the order quantity. Thus, the total cost function
represents a trade-off between the carrying costs and ordering
costs for determining the EOQ.

To obtain the formula for EOQ, Equation (4) is differentiated with

respect to Q and setting the derivative equal to zero, we obtain:

Economic order quantity = 2* quantity required * ordering cost

Carrying cost


Graphic approach:

The economic order quantity can also be found out graphically.

Figure illustrates the EOQ function. In the figure, costs-carrying,
ordering and total- are plotted on vertical axis and horizontal axis
is used to represent the order size. We note that total carrying
costs increase as the order size increasers, because, on an
average, a larger inventory level will be maintained, and ordering
costs decline with increase in order size means less number of
orders. The behaviors of total costs line is noticeable since it is a
sum of two types of cost which behave differently with order size.
The total costs decline in the first instance, but they start rising
when the decrease in average ordering cost is more than offset by
the increase in carrying costs. The economic order quantity occurs
at the point Q* where the total cost is minimum. Thus, the firm’s
operating profit is maximized at point Q*.

Minimum total


Carrying cost
Costs ordering cost

Q* order size (Q)

Economic order quantity

Optimum productions run:

The use of the EOQ approach can be extended to production

runs to determine the optimum size of manufacture. Two costs
involved are set-up costs and carrying costs. Set-up costs include
costs on the following activities: preparing and processing the
stock orders, preparing drawings and specifications, tooling
machines set-up, handling machines, tools, equipment and
materials, over time etc. Production runs but carrying costs will
increase as large stocks of manufactured inventories will be held.
The economic production size will be the one where the total of
set-up and carrying costs is minimum.

Reorder Point:

The problem, how much to order, is solved by determining the

economic order quantity, yet answer should be sought to be
second problem, when to order. This is a problem of determining
the reorder point. The reorder point is that inventory level at
which an order should be placed to replenish the inventory. To
determine the reorder point under certainty, we should known: (a)
lead time (b) average usage, and (c) economic order quantity.
Lead time is the normally taken is replenishing inventory after
the order has been placed. By certainty we mean that usage and
lead time do not fluctuate. Under such a situation, reorder point is
simply that inventory level which will be maintained for
consumption during the lead time. That is:

Reorder point = Lead * Average usage

Safety stock:

The demand for inventory is likely to fluctuate from time to

time. In particular, at certain points of time the demand may
exceed the anticipated level. In other words, a discrepancy
between the assumed (anticipated/expected) and the actual usage
rate of inventory is likely to occur in practice.

The effect of increased usage and/or slower delivery would be

shortage of inventory. That is, the firm would disrupt production
schedule and alienate the customers. The firm would, therefore,
be will advised to keep a sufficient safety margin by having
additional inventory to guard against stock-out situation. Such
stocks are called safety stocks. This would act as a buffer/cushion
against a possible shortage of inventory. Safety stock may,
thus, be defined as minimum additional inventory to serve as
safety margin/buffer/cushion to meet unanticipated increase in
usage resulting from unusually high demand and/or uncontrollable
late receipt of incoming inventory.

The carrying costs are the costs associated with the maintenance
of inventory. Since the firm is required to maintain additional
inventory, in excess of the normal usage, additional carrying costs
are involved.

The stock-out and carrying costs are counterbalancing. The larger

the safety stock, the larger the carrying costs and vice versa.
Conversely, the larger the safety stock, the smaller the stock-out

Max. Inventory

Average usage

Avg. inventory----------------------------------------------------

Re-order point-----------------------------------------------------


Safety stock -------------------------------------------------------

Weeks lead time

Re-order point under safety stock

VED Analysis: The VED analysis is used generally for spare

parts. The requirement and urgency of spare parts is different
from that of materials. A-B-C analysis may not be properly used for
spare parts. The demand for spares depends upon the
performance of the plant and machinery. Spare parts are classified
as: Vital (V), Essential (E) and Desirable (D). The vital spares are a
must for running the concern smoothly and these must be stored
adequately. The non-availability of vital spares will cause havoc in
the concern. The E types of spares are also necessary but their
stocks may be kept at low figures. The stocking of D types of
spares may be avoided at times. If the lead time of these spares is
less, then stocking of these spares can be avoided.

The classification of spares under three categories is an important

decision. A wrong classification of any spare will create difficulties
for production department. The classification of spares should be
left to the technical staff because they know the need, urgency
and use of these spares.

Assumptions: In applying EOQ formula, it is assumed that:

(i) Total demand is known with certainty.

(ii) The usage rate of material is steady.
(iii) Orders for replenishment on inventory are placed exactly
when inventories reach ordering level.
(iv) The ordering cost per order and holding cost per unit are

EOQ and Total Inventory Cost: At EOQ level total inventory

cost is minimum. Total inventory cost is the sum of material
purchase cost, ordering cost and carrying cost

As per the formula:

Total Inventory Cost (TIC) = Material Purchase Cost + Total
Ordering Cost + Total Carrying Cost
= (R x P) + (R/Po x Cp) + (Qo/2 x Ch)

Discount Offer and Economic Order Quantity:

Sometimes supplier offers different discounts on orders of large
quantity. In such a situation, at first we should calculate EOQ
and find out TIC without considering discount offer. Then we
should calculate TIC of each alternative offer. That quantity will
be EOQ at TIC is the lowest.


Perpetual inventory system implies maintenance of up-to-

date stock records and in its broad sense it covers both
continuous stock taking as well as up-to-date recording stores
books. According to Weldon, It may be defined as “a method of
recording stores balances after every receipt and issue to
facilitate regular checking and to obviate closing down for sock-
taking”. The basic object of this system is to make available
details about the quantity and value of stock of each item at all
times. The system thus provides a rigid control over stock of
each item of store can regularly be verified with the stock
records in the bin cards kept in the stores and stores ledger
maintained in cost office.
Advantages of Perpetual Inventory system:

1. Saving in time: The long and costly work

of stocktaking is avoided. Hence, interim and final financial
accounts can be prepared with greater convenience.

2. Arrangement of proper verification: In

this system a detailed and more reliable checking of the store is
exercised because of the continuous and random checking.

3. Verification of Errors: Errors are easily

located and rectified. This gives an opportunity for preventing a
recurrence in many cases.

4. Double control: Due to separate records

in Bin card and stores ledger, double control is maintained.

