New IM

INTRODUCTION
Definition of Inventory:
The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense, inventory can be
defined as an idle resource which has an economic value. It is however, commonly used to
indicate various items of stores kept in stock in order to meet future demands.
Introduction to the study:
In any organization, there may be following four types of inventory:
(a) Raw materials & partsthese may include all raw materials, components and
assemblies used in the manufacture of a product;
(b) Consumables & Spares -- These may include materials required for maintenance
and day-to-day operation;
(c) Work in progress -- These are items under various stages of production not yet
converted as finished goods;
(d) Finished Products -- Finished goods not yet sold or put into use.
Inventory control is the activity, which organizes the availability of items to
the customers. It co-ordinates the purchasing manufacturing and distribution
functions to meet the marketing needs. This role includes the supply of current
sales items, new products, consumables, spare parts, obsolescent items and all
other supplies.
MBA Department, AIZZA College Of Engg & Tech
NEED AND SCOPE OF THE STUDY

The need of the study is identify that inventory management process and maintenance
of inventories at SSCL
The study is done on inventories held by SCCL. To identity whether adequate
inventories of raw material is maintain or not
OBJECTIVES:
1. To examine the organization structure of inventory management in the stores of
the SCCL.
2.
To discuss pattern, levels and trends of inventories in SCCL.
3.
To understand the various inventory control techniques followed by

stores in SCCL.
4.
To know the performance of inventory management of the SCCL by

selected accounting ratios.
5.
6.
To minimize investment in inventories keeping In view operating requirements.

To provide for efficient store of materials so that inventories are protected from
loss by fire and theft and handling time and cost are kept at a minimum.
RESEARCH METHODOLOGY
PRIMARY DATA:
Primary data has been collected from the financial employees through oral and discussion
with the supervisors has been used to collect the data from them.
SECONDARY DATA:
Secondary data is collected from the various text books, annual reports, stores and ledgers
and website of the comapnay..
LIMITATIONS OF THE STUDY:

The study has the following limitations:

1.
.
2.
The study is limited only for a period of 5 years i.e. from 2002-11
3.
There may be approximations in calculating ratios and taking the

figures from the annual reports,
4.
The study is purely based on secondary data.
5.
The study is confined to 45 days
The limitations of ratio analysis can be applicable to the study.
ORGANIZATION PROFILE
The Singareni collieries company limited is the oldest public sector company in India,
carrying the coal mining activities in the Godavari valley of Andhra Pradesh and catering the
needs of the consumers in southern India.
The origin of SCCL may be traced back to the year 1871, where the coal was first
discovered in Nizam state at Yellandu. In those days pilgrims going to Bhadrachalam
used to travel
by road. After getting down at Yellandu railway station, many of the
pilgrims used to cook their food with firewood in the vicinity of the railway station before
continuing their journey.
One such party arranged the fireplace for cooking by lighting the firewood between
them. They observed that the stones were also burning; sending out heat even after the
firewood was consumed.
Based on their
report, the
authorities concerned carried
investigation and found the existence of coal deposits around the village of Singareni.
After the discovery of coal in the year 1871, the Hyderabad Deccan Company was
incorporated in England in the 1886. In 1921,the company was converted into a public
limited company and was named as the Singareni collieries company limited after the
name of the village Singareni near yellandu and was listed in the London stock exchange.
In 1945, the Nizam of Hyderabad purchased the shares of the company at London
stock exchange and this action brought the company under the government control through a
Trust Fund. Thus the Singareni collieries company limited has the distinction of being the
first government owned Coal Company in India.
Today the equity capital is shared in the ratio of nearly 51:48 between government of
Andhra Pradesh and government of India. The loan capital is entirely provided by
government of India.
The assistance is by tripartite agreements between SCCL and
government of India and government of Andhra Pradesh. The company has proven coal
reserves of 8091 million tones as on March 31, 2003 spread over in the districts of
Khammam, Adilabad, Karimnagar and Warangal of Andhra Pradesh
HISTORY
In the year 1871, Dr. King of the Geological Survey of India discovered coal near the village
of Yellandu in Khammam district and one of the important coal seams bore his name. The
Hyderabad (Deccan) Company Limited incorporated in England acquired mining rights in
1886 to exploit coal found in Yellandu area. The present Company was incorporated on 23rd
December 1920 under the Hyderabad Companies Act as a public limited company with the
name 'The Singareni Collieries Company Limited' (SCCL). It acquired all the assets and
liabilities of the Hyderabad (Deccan) Co. Ltd. Best & Co., acted as Secretaries and Selling
Agents. The State of Hyderabad purchased majority shares of the Company in 1945. From
1945 to 1949, the Hyderabad Construction Co., Ltd., was acting as Managing Agent. In 1949
this function was entrusted to Industrial Trust Fund by the then Government of Hyderabad.
The controlling interest of the Company devolved on the Government of Andhra Pradesh in
1956 pursuant to the reorganization of States. Thus, the SCCL became a Government
Company under the Companies Act in 1956.
Large-scale expansion of SCCL was undertaken during the initial Five-year plans. In 1960
the Govt. of India started its participation in the equity of the Company and also started
extending loan assistance. Thus since March 1960 it has been jointly owned by the
Government of Andhra Pradesh and the Govt. of India. In 1974 the Government of India
transferred its share capital to the Coal Mines Authority Limited. The manner of extending
financial assistance for expansion of SCCL by the Govt. of A.P., and the Govt. of India during
V plan period was agreed upon in the Four parties Agreement executed on 10th June 1974.
Subsequently, the Govt. of India decided to control its equity directly in SCCL. Accordingly,
agreement was concluded on 13th December 1977. The SCCL, the Government of A.P., the
Government of India and Coal India Limited were parties to the agreement. These two
agreements are popularly called quadripartite agreements.
For financial and other assistance during VI, VII, VIII, IX & X Plan periods, separate
agreements were executed on 31st March, 1985, 10th February 1989, 24th September 1994,
11th January 2002 and 19th October 2004 between the Government of India, the Government
of Andhra Pradesh and SCCL. These agreements are called tripartite agreements.
The Company's accredited function is to explore and exploit the coal deposits in the Godavari
valley coalfield, which is the only repository of coal in South India. Mining activities of
SCCL are presently spread over four districts of Andhra Pradesh Viz. Adilabad, Karimnagar,
Khammam and Warangal.
The studies of Geological Survey of India attribute as much as 16997 million tones of coal
reserves in the Godavari valley coalfield. The reserve covers up to a depth of 1200 meters and
it includes reserves confirmed, indicated as well as inferred.
The coal extracted by SCCL in the Godavari valley coalfield up to the year 2004-05 was
about 721 million tones.
LAWS SPECIFIC TO THE COAL SECTOR