5. Optimum size of material: Overstocking

and under stocking can be avoided because perpetual inventory
system covers verification of stock with regards to maximum,
minimum and other levels.
6. Lack of misuse of Material: Under this
system, effective control on issue of material is possible, thus
misuse of material can be avoided.
7. Moral Check on Stores staff: Due to
continuous checking, this system serves as a moral check on
the stores staff. They are discouraged from committing
8. Loss of stock due to obsolescence: It is
detected at an early stage and so timely action can be taken to
prevent recurrence.



Most manufacturing firms find themselves confronted with

virtually thousands of different inventory items. Most of these
items are relatively inexpensive, while other items are quite
expensive and account for a large portion of the firm’s
investment. Some inventory items, although not expensive,
turnover slowly and therefore, they require a high average
investment. The firm should classify them into A.B.C category
items. Category A will include more expensive items (in cost of
product) with high investment and it will require more intensive
The ‘B’ group will consist of the items accounting for the next
largest investment.

The ‘C’ group will consist of a large number of items of inventory

accounting for small investment.

The ‘A’ items require intensive inventory control and most

sophisticated inventory control techniques should be applied to
these items.

The ‘B’ items can be controlled using less sophisticated

technique, and their level can be viewed less frequently than ‘A’

The ‘C’ items can receive the minimum attention: they will
probably be ordered in large quantities in order to obtain them
at the lowest price.

Though the ABC technique is a good technique but it cannot be

universally applied. Certain items of inventory may be
inexpensive but may be critical to the product in process and
cannot be easily obtained. Therefore, they may require special
These types of items must be treated as “A” class items even
though, using the broad framework, they would be “B” or “C”
class items.

Although, not perfect, the ABC system is an excellent method

for determining the degree of inventory control efforts required
to expand each item of inventory.

The following points should be kept in mind for ABC


(1) Where items can be

substituted for each other, they should be preferably treated as
one item.
(2) More emphasis should be
given to the value of consumption and not to price per unit of the
(3) All the items consumed by
an organization should be considered together for classifying as A,
B or C instead of taking item as spare, raw materials, semi-finished
and finished items and then classifying as A, B and C.
There can be more then three classes and the period of
consumption need not necessarily be one year
Application of ABC Analysis:

ABC analysis can be effectively

used in Material Management. The various stages where it can be
applied are:

(1) Information of items which

require higher degree of control.
(2) To evolve useful re-ordering
(3) Stock records.
(4) Priority treatment to different
(5) Determination of safety
stock items.
(6) Stores layout.
(7) Value analysis.

Just-in-time (JIT) System:

Japanese firms popularized the just-
in-time (JIT) system in the world. In a JIT system material or the
manufactured components and part arrive to the manufacturing
sites or stores just few hours before they are put to use. The
delivery of material is synchronized with the manufacturing cycle
and speed. JIT system eliminates the necessity of carrying large
inventories, and thus, saves carrying and other related costs of
manufacturer. The system requires perfect understanding and
coordination between the manufacturer and supplier in terms of
the timing of delivery and quality of the material. Poor quality
material or complements could halt the production. The JIT
inventory system complements the total quality management
(TQM). The success of the system depends on how well a
company manages its suppliers. The system puts tremendous
pressure on suppliers. They will have to develop adequate system
and procedures to satisfactory meet the needs of manufacturers.

System of Accounting for Material Issued/Inventory


Either the periodic inventory system or the perpetual inventory

system may be used to account for materials issued to production
and ending materials inventory.
Periodic Inventory System

Under the periodic inventory system,

the purchase of materials is recorded in Purchase of Raw
Materials Account. The opening/beginning inventory, if any, is
recorded in a separate Materials Inventory- Opening Account.
The materials available for use during a period equal purchases
plus opening inventory. A physical count is made of the materials
on hands at the end of the period to arrive at the closing/ending
materials inventory. The cost of materials for the period is
determined as shown in Exhibit:

Cost of Materials Issued

Materials inventory-opening

+ Purchases

= Materials available for use

- Materials inventory-closing (based on physical count)

= Cost of materials issued

The entire book inventory is verified at a given date by an actual
count of materials on hand. This physical inventory is usually
taken near the end of the accounting year/period. This method
provides for the recording of the purchases on a daily basis but
does not provide for a continuous inventory-taking. Neither a
physical count is made of the quantity of goods on hand, nor the
value of the inventory in determined by using an appropriate
pricing method and attaching costs to units counted. It is assumed
that goods not on hand at the end of the period have been sold.
There is no system and accounting period, and they can be
discovered only at the end.


One important technique of inventory control is to use

inventory turnover ratios. These ratios are calculated to assess
the efficiency in use of inventories. Following control ratios can
be computed for inventory analysis:
(i) Inventory Turnover Ratio = Cost of goods sold/ Average

Where Average Inventory = (Opening Inventory + Closing

Inventory Turnover Ratios ca be calculated separately for raw
materials and finished goods.

(A) Raw Material Turnover Ratio = Raw Material Consumed/

Average stock of Raw material.

(B) Finished Goods Turnover Ratio = Cost of Goods Sold/

Average Stock of Finished Goods

Average Age of inventory of inventory Turnover in Days = Days

during the period/ Inventory Turnover Ratio

(ii) Average inventory to total cost of production =

(Average Inventory/ total cost of production) x 100

(iii) Slow Moving Stores to Total Inventory = Average Cost

of Slow Moving Stores/Average Inventory

(iv) Inventory Performance Index = (Actual Material

Turnover Ratio/ Standard Material Turnover Ratio) x 100

These ratios provide a broad framework for the control and

provide the basis for future decisions regarding inventory
control. The ratios provide a tough indication of when Inventory
levels are going to be high. Even if it appears from the ratio that
the levels are too high there might be a perfectly good reason
why the level of Inventory is being maintained. The ratios also
indicate the situation and trend. However, the limitation of
ratios should be kept in mind. They are not an end themselves,
but only tools of sound Inventory Management.



Inventory represents a large investment by manufacturing

concern: therefore, great emphasis must be placed on its
efficient management. Though, the operative responsibility for
Inventory management lies with the inventory manager, the
financial manager must also be concerned with all types of
inventories- raw materials, work-in-progress and finished goods.
He must monitor Inventory levels and see that only an optimum
amount is invested in Inventory. He should be familiar with the
Inventory control techniques and ensure that Inventory is
managed well.
He should try to resolve the conflicting view points of all the
departments in order to have efficient inventory management.
He has to act as a careful inspector levels. He should introduce
the policies which reduce the lead time, regulate usage and
thus, minimize safety stock. All these techniques of Inventory
management lead to the goal of wealth maximization.



A primary issue in accounting for inventories is the

determination of the value at which inventories are carried in
the financial statements until the related revenues are
recognized. This statement deals with the determination of such
value, including the ascertainment of cost of inventories and
any write-down thereof to net realizable value.

1. This statement should be applied in accounting for

inventories other than:

(a) Work-in-progress arising under construction contacts, including

directly related service contracts.

(b) Work-in-progress arising in the ordinary course of business of

service providers.

(c) Shares, debentures and other financial instruments held as

(d) Producer’s inventories of livestock, agricultural and forest
products and mineral oils, ores and gases to the extent that
they are measured at net realizable value in accordance with
well established practices in those industries.

2. The inventories referred are measured at net realizable

value at certain stages of production. This occurs, for example,
when agricultural crops have been harvested or mineral oils,
ores and gases have been extracted and sale is assured under a
forward contract or a government guarantee or when a
homogenous market exists and there is a negligible risk of
failure to sell. These Inventories are excluded from the scope of
this statement.


The following terms are used in this statement with the

meanings specified:

Inventories are assets:

(a) Held for sale in the ordinary course of business.

(b) In the process of production for such sale, or
(c) In the form of materials or supplies to be consumed in
the production process or in the rendering of services.

1. Inventories encompass goods purchased and held for resale,

for example, merchandise purchased by a retailer and held for
resale, computer software held for resale, or land and other
property held for resale. Inventories also encompass finished
goods produced, or work-in-progress being produced, by the
enterprise and include materials, maintenance supplies,
consumables and loose tools awaiting use in the production
process. Inventories do not include machinery spares which can
be used only in connection with an item of fixed asset and
whose use is expected to be irregular; such machinery spares
are accounted for in accordance with Accounting Standard (AS)
10, Accounting for Fixed Assets.

2. Inventories should be valued at lower of cost net realizable


3. Cost of Inventories
The cost of inventories should comprise all costs of purchase,
costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
4. Costs of Purchase
The costs of purchase consist of the purchase price including
duties and taxes (other than those subsequently recoverable by
the enterprise from the taxing authorities), freight, inwards and
other expenditure directly attributable to the acquisition. Trade
discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase.

5. Costs of Conversion
The costs of conversion of inventories include costs
directly related to the units of production, such as direct
labour. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting
materials into finished goods. Fixed production overheads are
those indirect costs of production that remain relatively
constant regardless of the volume of production, such as
depreciation and maintenance of factory buildings and the cost
of factory management and administration. Variable production
overheads are those indirect costs of production that vary
directly, or nearly with the volume of production such as indirect
materials and indirect labour.

6. The allocation of fixed production overheads for purpose of

their inclusion in the costs of conversion is on based on the
normal capacity of the production facilities. Normal capacity is
the production expected to be achieved on an average over a
number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned
maintenance. The actual level of production may be used if it
approximates normal capacity. The amount of fixed production
overheads allocated to each unit of production is not increased
as a consequence of low production or idle plant. Unallocated
overheads are recognized as an expense in the period in which
they are incurred. In periods of abnormally high production, the
amount of fixed production overheads allocated to each unit of
production is decreased so that inventories are not measured
above cost. Variable production overheads are assigned to each
unit of production on the basis of the actual use of the
production facilities.

7. A production process may result in more than one product

being produced simultaneously. This is the case, for example,
when joint products are produced or when there is a main
product and a by- product. When the costs of conversion of each
product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The
allocation may be based, for example, on the relative sales
value of each product either at the stage in the production
process when the products become separately identifiable, or at
the completion of production. Most by- products as well as scrap
or waste materials, by their nature, are immaterial. When this is
the case, they are often measured at net realizable value and
this value is deducted from the cost of the main product. As a
result, the carrying amount of the main product is not materially
different from its cost.

8. Other costs are included in the costs of inventories only to the

extent that they are incurred in bringing the inventories to their
present location and condition. For example, it may be
appropriate to include overheads other than production
overheads or the costs of designing product for specific
customers in the cost of inventories.

9. Interest and other borrowing costs are usually considered as

not relating to bringing the inventories to their present location
and condition and are, therefore, usually not included in the cost
of inventories.

10. Exclusions from the cost of Inventories

In determining the cost of inventories in accordance with
paragraph 3. It is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are
incurred. Examples of such costs are;

1. Abnormal amounts of wasted materials, labour, or other

production costs.

2. Storage costs, unless those costs are necessary in the

production process prior to a further production stage.

3. Administrative overheads that do not contribute to bringing

the inventories to their present location and condition, and

4. Selling and distribution costs.

11.The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and
segregated for specific projects should be assigned by specific
identification of their individual costs.

12.Specific identification of cost means that specific costs are

attributed to identify items of inventory. This is an appropriate
treatment for items that are segregated for a specific project,
regardless of whether they have been purchased or produced.
However, when there are large numbers of items of inventory
which are ordinarily interchangeable, specific identification of
costs is inappropriate since, in such circumstances, an
enterprise could obtain predetermined effects on the net profit
or loss for the period by selecting a particular method of
ascertaining the items that remain in inventories.

13. The cost of inventories, other than those dealt with in

paragraph 11, should be assigned by using the first-in, first-out
(FIFO), or weighted average cost formula. The formula used
should reflect the fairest possible approximation to the cost
incurred in bringing the items of inventory to their present
location and condition.
14. A variety of cost formulas is used to determine the cost of
inventories other than those for which specific identification of
individual costs is appropriate. The formula used in determining
the cost of an item of inventory needs to be selected with a view
to providing the fairest possible approximation to the cost
incurred in bringing the item to its present location and

The FIFO formula assumes that the items of inventory which

were purchased or produced first are consumed or sold first, and
consequently the items remaining in inventory at the end of the
period are those most recently purchased or produced. Under
the weighted average costs formula, the cost of each item is
determined from the weighted average of the cost of similar
items at the beginning of a period and the cost of similar items
purchased or produced during the period. The average may be
calculated on a periodic basis or as each additional shipment is
received, depending upon the circumstances of the enterprise.