The Coal Mines Act, 1952, along with the Coal
Rules, 1955, govern coal mining in India.
Mine Regulation, 1957 and Coal Mines
The onus of administering the Mines Act,
Regulation and Rules lies with the Director General of Mines Safety. The MMD Act-1957
lies down procedures for the grant of mining leases and preparing of mining plants.
Acquisition of land for mining is to follow the Land Acquisition Act and Forest Conservation
Act. Of course various Labour Acts such as Payment of wages Act, Payment of Gratuity Act,
Payment of Bonus Act, Coal Mines provident fund and Misc. provision Act are following
judiciously for maintaining harmonious labour relations. It is also observed that benefits are
extended in some cases more than that statutory obligation.
ROLE OF SCCL IN NATIONAL SCENARIO

Coal mining in India commenced in 1774 and the production level Increased from
6.19 million tones on 1900 to around 340 million tones in 2005-2006. Almost the entire
sector is under state control. Coal India ltd., (CIL) a Govt. of India undertaking, has seven
coal producing subsidiaries and produce 87% of the total coal production. Singareni
collieries company Ltd \(SCCL) joint venture of the state Government of Andhra Pradesh
and Govt. of India, contribute about 10%of the coal production with only 7% of national coal
reserves catering south Indias coal requirements.
PRODUCTION PROFILE:
SCCL occupies a vital position in the coal production program of the country with 7%
of India reserves and is producing around 10 % of country annual coal mining.
Opencast mining, launched in SCCL in 1975 now it contributes to more than

60% of the total coal output from 12 opencast mines.
MARKET PROFILE:
SCCL has been endeavoring to meet the coal demand of entire south. All the
powerhouses located within the state of Andhra Pradesh get their coal supplies from
Singareni collieries. In addition, the requirement of coal of some of the powerhouses located
in Maharastra and Karnataka is also met from Singareni Colliery Company limited.
In the small-scale sector, about 2700 industrial units situated over the southern states
get their requirements of coal from SCCL.
CUSTOMER SATISFACTION:
To improve the customer satisfaction the company adopted selective mining in
under ground and open cast mines to improve the quality of coal
dispatches.
Non
carbonaceous brands like clay were blasted separately and excluded from coal brought to
surface. In some mines, picking arrangements for removing shale, stone etc were intensified
at all dispatch points. Various steps are being taken by the company to improve the quality
and
availability of coal. Apart
weighbridges
in
the
place
from the above, steps like installation

of
of
electronic
mechanical weighbridges; joint sampling methods etc
were also taken.
VISSION OF SCCL
To train up young men & women able and eager to create and put into action such ideas,
methods, techniques and information.
MISSION OF SCCL
1. To retain our strategic role of a premier coal producing company in the country and
excel in a competitive business environment.
2. To strive for self-returns by optimum utilization of existing resources and earn
adequate returns on capital employed.
STRENGTH OF SCCL
Strong will power and determination, teamwork and commitment to the Defined goals yield
positive results and pay good Dividends. This has been proved in Singareni Collieries
Company Ltd., SCCL has made a dramatic turn around by recording Rs.361 crore profits
during 2004-2005 and Rs.145 crore profits during 2003-2004. SCCL's strength is within its
people. In 1998 the Company was able to successfully counter the strike culture and
promoted harmonious industrial relations. The company introduced several welfare schemes
for its workers and their families The company, which had a low customer-focus in the past,
laid emphasis on market dynamics by scripting fuel supply The company is now looking to
reinvent itself, backed by the visionary political leadership of the state, smart management,
Motivated workforce and responsible leadership of workers.
AWARDS
The Company bagged 1st prize for Design and concept in the Mineral Sector at the 4 th
International Trade Fair on Mineral and Metallurgy conducted at Pragati Maidan, New Delhi
from 12th September 2002. SCCL has established an Integrated Environment and Forestry
Department and is a pioneer in Bioengineering works taken up at the Opencast-mines for
stabilizing OB dumps and their reclamation. Over the years, more than 1.20 crore saplings
have been planted over an area of 6070 hectares. SCCLs Herculean efforts in this sphere that
have been recognized by it being awarded the prestigious Golden Peacock Environment
Management Award by the world Environment Foundation in June 2005.
The SCCL has bagged the State Governments Labor Ministry Management Award for the
year 2002 on May Day from Chief Minister of Andhra Pradesh. The C&ND has said this
award was possible was because of cohesive work by all employees including officers and
supervisors. Their integrity, honesty, hard working nature, Trade Unions wholehearted
support helped the SCCL to bag this prestigious award.
ADMINISTRATIVE SET UP OF SCCL:

Chairman &
MD
FUNCTIONAL
DIRECTORS
Director
Operations
Director Finance
GOVT OF AP
NOMINEES
DIRECTORS
GOVT OF INDIA
NOMINEE
DIRECTORS
Special Chief Secretary

Energy Department
Joint Secretary
Ministry of Coal
Principal Secretary,
Finance Department
Chairman cum MD
Mahanadi Coal Fields
Ltd
Director
(Plnning&Projects)
Director,
Ministry of Coal
Director (P A &
W)
Director (E&M)
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DISTRIBUTION OF VARIOUS FUNCTIONAL WINGS OF SCCL

AMONG THE SO TO C&MD, AND FUNCTIONAL DIRECTORS
SO TO
C&MD
RO DELHI
DIRECTOR
OPERATION
CGM STORES
DIRECTOR
PROJ.PLG
CGM CP&P
DIRECTOR
PA&W
DIRECTOR
FINANCE
DIRECTOR
E&M
CGM HRD
CGM (F&A) CGM (E&M)OCPS
EE (MM&PR) CGM PURCHASE CGM RG.1
CGM PERSONNEL
GM AUDIT CGM (E&M) UGMS
HYD OFFICE CGM CIVIL
CHIEF MS
CO.SEC
ED (FOREST)
CGM QM
CGM SAFETY GM IE
GM IT
CGM EXPL
CHIEF ESTATES
GM KGM
CGM BD
CGM EDN
GM YLD
CGM PP
CGM VIGILANCE
GM MNG
GM I&PM
CSO
GM RG3
GM R&D
AGM (LAW)
GM BHPL
GM RG.2
MD SUPER BAZAR
GM (E&M) WSs&phS
GM BPA
GM MMR
GM SRP
AGM SURVEY
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REVIEW OF LITERATURE
DEFINITION:
Inventory is an idle stock of physical goods that contain economic value, and are held in
various forms by an organization in its custody awaiting packing, processing transformation,
use or sale in a future point of time.
Inventory management is primarily about specifying the size and placement of
stocked goods. Inventory management is required at different locations within a facility or
within multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods.
Every enterprise needs inventory for smooth running of its activities. It serves as a
link between production and distribution process. There is, generally, a time lag between the
recognition of a need and its fulfillment the greater the time lag, the higher the requirements
for inventory. It also provides a cushion for future price fluctuations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings. Thus, it is very essential to have proper
control and management of inventories.
The purpose of inventory management is to ensure availability of materials in
sufficient quantity as and when required and also to minimize investment in inventories.
Meaning and nature of inventory:
In accounting language, inventory may mean the stock of finished goods only. In a
manufacturing concern, it may include raw materials, work-in-process and stores etc.
Inventory includes following things:
a).
Raw Material: Raw material form a major input into the organization.
They are required to carry out production activities uninterruptedly.
The quantity of raw materials required will be determined by the rate
Of consumption and the time required for replenishing the supplies.
The factors like the availability of raw materials and government
regulations etc. too affect the stock of raw materials.
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b).
Work in Progress: The work in progress is that stage of stocks which are in between
raw materials and finished goods.
The quantum of work in progress depends upon the time taken in the manufacturing
process.
The greater the time taken in manufacturing, the more will be the amount of work in
progress.
c).
Consumables: These are the materials, which are needed to smoother the process of
production. These materials do not directly enter production but they act as catalysts.
Consumables may be classified according to their consumption and criticality.
Generally, consumable stores do not create any supply problem and form a small part
of production cost.
There can be instances where these materials may account for
much value than the raw materials. The fuel oil may form a substantial part of cost.
d)
Finished goods: These are the goods which are ready for the consumers. The stock of
finished goods provides a buffer between production and market.
The purpose of maintaining inventory is to ensure proper supply of goods to
customers,
e)
Spares: The stocking policies of spares differ from industry to Industry. Some
industries like transport will require more spares than other concerns. The costly spare
parts like engines, maintenance spares etc are not discarded after use, rather they are
kept in ready position for further use.
All decisions about spares are based on the financial cost of inventory on such spares
and the costs that may arise due to their non-availability.
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BENEFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm's funds and the costs of storage
and handling, every business enterprise has to maintain certain level of inventories to
facilitate un-interrupted production and smooth running of business.
In the absence of inventories a firm will have to make purchases as soon as it receives
orders. It will mean loss of time and delays in execution of orders which sometimes may
cause loss of customers and business.
A firm also needs to maintain inventories to reduce ordering cost and avail quantity
discounts etc.
There are three main purposes of holding inventories,
i)
The transaction motive: which facilitates continuous production and timely