15. Techniques for the measurement of the cost of

inventories, such as the standard cost method or the retail
method, may be used for convenience if the results approximate
the actual cost. Standard costs take into account normal levels
of consumption of materials and supplies, labour, efficiency and
capacity utilization. They are regularly reviewed and if
necessary, revised in the light of current conditions.

16. The retail method is often used in the retail trade for
measuring inventories of large numbers of rapidly changing
items that have similar margins and for which is impracticable
to use other costing methods. The cost of the inventory is
determined by reducing from the sales value of the inventory
the appropriate percentage gross margin. The percentage used
takes into consideration inventory which has been marked down
to below its original selling price. An average percentage for
each retail department is often used.

17.The cost of inventories may not be recoverable if those

inventories are damaged, if they have become wholly or
partially obsolete, or if their selling prices have declined. The
cost of inventories may also not be recoverable if the estimated
costs of completion or the estimated costs necessary to make
the sale have increased.

The practice of writing down inventories below cost to net

realizable value is consistent with the view that assets should
not be carried in excess of a amounts expected to be realized
from their sale or use.

18.Inventories are usually written down to net realizable value on

an item-by-item basis. In some circumstances, however, it may
be appropriate to group similar or related items. This may be
the case with items of inventory relating to the same product
line that have similar purposes or end uses and are produced
and marketed in the same geographical area and cannot be
practicably evaluated separately from other items in that
product line. It is not appropriate to write down inventories
based on a classification of inventory, for example, finished
goods, or all the inventories in a particular business segment.

19. Estimates of net realizable value are based on the most

reliable evidence available at the time the estimates are made
as to the amount the inventories are expected to realize. These
estimates take into consideration fluctuations of price or cost
directly relating to events occurring after the balance sheet date
to the extent that such events confirm the conditions existing at
the balance sheet date.

20.Estimates or net realizable value also take into consideration the

purpose for which the inventory is held. For example, the net
realizable value of the quantity of inventory held to satisfy firm
sales or service contracts is based on the contract price. If the
sales contracts are for less than the inventory quantities held,
the net realizable value of the excess inventory is based on
general selling prices.

Contingent losses on firm sales contracts in excess of inventory

quantities held and contingent losses on firm purchase contracts
are dealt with in accordance with the principles enunciated in
Accounting Standard (A.S) 4, contingencies and events
occurring after the balance sheet date.

21. Materials and other supplies held for use in the

production of inventories are not written down below cost if the
finished products in which they will be incorporated are
expected to be sold at or above cost. However, when there has
been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable
value, the materials are written down to net realizable value. In
such circumstances, the replacement cost of the materials may
be the net available measure of their net realizable value.
An assessment is made of net realizable value as at each
balance sheet date.

22. Disclosure.
The financial statements should disclose:

The accounting policies adopted in measuring inventories,

including the cost formula used, and The total carrying amount
of inventories and its classification appropriate to the enterprise.

24. Information about the carrying amounts held in different

classifications of inventories and the extent of the changes in
these assets is useful to financial statement users. Common
classifications of inventories are raw materials and components,
work in progress, finished goods, stores, spares and loose tools.

In analysis of inventory of J&J, We collect the data by the
different sources. We collect the primary and secondary data.

SECONDARY DATA – The secondary data are those data the

already in presence for specific purpose we use the secondary
data about inventory to looks old records of the company .For
the daily information about the items We show the MRN, ledger
register and daily issue slip of materials the purchase register
and other documentary evidence used for the findings.

In the analysis of inventory the secondary data are not

sufficient .then We collect primary data.


Primary data are those data that are

originated very first time or fresh data .with the help of primary
data formulated the research objectives. Primary data are the
accurate attainable reliable and useful data.

1. Inventory control techniques used by the company

2. Inventory systems as perpetual and periodic systems.
3. Stock levels etc.
4. Companies website


Fiscal Years Ended January 3, 2010, December 28, 2008 and
December 30, 2007
(Dollars in Millions)
2009 Balance Accruals Payments / Balance
at Other at End of
Beginni Period
ng of
Accrued Rebates $1808 6584 (6,753 ) 1639
Accrued Returns $794 355 (460 ) 689
Accrued $356 2446 (2,373 ) 429
Subtotal $2958 9385 (9,586 ) 2757
Reserve for $267 110 (44 ) 333
doubtful accounts
Reserve for cash $79 $1163 (1,141 ) 101
Total $3304 $10658 (10,771 ) 3191
2008 Balance Accruals Payments / Balance
at Other at End of
Beginni Period
ng of
Accrued Rebates $1802 $5578 (5572) 1808
Accrued Returns $648 $402 (256) 794
Accrued $578 $2991 (3213) 356
Subtotal $3028 $8971 (9041) 2958
Reserve for $193 $101 (927) 267
doubtful accounts
Reserve for cash $71 $905 (897) 79
Total $3292 $9977 (9965) 3304

) Includes reserve for customer rebates of $729 million, $721 million, $710

million at January 3, 2010,

December 28, 2008 and December 30, 2007, respectively.
(2) Includes $171 million adjustment related to previously estimate accrued
sales reserve.


The Medical Devices and Diagnostics segment achieved sales of $23.6
billion in 2009, representing an increase of 1.9% over the Prior year, with
operational growth of 4.2% and a negative currency impact of 2.3%. U.S.
sales were $11.0 billion, an increase of
4.5% over the prior year. International sales were $12.6 billion, a decrease
of 0.2%, with growth of 4.0% from operations and a decrease of 4.2%
resulting from the negative impact of currency fluctuations. The DePuy
franchise achieved sales of $5.4 billion in 2009, a 4.6% increase over the
prior year. This was primarily due to growth in the spine, hip and knee
product lines. Additionally, new product launches in the Mitek sports
medicine product line contributed to the growth.
The Ethicon Endo-Surgery franchise achieved sales of $4.5 billion in 2009, a
4.8% increase over the prior year. This was attributable to growth in the
endoscopy, HARMONIC ® , ENSEAL ® and Advanced Sterilization product
lines. The Ethicon franchise achieved sales of $4.1 billion in 2009, a 7.3%
increase over the prior year. This was attributable to growth in the sutures,
biosurgical and mesh product lines in addition to sales of newly acquired
products from the acquisitions of Omrix Biopharmaceuticals, Inc. and
Mentor Corporation. The growth was partially offset by the divestiture of the
Professional Wound Care business of Ethicon, Inc. in the fiscal fourth quarter
of 2008.
Sales in the Cordis franchise were $2.7 billion, a decline of 10.3% versus the
prior year. The decline reflects lower sales of the CYPHER ® Sirolimus-
eluting Coronary Stent due to increased global competition. The decline was
partially offset by growth of the Biosense Webster business. The Vision Care
franchise achieved sales of $2.5 billion in 2009, a 0.2% increase over prior
year primarily related to growth in the Astigmatic contact lens product line
offset by the negative impact of currency. Sales in the Diabetes Care
franchise were $2.4 billion in 2009, a decline of 3.7% versus the prior year.
Declines in the LifeScan product line were partially offset by growth of the
Animas insulin delivery business resulting from new product launches and
continued development in international markets. The Ortho-Clinical
Diagnostics franchise achieved sales of $2.0 billion in 2009, a 6.6% increase
over the prior year primarily attributable to the recent launch of the VITROS
® 3600 and 5600 analyzers.
The Medical Devices and Diagnostics segment achieved sales of $23.1
billion in 2008, representing an increase of 6.4% over the prior year, with
operational growth of 3.5% and 2.9% due to a positive impact from currency
fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International
sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations
and a positive currency impact of 5.5%. Analysis of Consolidated Earnings
Before Provision for Taxes on Income Consolidated earnings before
provision for taxes on income decreased by $1.1 billion to $15.8 billion in
2009 as compared to the $16.9 billion earned in 2008, a decrease of 6.9%.
The decrease was primarily related to lower sales, the negative impact of
product mix, lower interest income due to lower rates of interest earned and
restructuring charges of $1.2 billion. This was partially offset by lower
selling, marketing and administrative expenses due to cost containment
efforts across all the businesses. 2008 included purchased in-process
research and development (IPR&D) charges of $0.2 billion and increased
investment spending in selling, marketing and administrative expenses
utilized from the proceeds associated with the divestiture of the Professional
Wound Care business of Ethicon, Inc. The increase in 2008 of 27.4% over
the $13.3 billion in 2007 was primarily due to lower
IPR&D charges of $0.6 billion, gains from divestitures of $0.5 billion and
higher litigation gains of $0.5 billion versus restructuring charges of $0.7
billion and the write-down of the NATRECOR ® intangible asset of $0.7
billion recorded in 2007. As a percent to sales, consolidated Major Medical
Devices and Diagnostics Franchise Sales*:
(Dollars in Millions) 2009 2008 2007 ’09 vs. ’08 ’08 vs. ’07
DEPUY ® $ 5,372 5,136 4,698 4.6 % 9.3
ETHICON ENDO-SURGERY ® 4,492 4,286 3,834 4.8 11.8
ETHICON ® 4,122 3,840 3,603 7.3 6.6
CORDIS ® 2,679 2,988 3,314 (10.3 ) (9.8 )
Vision Care 2,506 2,500 2,209 0.2 13.2
Diabetes Care 2,440 2,535 2,373 (3.7 ) 6.8
ORTHO-CLINICAL DIAGNOSTICS ® 1,963 1,841 1,705 6.6 8.0
Total $ 23,574 23,126 21,736 1.9 % 6.4


Operating profits by segment of business were as follows:

Percent of Segment Sales (Dollars in Millions) 2009

2008 2009 2008

Consumer $ 2,475 2,674

15.7 % 16.7
Pharmaceutical 6,413 7, 605
28.5 % 31.0
Med Devices and Diagnostics 7,694 7,223
32.6% 31.2
Total (1) 16,582
17,502 26.8% 27.4
Less: Expenses not allocated to segments (2) 827 573
Earnings before provision for taxes on income $ 15,755 16,929 25.4 % 26.5
Normally each fiscal year consists of 52 weeks, but every five or six years
the fiscal year consists of 53 weeks, as was the case in
2009 and will be the case again in 2014.
Certain prior period amounts have been reclassified to conform to current
year presentation.
2. Cash, Cash Equivalents and Current Marketable Securities
As of January 3, 2010, current marketable securities consist of $3,434
million and $181 million of government securities and obligations and
corporate debt securities, respectively.
As of December 28, 2008, current marketable securities consist of $1,663
million, $342 million and $36 million of government securities and
obligations, corporate debt securities and time deposits, respectively.
Fair value of government securities and obligations and corporate debt
securities were estimated using quoted broker prices in active markets.
The Company invests its excess cash in both deposits with major banks
throughout the world and other high-quality money market instruments. The
Company has a policy of making investments only with commercial
institutions that have at least an A (or equivalent) credit rating.
3. Inventories
At the end of 2009 and 2008, inventories were comprised of:
4. Property, Plant and Equipment
At the end of 2009 and 2008, property, plant and equipment at cost and
accumulated depreciation were:
The Company capitalizes interest expense as part of the cost of construction
of facilities and equipment. Interest expense capitalized in 2009, 2008 and
2007 was $101 million, $147 million and $130 million, respectively.
Depreciation expense, including the amortization of capitalized interest in
2009, 2008 and 2007, was $2.1 billion, $2.0 billion
January 3, 2010 December 28, 2008
Amortized Unrealized Estimated Amortized Unrealized Estimated
(Dollars in Millions) Cost Gains/(Losses) Fair Value Cost Gains/
(Losses) Fair Value
Current Investments
Cash $ 2,517 — 2,517 3,276 — 3,276
Government securities and obligations 13,370 1 13,371 7,486 4 7,490
Corporate debt securities 426 — 426 627 1 628
Money market funds 1,890 — 1,890 813 — 813
Time deposits 1,222 — 1,222 607 — 607
Total cash, cash equivalents and current marketable securities $ 19,425 1
19,426 12,809 5 12,814