Execution of sales orders.
ii) The precautionary motive: which necessitates the holding of inventories for
meeting
the unpredictable changes in demand and supplies of materials,
iii) The speculative motive: which induces to keep inventories for taking advantage of
price fluctuations, saving in re-ordering costs and quantity discounts.
RISK AND COSTS OF HOLDING INVENTORIES

The holding of inventories involves blocking of a firm's funds and incurrence of capital and
other costs.
The various costs and risks involved in holding inventories are:
i)
Capital costs: Maintaining of inventories results in blocking of the firms financial
resources.
The firm has therefore to arrange for additional funds
to meet the cost of
inventories. The funds may be arranged from own resources or from outsiders. But in both
the cases, the firm incurs a cost. In the former case, there is an Opportunity cost of
investment while in the later case; the firm has to pay Interest to the outsiders.
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ii)
Storage and handling costs: Holding of inventories also involves costs on storage as
well as handling of materials. The storage of costs include the rental of the godown,
insurance charges etc.
iii)
Risk of price decline: There is always a risk of reduction in the prices of inventories
by the suppliers in holding inventories.
This may be due to increased market
supplies, competition or general depression in the market,
iv)
Risk of obsolescence: The inventories may become obsolete due to improved

technology, changes in requirements, change in customer tastes etc.
iv)
Risk determination in quality: The quality of materials may also deteriorate while the
inventories are kept.
Objects of Inventory Management

Definition of Inventory Management: Inventory management is concerned with the
determination of optimum level of investment for each components of inventory and the
efficient use of components and the operation of components and the operation of an
effective control and review of mechanism.
The main objectives of inventory management are operational and financial. The
operational objective mean that the materials and spares should be available in sufficient
quantity so that work is not disrupted for want of inventory The financial objective means
that investments in inventory should not remain idle and minimum working capital should be
locked in it.
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The following are the objectives of inventory management;

To ensure continuous supply of materials, spares and finished goods so that production
should not suffer at any time and the customers demand should also be met. To avoid both
over-stocking and under-stocking of inventory.
To maintain investment in inventories at the optimum level as required by the operational and
sales activities.
To keep material cost under control so that they contribute in reducing the cost of production
and overall costs
To eliminate duplication in ordering or replenishing stocks. This is possible with the help of
centralizing purchases.
To minimize loses through deterioration, pilferages, wastages and damages.
To ensure perpetual inventory control so that materials shown in stock ledgers should be
actually lying in the stores.
To ensure right quality goods at reasonable prices.
Suitable quality standards will ensure
proper quality of stocks. The price-analysis, the cost-analysis and value-analysis will ensure
payment of proper prices.
To facilitate furnishing of data for short-term and long-term planning and control of
inventory.
TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT
A proper inventory control not only helps in solving the acute problem of liquidity but
also increases profits and causes substantial reduction in the working capital of the concern.
The following are the important tools and techniques of inventory management and
control: Determination of stock levels:
16
Carrying of too much and too little of inventory is detrimental to the firm.
If the
inventory level is too little, the firm will face frequent stock
Maximum Level:
It is the quantity of materials beyond which a firm should not exceed its stocks. If the
quantity exceeds maximum level limit then it will be overstocking. Overstocking will mean
blocking of more working capital, more space for storing the materials, more wastage of
materials and more chances of losses from obsolescence.
Maximum stock level = Reordering level +Reorder quantity-(Minimum Consumption X
minimum reorder period).
Danger stock level:
It is fixed below minimum stock level.
The danger stock level indicates emergency of stock position and urgency
of obtaining
fresh supply at any cost.

Danger stock level = Average rate of-consumption X emergency delivery time.
Average stock level:

This stock level indicates the average stock held by the concern,
Average stock level = Minimum stock level + % x reorder quantity.
Determination of safety stocks

Safety stock is a buffer to meet some unanticipated increase in usage. The demand for
materials may fluctuate and delivery of inventory may also be delayed and in such a situation
the firm can face a problem of stock out.
In order to protect against the stock out arising out of usage fluctuations, firms usually
maintain some margin of safety stocks.Two costs are involved in the determination of this
stock that is opportunity cost of stock outs and the carrying costs.If a firm maintains low
level of safety frequent stock outs will occur resulting into the larger opportunity costs. On
the other hand, the larger quantity of safety stocks involves carrying costs.
17
outs involving heavy ordering cost and if the inventory level is too high it
will be
unnecessary tie up of capital.

An efficient inventory management requires that a firm should maintain an optimum level of
inventory where inventory costs are the minimum and at the same time there is no stock out
which may result in loss or sale or shortage of production.
Minimum stock Level: It represents the quantity below its stock of any item should
not be allowed to fall.
Lead time: A purchasing firm requires sometime to process the order and time is also
required by the supplying firm to execute the order. The time taken in processing the order
and then executing it is known as lead time.
Rate of consumption: It is the average consumption of materials in the factory. The rate of
consumption will be decided on the basis of past experience and production plans.
Nature of material: The nature of material also affects the minimum level. If a material is
required only against the special orders of the customer then minimum stock will not be
required for such material. Minimum stock level can be calculated with the help of following
formula.
Minimum stock level = Reordering level - (normal consumption X

Normal re-orders period).
b) Re-ordering level:
When the quantity of materials reaches at a certain figure then fresh order is sent to get
materials again. The order is sent before the materials reach minimum stock level. Reordering level is fixed between minimum level and maximum level.
Re-ordering level = Maximum consumption x maximum re-order period.