(Dollars in Millions) 2009 2008

Raw materials and supplies $ 1,144 839
Goods in process 1,395 1,372
Finished goods 2,641 2,841
$ 5,180 5,052(Dollars in Millions) 2009 2008
Land and land improvements $ 714 886
Buildings and building equipment 8,863 7,720
Machinery and equipment 17,153 15,234
Construction in progress 2,521 3,552
29,251 27,392
Less accumulated depreciation 14,492 13,027 $ 14,759 14,365 and $1.9
billion, respectively. Upon retirement or other disposal of property, plant
and equipment, the costs and related amounts of accumulated depreciation
or amortization are eliminated from the asset and accumulated depreciation
accounts, respectively. The difference, if any, between the net asset value
and the proceeds are recorded in earnings.
5. Intangible Assets and Goodwill
At the end of 2009 and 2008, the gross and net amounts of intangible
assets were:
(Dollars in Millions) 2009 2008
Intangible assets with definite lives:
Patents and trademarks — gross $ 5,697 5,119
Less accumulated amortization 2,177 1,820
Patents and trademarks — net $ 3,520 3,299
Other intangibles — gross $ 7,808 7,376
Less accumulated amortization 2,680 2,433
Other intangibles — net $ 5,128 4,943
Total intangible assets with definite lives — gross $ 13,505 12,495
Less accumulated amortization 4,857 4,253
Total intangible assets with definite lives — net $ 8,648 8,242
Intangible assets with indefinite lives:
Trademarks $ 5,938 5,734
Purchased in-process research and development* 1,737 —
Total intangible assets with indefinite lives $ 7,675 5,734
Total intangible assets — net $ 16,323 13,976

Total sales
Inventory turn over ratio = Average inventory

The sale of J&J in year 2007 is 720 million & its investment
on inventory is 126 million.

Then inventory turnover ratio = 720/126

= 5.71

J&J used Rs. 6 million worth inventory for operation. It could

generates additional sales, sales

Sales = 6 million * 5.71

= 34.26 million
If J&J increases investment more on their inventories, then
company increases their sales.
Inventory turn in year 2008
Total sales in 2008 = 670 million
Investment on inventories = 118 million

Turnover ratio = 670/118

= 5.67
Inventory turnover in year 2007-

Total sales in 2007 = 620 million

Investment on inventories = 110 million

Turnover ratio = 620/ 110

= 5.63

Inventory turn ratio in year 2006

Total sales in 2006 = 615 million

Investment on inventories = 100 million
Turnover ratio = 615 / 100
= 6.15
Investment of inventories & sales on wards 2006-

year Investment on total sales in

inventories in million
2006 100 615
2007 110 620
2008 118 670
2009 126 720

Johnson & Johnson Ltd. increases investment on their inventories.

Every year, then total sales increases year by year.
Date Q Co Valu Qt Co Valu Qt Co Valu
t st e y st e y st e
1 10 2.1 210
00 0 00
9 1 2.2 221 11 - 232
0 1 0 00 10
0 0
12 20 2.1 420 90 - 190
00 0 0 00 10
27 2.3 231 10 - 213
1 0 00 20
10 40 2.1 840 60 - 129
00 0 0 00 20
16 2 2.4 482 80 - 177
0 1 0 00 40
3 2 2.4 482 10 - 225
0 1 0 00 60
0 0
17 40 2.1 840 60 - 141
00 0 0 00 60
29 4 2.2 916 10 - 233
0 9 0 00 20
0 0
4 2 2.1 428 12 - 276
0 4 0 00 00
0 0
18 40 @ 934 60 - 182
00 0 00 60
23 2 2.0 408 10 - 223
0 4 0 00 40
0 0
12 10 2.4 240 90 - 199
00 0 0 00 40
24 3 2.0 600 12 - 259
0 0 0 00 40
0 0
10 10 2.4 240 11 - 235
00 0 0 00 40
30 2 2.0 404 13 - 275
0 2 0 00 80
0 0
Total 1 2.1 417 16 - 351
9 9 00 00 40
0 0
Where @ is 1000 2.21 2210

1000 2.31 2310

2000 2.41 4820

Total 4000 - 9340

Interpretation -

The FIFO method of valuation of inventory is based on the assumption

that the inventory consumed in chronological order. That is received first
are issued / consumed first and value fixed accordingly. From the table
with an opening inventory of 10000 units at rs 2.10, the first 10000 units
issued are charged to the cost of goods sold at these opening inventory
rate rs 2.10. The April 18 issue or consignment of 4000 units is cosseted
on the basis of first received of the year. January 9, 1000 units at rs 2.21,
January 27 1000 units at rs 2.31, and February 16, 2000 units at rs 2.41.
The 1000 each issued on May 12 and June 10 are cosseted on the basis of
the 2000 units received on March 3. Therefore the cost of the 13000
inventory on June 30 is composed of the received of March29, April 4 and
23, May 24 and June 30 and the value is the sum of the cost of these

Valuation under perpetual inventory system-

Date Receipts Issues Balance


1Jan - - - - - - 200 1400

6Jan - - - 100 7 700 100 700

8Jan 1100 8.50 9350 - - - 1200 10050

9Jan - - - 200 8.50 1700 1000 8350

15Jan - - - 400 8.50 3400 600 4950

25Jan 300 9 2700 - - - 900 7650

27Jan - - - 300 8.50 2550 300 240

300 9 2700 0

31Jan 400 9.20 3680 - - - 700 6080

The value of inventory after 31 January is 6080 /rs


The value of inventory under periodic & perpetual inventory system is

different. The value of inventory under perpetual system is more than
periodic system

Data of concentrate at J&J is as follows –

Maximum consumption = 5000Dz per day

Minimum consumption = 55 units per day

Normal consumption = 59 units per day

Re-order period = 10-15 days

Re-order quantity = 878 units

Normal re-order period = 12 days

Re-order level = Maximum consumption * Maximum

Re-order period

Data of concentrate at J&J is as follows –

Maximum consumption = 65 units per day

Minimum consumption = 55 units per day

Normal consumption = 59 units per day

Re-order period = 10-15 days

Re-order quantity = 878 units

Normal re-order period = 12 days

Re-order level = 65 units * 15 days

= 975 units

Minimum stock level = re-order level – (normal consumption *

Normal re-order period)

= 975 - (59 units * 12 days)

= 267 units

Maximum stock level = (re-order level + re-order quantity )

- ( min. consumption – order period)

= ( 975 units + 878 units ) - (55 units * 15 days)

= 1028 units

Average stock level = minimum stock level + ½ of Re-ordering


= 267 units + ½ * 878 units

= 267 units + 439 units

= 706 units

Interpretation of result : -

1. After calculation the re-order level of J&J is 975 units but the actual re-
order quantity is 878 units.
2. The minimum stock level of J&J is 267 units.
3. The maximum stock level of J&J is 1028 units.
4. The average stock level must be 706 units.

Calculation of expected stock out cost –

Safety stock stock prob. Of expected total

Stock out (units) out stock stock out expt.

Level cost (40/unit) out cost SOC

500 0 0 0 0 0

400 100 4000 0.01 40 40

250 250 10000 0.01 100

150 6000 0.02 120 220

100 400 16000 0.01 160

300 12000 0.02 240 580

150 6000 0.03 180

50 450 18000 0.01 180

350 14000 0.02 280

200 8000 0.03 240 780

50 2000 0.04 80

0 500 20000 0.01 200

400 16000 0.02 320

250 1000 0.03 300 1180

100 4000 0.04 160

50 2000 0.10 200

Expected stock out cost == stock out cost * probability of stock out .


J&J faces the following problems-

1 Johnson & Johnson Ltd. Faces the problem of competition.

2. Organization facing the problem of proper skilled employees in the
production department.

3. There is no proper sequence &acknowledgement board for certain

items in store department .It is not good when external auditing held in

4. Organization has no record of wastage items. It is not good for

operating profit of the company.

5. In organization store assistants have no proper knowledge about

engineering goods & raw materials.


The organizations give proper knowledge & training for unskilled

employees about their work.

1. In store department items should placed their proper sequence &

2. There should be proper record of wastage. It is good for the company.

4. Store manager give the proper knowledge about engineering & raw

The goal of the wealth maximization is affected by the efficiency with
which inventory is managed. Inventories constitute about 60% of
current assets of companies in India. The manufacturing companies
hold inventories in the form of raw materials, work in progress and
finished goods. Inventories facilitate smooth production and sales
operation (transaction motive), to guard against the risk of
unpredictable changes in usage rate and delivery time (precautionary
motive), & to take advantage of price fluctuations (speculative

Inventories represent investment of a

firm’s funds. The objectives of the inventory management
should be the maximization of the value of the firm. Therefore
the firm should consider:

1. Cost 2. Return 3. Risk factors

In inventory maintenance two types of costs are involved

carrying cost & ordering cost .the firm should minimize the
total cost (carrying plus ordering cost).The firm follows
inventory control techniques as A-B-C technique EOQ & JIT
techniques for better holding inventories.

PRIMARY DATA ANALYSIS (Bio – Profile of the


1 30 percent of the officials belong to the age group of 35 and 50

2 58 percent of the officials belong to the age group of 25 to 34

3 12percent of the officials belong to the age group of above 50

4 69 percent are male officials

5 31 percent are female officials

6 72 percent are graduates and above

7 12 percent are those who are having technical and professional


8 16 percent are undergraduates.

9 55 percent are those who are associated with the field

10 25 percent are those who are in the managerial and

administrative posts.

11 20 percent belongs to the others category


1 Are you aware about Inventory Management System?

 Yes ------------------------------------------ 75 per cent

 No ------------------------------------------- 17 per cent

 Do not know/ Can not say ---------------- 08 per cent

Interpretation:The awareness level among the company officials

regarding the existence, functioning and applicability of inventory

management system is high that is 75 per cent, as per the result

of the study.
2 Do you know that your company has an inventory

management system?

 Yes ---------------------------------------------- 72 per cent

 No ------------------------------------------------ 20 per cent

 Do not know/ Cannot say -------------------- 08 per cent





40% Yes

30% No

20% Do not know/Can Not say


Yes 72%
No 20%
Do not know/Can Not say 8%

Interpretation: The company officials are aware about their

company having an inventory management system. 72 per cent of

the respondents do have this awareness as against 20 per

cent+08 per cent of the respondents who are either not aware or

not able to provide any information in this regard.

3 Do you agree that there should be an inventory

management system in place in any organization /


 Agree ------------------------------------------------ 68 per cent

 Disagree --------------------------------------------- 12 per cent

 Do not know/ Cannot say ------------------------- 20 per cent

Interpretation:According to the response to the above question,

it appears that every company/organization should have a system

or mechanism in place for managing their inventory.

4 For what reasons do you feel that there should be an

inventory management system?

 To smoothen operational requirement --------------------- 27 per


 To save time ---------------------------------------------------- 22 per


 To maintain accountability and transparency ----------------30

per cent

 Other reasons --------------------------------------------------- 15 per


 Do not know/ Cannot say ------------------------------------ 06 per



To everyone’s surprise, 30 per cent of the respondents feel that it

is for accountability and transparency purpose that inventory

records are maintained and hence the need for an inventory

management system. This is followed by the need for saving time

and the requirement of operational smoothness.

5 Do you agree that the inventory management system in

your company has fulfilled the needs for which it was

 Strongly Agree -------------------------------------- 20 per cent

 Agree ------------------------------------------------- 47 per cent

 Disagree ----------------------------------------------- 15 per cent

 Strongly Disagree ------------------------------------- 07 per cent

 Do not know/ Cannot say ---------------------------- 11 per cent

From the above response, it appears that the inventory

management system has more or less achieved its objectives for

which it was in place. This is evident from the 67 per cent of the

respondents’ opinion who have either agreed or strongly agreed in

favor of this proposition. However the response of 22 per cent of

the respondents who think otherwise also speaks something.

6 What according to you is the major benefit of going for

an inventory management system by your company?

 It has made storage and retrieval of material easier --------- 37

per cent

 Improved Sales Effectiveness ---------------------------------- 26 per


 Reduced Operational Cost ----------------------------------- 18 per


 Other Benefits -------------------------------------------------- 10 per


 Do not know/ Cannot say ------------------------------------ 09 per



As regards the benefits of having an inventory management

system by the company, the respondents are of the opinion that

the major benefit lies in relaxation in terms of storage and

retrieval of material. This is followed by increasing sales

effectiveness and reduction in operational cost. However, all these

benefits are interlinked and the spearing between them is more

analytical than anything else.

7 Do you have skilled professionals in your company for

inventory management?

 Yes ----------------------------------------------- 48 per cent

 No ------------------------------------------------- 30 per cent

 Do not know/ Cannot say ---------------------- 22 per cent






25% Yes

20% No

Do not know/Can Not say


Yes 48%
No 30%
Do not know/Can Not say 22%


Recruitment of skilled professionals well vesed with latest

inventory management technology, particularly in chemicals and

paint industry is a concern for the company as it appears that it

lacks in this domain.