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Outs involving heavy ordering cost and if the inventory level is too high it will be
unnecessary tie up of capital.
An efficient inventory management requires that a firm should maintain an optimum level of
inventory where inventory costs are the minimum and at the same time there is no stock out
which may result in loss or sale or shortage of production.
Minimum stock Level: It represents the quantity below its stock of any item should
not be allowed to fall.
Lead time: A purchasing firm requires sometime to process the order and time is also
required by the supplying firm to execute the order. The time taken in processing the order
and then executing it is known as lead time.
Rate of consumption: It is the average consumption of materials in the factory. The rate of
consumption will be decided on the basis of past experience and production plans.
Nature of material: The nature of material also affects the minimum level. If a material is
required only against the special orders of the customer then minimum stock will not be
required for such material. Minimum stock level can be calculated with the help of following
formula,
Minimum stock level = Reordering level - (normal consumption X

Normal re-orders period).
Economic Order Quantity (EOQ);

The quantity of material to be ordered at one time is known as economic
ordering
quantity.
This quantity is fixed in such a manner as to minimize the cost of ordering and
carrying costs,
Total cost of material = Acquisition cost+ carrying costs +ordering cost
Carrying cost: It is the cost of holding the materials in the store.
Ordering cost: It is the cost of placing orders for the purchase of materials.
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EOQ can be calculated with the help of the following formula.

EOQ - 2 CO/I
Where C=consumption of the material in units during a year
O=ordering cost.
I= carrying cost or interest payment on the capital.
ECQ
CO
A-B-C Analysis: (Always better control analysis)

Under A-B-C Analysis, the materials are divided into 3 categories viz., A.B and C.
Almost 10% of the items contribute to 70% of value of consumption and this category is
called 'A' category.
About
20%
of the
items
contribute about 20% of value of consumption and this is
known as category 'B materials, Category

"C"
covers about 70% of items of materials which contribute only 10% of value of
consumption.
VED Analysis; (Vital Essential Desire)

The VED analysis is used generally for spare parts. Spare parts classified as Vital (V),
Essential (E) and Desirable (D).
The vital spares are a must for running the concern smoothly and
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These
Must be stored adequately.
The *E' type of spares are also necessary but their stocks may be kept at low figures.
The stocking of D type spares may be avoided at times. If the lead time of these spares is
less, then stocking of these spares can be avoided.
INVENTORY TURNOVER RATIO

Classification and Codification of Inventories:
The inventories should first be classified and then code numbers should be assigned
for their identification. The identification of short names are useful for inventory management
not only for large concerns but also for small concerns. Lack of proper classification may also
lead to reduction in production.
Generally, materials are classified- accordingly to their nature such as construction
materials, consumable stocks, spares, lubricants etc. After classification the materials are
given code numbers. The coding may be done alphabetically or numerically. The later
method is generally used for coding.
In SCCL the item codification is done on a ten digit code wherein the class of
materials is assigned two digits, sub class is assigned two digits, assembly is assigned two
digits, sub-assembly is assigned three digits and check number is one digit.
Valuation of inventories-Method of valuation:
FIFO method
LIFO method
Base Stock method
Weighted average price method.
CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall objective of the inventory system is to minimize the cost to the firm
at the risk level acceptable to management, the more proximate criteria for judging the
inventory system are:
Comprehensibility
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Adaptability
Timeliness
Areas of improvement: Inventory management in India can be improved in various ways.
Improvements could be affected through:
Effective computerization: Computers should not be used merely for accounting purposes
but also for improving decision-making.
Review of classifications: ABC and FSN classifications must be periodically reviewed.
Improved Co-ordination: Better co-ordination among purchase, production, marketing, and
finance departments will help in achieving greater efficiency in inventory management.
Development of long term relationships:

Companies should develop long term relationships with vendors. This would help in
improving quality and delivery.
Disposal of obsolete/surplus inventories:

Procedures for disposing obsolete/surplus inventories must be simplified. Adoption of
challenging norms:
Companies should set benchmarks with global competitors and use ideals like JTT to
improve inventory management.
Inventory cost - an overall view

In financial parlance, inventory is defined as the sum of the value of the raw materials, fuels,
and lubricants spares parts maintenance consumable, semi-processed materials and finished
goods stock at any giving point of time. The operational definition of inventory would be :
amount of raw materials, fuel and lubricants, spare parts and semi-processed materials to be
stocked for the smooth running of the plant/industry.
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INVENTORY MANAGEMNT IN SCCL