What category of professionals is managing your company


 Skilled and trained --------------------------------- 32 per cent

 Only skilled but not trained ----------------------- 16 per cent

 Non skilled but trained professionals -------------- 20 per cent

 Non skilled and non trained professionals --------- 25 per cent

 Others --------------------------------------------------- 07 per cent




Skilled and trained
Only skilled but not
10% trained

5% Non skilled but trained

Non skilled and non
Skilled and trained 32% trained professionals
Only skilled but not trained 16%
Non skilled but trained
Non skilled and non trained
Others 7%

As already stated above in the earlier question, availability of

trained and skilled professionals for inventory management needs

serious attention of the company.

8.Do you agree that your company gives more emphasis on

software than skilled manpower with regard to inventory


 Strongly Agree -------------------------------------- 18 per cent

 Agree ------------------------------------------------- 52 per cent

 Disagree ----------------------------------------------- 15 per cent

 Strongly Disagree ------------------------------------- 07 per cent

 Do not know/ Can not say ---------------------------- 08 per cent


The above response gives an impression that the company puts

greater emphasis on software than skilled manpower for inventory

details management.

9.Do you think that the software used by your company is

according to the design and needs of the system?

 Yes -------------------------------------------------- 86 per cent

 No ---------------------------------------------------- 10 per cent

 Do not know/ Cannot say ------------------------- 04 per cent


The company appears to be using the software according to the

system requirement and design and according to the customers’


10. What is the prime challenge before Yor Company with

reheard to inventory management?

 Lack of trained professionals ------------------------------- 42 per


 Maintenance cost --------------------------------------------- 21 per cent

 Changing requirements of customers ------------------------- 27

per cent

 Other problems -------------------------------------------------- 06 per


 Do not know/ Cannot say ------------------------------------- 04 per



Lack of availability of trained professionals coupled with

maintenance cost and changing needs of the customers are

perceived to be the inventory challenges before the company.

12. What is the future of inventory management system in

your company?

 Will continue as a successful mechanism --------------------- 43

per cent

 May change according to time ----------------------------------- 33

per cent

 Shall collapse ------------------------------------------------------- 12 per


 Do not know/ Cannot say ----------------------------------------- 12 per


The future of inventory management system at Johnson &

Johnson Ltd. appear to pretty good, going by the response of our


1 Are you aware about Inventory Management System?

 Yes ------------------------------------------ 75 per cent

 No ------------------------------------------- 17 per cent

 Do not know/ Can not say ---------------- 08 per cent

2 Do you know that your company has an inventory management


 Yes ---------------------------------------------- 72 per cent

 No ------------------------------------------------ 20 per cent

 Do not know/ Can not say -------------------- 08 per cent

3 Do you agree that there should be an inventory management

system in place in any organisation / company?

 Agree ------------------------------------------------ 68 per cent

 Disagree --------------------------------------------- 12 per cent

 Do not know/ Can not say ------------------------- 20 per cent

4 For what reasons do you feel that there should be an inventory

management system?

 To smoothen operational requirement --------------------- 27 per cent

 To save time ---------------------------------------------------- 22 per cent

 To maintain accountability and transparency ----------------30 per cent

 Other reasons --------------------------------------------------- 15 per cent

 Do not know/ Can not say ------------------------------------ 06 per cent

5 Do you agree that the inventory management system in your

company has fulfilled the needs for which it was evolved?

 Strongly Agree -------------------------------------- 20 per cent

 Agree ------------------------------------------------- 47 per cent

 Disagree ----------------------------------------------- 15 per cent

 Strongly Disagree ------------------------------------- 07 per cent

 Do not know/ Can not say ---------------------------- 11 per cent

6 What according to you is the major benefiit of going for an

inventory management system by your company?

 It has made storage and retrieval of material easier --------- 37 per cent

 Improved Sales Effectiveness ---------------------------------- 26 per cent

 Reduced Operational Cost ----------------------------------- 18 per cent

 Other Benifits -------------------------------------------------- 10 per cent

 Do not know/ Can not say ------------------------------------ 09 per cent

7 Do you have skiled professionals in your company for inventory


 Yes ----------------------------------------------- 48 per cent

 No ------------------------------------------------- 30 per cent

 Do not know/ Can not say ---------------------- 22 per cent

8. What category of professionls are managing your company


 Skilled and trained --------------------------------- 32 per cent

 Only skilled but not trained ----------------------- 16 per cent

 Non skilled but trained professionals -------------- 20 per cent

 Non skilled and non trained professionals --------- 25 per cent

 Others --------------------------------------------------- 07 per cent

9. Do you agree that your company gives more emphasis on

software than skilled manpower with regard to inventory


 Strongly Agree -------------------------------------- 18 per cent

 Agree ------------------------------------------------- 52 per cent

 Disagree ----------------------------------------------- 15 per cent

 Strongly Disagree ------------------------------------- 07 per cent

 Do not know/ Can not say ---------------------------- 08 per cent

10. Do you think that the software used by your company is

according to the design and needs of the system?

 Yes -------------------------------------------------- 86 per cent

 No ---------------------------------------------------- 10 per cent

 Do not know/ Can not say ------------------------- 04 per cent

11. What is the prime challenge before yor company with rehard to

inventory management?

 Lack of trained professionls ------------------------------- 42 per cent

 Maintenance cost --------------------------------------------- 21 per cent

 Changing requirements of customers ------------------------- 27 per cent

 Other problems -------------------------------------------------- 06 per cent

 Do not know/ Can not say ------------------------------------- 04 per cent

12. What is the future of inventory management system in your


 Will continue as a successful mechanism --------------------- 43 per cent

 May change accoeding to time ----------------------------------- 33 per cent

 Shall collapse ------------------------------------------------------- 12 per cent

 Do not know/ Can not say ----------------------------------------- 12 per cent

• Advanced Accountancy
Ninth Edition

S N Maheshwari, S K Maheshwari

Vikas Publishing House Pvt. Ltd.

• Financial Management
Ninth Edition

I M Pandey

Vikas Publishing House Pvt. Ltd

• Management Accounting
Third Edition

M Y Khan, P K Jain

Tata Mc-Graw Hill Publishing Company Ltd

• Purchase , Sales Boucher & Other Documents of the
Johnson & Johnson Ltd.