About 10% of the total cost of production in SCC Limited represents inventory cost.
Inventories are maintained basically for the operational smoothness which they can be
affected by uncoupling successive stages of production, whereas the monetary value of the
inventory serves as a guide to indicate the size of the investment made to achieve this
operational convenience. The materials management departments' primary function is to
provide this operational convenience with a minimum possible investment in inventories.
Materials department is accused of both stock outs as well as large investments in inventories.
The solution lies in exercising a selective inventory control and application of inventory
control techniques. Inventories built to act as a cushion between supply and demand. It is
sufficient to take care of the requirements of demand till the next supply arrives. It is
sufficient to take care of probable delays in supply as well as probable variations in demand.
The size of the inventory depends upon the factors such as size of industry internal
lead time for purchase, supplier's lead time, vendor relations, availability of the materials,
annual consumption of the materials. Inventory cost can be controlled by applying Modern
Techniques viz, ABC analysis, SDE, FSN, HMC, VED etc, these techniques can be used
effectively with the help of computerization. Who determines inventory:
Norm per inventory could be set by the area top management. In the SCCL corporate
planning department will allocate this investment with the various items taking into
consideration the requisitions given by the areas and requisitions approved by the corporate
planning department for smooth operation of the company. Purchase department will process
the procurement action.
Inventory cost represents:

A.
The total value of stores and spares and capital spares,
B.
Stores in transit and under inspection and
C.
Stock of finished products.
Normally, there are certain problems in maintaining optimum level of inventory.

Problems of inventory can be resolved by the cost implications. Costs which are
relevant for consideration are discussed in the following lines;
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Basically there are four costs for consideration in developing an inventory model.
1.
The cost of placing a replenishment order.
2.
The cost of carrying inventory.
3.
The cost of under stocking and
4.
The cost of overstocking.

The cost of ordering and inventory carrying cost are viewed as Hie supply side
costs and help in the determination of the quantity to be ordered for each
replenishment.
The under stocking and over stocking costs are viewed as the demand side
costs and help in the determination of the amount of variations in demand and the
delay in supplies which the inventory should withstand.
Whenever an order placed for stock replenishment, certain costs are involved,
and, for most practical purposes it can be assumed that the cost per order is constant.
The ordering cost may vary depending upon the type f items, for example raw
material like steel against production component like castings in steel plants, support
materials in the case of coal industry.
Ordering cost
1.
Paper work costs, typing and dispatching an order.
2.
Follow up costs- the follow up required to ensure timely supplies includes

the travel cost for purchase follow up, the telephones, and
postal bills etc.
3.
Costs involved in receiving of the order, inspection, checking and

handling in the stores.
4.
Any set up cost of machines charged by the supplier, either indicated in

quotations or assessed through quotations for various quantities.
5.
The salaries and wages of the purchase department.
24
Inventory carrying Cost:

This cost is measured as % of the unit cost of the item.
This measure gives basis for
estimating what are actually costs a company to carry stock. This cost includes:
Interest on capital
Insurance and tax charges
Storage costs - labour costs, provision of storage area and facilities like
Bins, racks etc.
Transport bills and hamali charges.
Allowance for deterioration or spoilages.
Salaries of stores staff
Obsolescence.
The inventory carrying cost varies and a major portion of this is accounted for by the
interest on capital. SCCL is paying 20% interest on bank loans.
Under stocking cost:

This cost is the cost incurred when an item is out of stock. It includes cost of lost
production during the period of stock out and the extra cost per unit which might have to be
paid for an emergency purchase.
Overstocking cost:
This cost is the inventory carrying cost (which is calculated per year) for a specific
period of time. The time varies in different contexts- it could be the lead time of procurement
of entire life time of machine. In the case of one time purchases, over stocking cost would be
= : purchase price- scrap price.
25
Inventory cost in relation to SCCL shall be classified as follows:

Inventory can be classified as capital and revenue. Certain items though titled as
capital in nature, example coal tubs, cap lamps etc., 100% of the depreciation shall be
charged in the year they are drawn. Hence, due care is to be taken by user mine while
drawing the material.
Materials which are to be imported from other countries have to be planned well in
advance nearly about 24 months and to initiate the proposals for procurement.
Similarly some of the items do not require any lead time since they are available in
the local market. For example sand, dolomite powder, automobile spares etc.
Sand transportation could be done with minimum lead time in Manuguru, Kothagudem areas
and Godavarikhani region since abundant sand is available in nearby areas of operations.
Similarly some of the inventories are to be procured during particular seasons: For example
timber. General experience in SCCL reveals that the production during the months of
November to March is on high side as such the requirement of spares and stores will be on
high side. As such one should be in a position to keep the material with better economics for
these five months taking lead time into account for procurement of material to get optimum
production. In the current financial year production trend reveals that the production is
improving and showing good performance through out the year unlike earlier years in
underground mines.
Inventory cost of any organization also adversely affects by retaining obsolete/scrap
and inventory costs can be reduced by the management with an advance planning of
procurement of materials, periodical review of existing spares with reference to the fast
consumption, ascertaining the information regarding the availability of spares in other areas.
Holding of extra inventory will be an additional financial burden to the company due to
payment of interest charges on the materials purchased, diminishing value of materials by
keeping them in stores for a long time, handling charges, space rent etc.
26
INVENTORY IN SCCL DURING 2006-11 IS AS FOLLOWS:

Rs.in lakhs
1 .stores
and
capital items
2006-07
2007-08
2008-09
2009-10
2010-11
23738.70
21954.87 22980.29
24786.6
25725.63
2. stores in transit and

under inspection
2577.11
3252.47
4166.44
2399.98
3756.53
3. Stock of coal, coke coal

tar fuel
4181.88
1311.06
1425.47
9668.87
19774.51
spares
Value of stores and spares representing 7.36, 8.46, 7.71, 8.02 month consumption during the
years 2006-07, 2007-08, 2008-09, 2009-10,2010-11 respectively.
Stock of coal, coke and coal tar fuel representing 0.56, 1.11, 0.89, 0.51 monthly sales
during the years 2006-07, 2007-08, 2008-09, 2009-10,2010-11 respectively.
In order to reduce the inventory cost the following steps may be considered accurate
assessment of materials requirement from area level to corporate office. Communicating
proper delivery schedule to suppliers based on our requirements. Better planning at mine
level before installation of equipment viz. ventilation and haulage and pumping etc. After
careful study the norms should be fixed regarding consumption of various areas/items.
Standardization of equipment will facilitate inter changeability in the event of
Breakdowns and also reduce the downtime of machines/equipment. Preventive
maintenance of equipments as per the schedules Periodical spot-checks at work spots for
tracing the availability of spares and the consumables.
Accountability and responsibilities are to be fixed. Introduction of technical audit cells and
Updating of technology from time to time. Re-utilization of materials.
27
Accounting for materials:

The accounting for direct material begins with the issuance of the purchase requisition
and ends only when the finished product has been shipped to the customer.
In the course of this cycle the other two elements of cost, direct labour and factory
over heads become part of material cost to the extent that they are applied to production and
included in inventory values.
Acquiring raw materials from vendors:

Four basic documents are involved in acquiring materials from vendors.
They are purchase requisition. the purchase order, the receiving report and the vendors
invoice. After due consideration of purchase requisition, a vendor is selected and a purchase
order is sent to the vendor by the purchasing agent. Ultimately the merchandise and the
vendors invoice are received and the receipt of merchandise is recorded on a receiving report.
If the vendors invoice, the purchase order, and the receiving report are found to be in
agreement, a voucher for payment is approved. At this time the receipt of the merchandise is
recorded in the General ledger as follows-.
Dr. Raw materials inventory
Cr. Accounts payable.
When payment is made, the following general ledger entry is made:
Dr. Accounts payable
Cr. Cash.
Purchase Requisitions:
This is used to request the purchasing agent to order materials. Timing of the
requisition and the amount to be requisitioned depend on the kind of material and the
circumstances.
For control purposes it is important that the individuals authorized to issue purchase
requisitions be limited to such personnel as foremen, storekeepers and departmental heads.
28
The purchase requisition originates a substantial percentage of the total costs of a

company, and one of the surest ways to control costs is to control them before they are
incurred.
Purchase requisitions may be dispensed with in those instances where agreements are
made with a supplier to meet specific requirements over a period of time. Such agreements
are blanket purchase requisitions.
In many companies, a copy of the requisition is sent to the accounting department for
checking of the propriety of the code. The origination also inserts the quantity to be ordered
the description of the material, the amount on hand, the monthly consumption and any special
rotation as to the purpose for which the material is ordered.
Vendor selection depends upon such things as quality and availability of desired
quantities when needed as well as price.
Purchase Orders:
A purchase order is prepared from the purchase requisition, with sufficient copies to meet the
requirements of the company organization structure. Usually at least four are prepared, the
original for the vendor and copies for the purchasing department files, the accounts payable
department and the receiving department. The copy for the latter department may have the
quantity ordered blocked out so that the count of material at receiving will not be influenced
by the quantities shown on the purchase order.
The purchase order is a vital document in the materials accounting process, for when it is
accepted by the vendor, it becomes a contract. As a contract it must be complete and specific.
Therefore, along with the list of items which are ordered, the purchase order should also
contain the terms and conditions like the required delivery date, packing and shipping
instruction, insurance instruction, billing instruction, and terms of payment. It is customary to
include clauses and conditions as to warranty, patent infringement, contractors liability when
services are to be performed etc. Such clauses may be inserted as required or be printed on
the face or back of the order with a definite and well marked statement that they are a part of
the contract. These clauses are very useful controlled devices from the point of view of
preventing costly legal entanglements.
29
Receiving Reports:
When material is received, the quantity is determined by counting, weighing or other
measurement by the receiving department. This is done to ensure that payment is made only
for goods actually received.
The receiving department prepares receiving reports, either on a special form or on a
receiving copy or copies of the purchase order.
Payment of Invoices:
Vendor's invoices are sent to the accounts payable department. Approved vendor's
invoices are filed by vendor according to date of payment. On that date a voucher is prepared
on which listed invoices of the vendor covered by the voucher. The cheque is drawn for the
net amount indicated by the voucher. A combination cheque and voucher form is frequently
used. The recording in the Invoice register may be done when the invoices are received or
after they are attached to die voucher for payment.
Internal Control:
The purchasing, receiving and payment procedures for goods and services are a vital
part of a system of internal control.
The matching of purchase orders, receiving records, and vendor's invoices assures that
payments are not made for goods and services not received and that the items of the invoice
are in agreement with those specified in the purchase order. This entire process aids in the
control of costs, for any payment for goods and services must ultimately be reflected in the
accounts as a cost of the current period or of a future period.
30
ACQUIRING RAW MATERIALS FROM THE STORE ROOM

Recognize
need for
materials in
production
Stores
Requisition
Materials are sent to work place
Notifies
store Requisition is recorded in
Clerk of need
1.
Requisition summary used to record general
ledger entry transferring R.Ms to WIP
2.
Perpetual inventory records
3.
Departmental cost records used to accumulate
materials costs by responsibility centers and to
determine costs for individual production
process.
4.
Job cost sheets used when manufacture of a
job shop variety and costs must be by
individual jobs
Journal entry:
To record total of requisition summery
Dr. Work in process
Cr. Raw materials inventory.
The first step is the recognition of the fact that materials are needed for production. Workers,
foreman and production control personnel are usually the people that recognize the need for material.
The stores requisition is prepared in order to obtain materials from the storeroom.
The stores requisition is the basic document behind general and subsidiary ledger entries charging
materials to work in process. The General Ledger entry resulting from stores requisitions is simply a
transfer of materials from the raw materials inventory to the work in process inventory. Such an entry is
as follows: Dr. Work in process Cr. Raw materials inventory.
Stores Requisition:
The stores requisition is the document, which is used to notify the storerooms that
materials are to be released for production. For control purposes it is better to have the foreman and
/or specified production control personnel requisition the materials.
In some plants the production control department may issue stores requisitions at the
same time that production schedules are issued. The foreman in such cases might be restricted only
31
to the issuance of the requisitions for materials required in excess of estimated or standard
quantities. This excess stores requisition is usually a distinct form, which might require a
supervisor's signature as well as foreman's signature. Waste of material cannot be hidden for long when
excess stores requisitions are used.
Recording the stores requisition - the General Ledger:

The stores requisition is recorded in the general ledger and in variSous subsidiary ledgers.
Among the usual subsidiary ledgers are the perpetual inventory cards, departmental cost
records, and job cost sheets.
STORES REQUISITION SUMMARY
Date Req. No
Dept -I
Direct
Indirect
Dept-Il
Direct
Indirect
Total
Direct
Indirect
Total
In the genera] ledger, stores requisitions are recorded by a transfer from raw materials
inventory (a credit) to work: in process (a debit)
Each stores requisition is not the subject of a general ledger entry. The stores
requisitions for a month are totaled, and this total is the subject of the above general Ledger
entry. Ordinarily each stores requisition is recorded in a requisition summary which is totaled
each month to determine the dollar amount of the general ledger entry.
A requisition summary shown above provides departmental distinctions as well as
distinctions between direct and indirect materials.
When the general ledger contains only one work in process account and one factory
overhead account, the monthly entry from the requisition summary would be
Dr. "Work in process (for direct materials)
Dr.
Factory overhead (for indirect materials)
Cr. Raw materials inventory

32
When the general ledger contains departmental accounts the monthly entry from the
requisition summary would be:
Dr.
Work in process-I
Dr.
Factory overhead-I
Dr.
Work m process-JI
Dr. Factory Overhead-fl

Cr. Raw materials inventory.
Recording the stores requisition- a subsidiary ledger:

The three basic subsidiary ledgers in which stores requisitions might be recorded are
the perpetual inventory cards, departmental cost records, and job card sheets. Perpetual
inventory are very useful for inventory control purposes, whereas departmental cost records
are valuable aids in accounting for each "area of responsibility". In addition, departmental
cost records are indispensable aids in calculating unit costs when production is of a
continuous process nature, for example, a canning factory.
Stores requisitions can be recorded individually in subsidiary ledgers, or if
summarizations are possible, requisitions can be recorded in summary form. The perpetual
inventory cards are to be useful aids in controlling inventories, the stores requisitions must be
recorded therein at least once each week or even daily for critical major materials.
Departmental cost records can take many different forms. However, if they are to be
complete, direct materials, direct labor, and factory overhead must be a part of such records.
The job cost sheet contains complete information on the costs pertaining to a job.
Direct labor, direct material, other direct charges, and factory overhead are all included on a
job cost sheet. Other direct charge includes such items as special tools and dies which can be
and are worthwhile tracing to individual jobs. Factory overhead per job is usually estimated
in terms of direct labor costs
33
INVENTORY VALUATION AND COST FLOWS
Inventory cost
One can readily visualize the determination of inventory quantities by physical count
or by use of perpetual inventory records. When this quantity is determined, it must be
multiplied by & unit cost in order to determine the inventory value that is used on financial
statements.
Trade and quantity discounts are to be excluded from unit cost since these discounts
exist for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the
other hand, have been considered as a reward for early payment and as a penalty for late
payment. The "reward" has often been interpreted as a form of income, whereas the
"penalty" has often been interpreted as a loss rather than as a part of unit cost. Thus it would
not be difficult to find difference of opinion as to whether invoice cost includes or excludes
cash discount.
When the "current replacement cost" of material on hand at the close of a year is less
than the actual cost, the inventory value is reduced to replacement cost (current market
price). Thus the acceptable basis inventory valuation is the "lower of cost or market" or
more properly the "lower of actual cost or replacement cost".
The determination of inventory values is very important from the point of view of the
balance sheet and the income statement since costs not included in the inventory (the balance
sheet) are considered to be expensive and are thus included in the income statement.
Valuation of inventories - methods of determination:

Although the prime consideration in the valuation of inventories is cost, there are a
number of generally accepted methods of determining die cast of inventories at the close of
an accounting period. The most commonly used methods ate first-in first-out (FIFO)
average, and last-in first -out (LIFO). The selection of the method for determining cost for
inventory valuation is important
34
for it has a direct bearing on the cost of goods sold and consequently on profit. When a
method is selected, it must be used consistently and cannot be changed from year to year in
order to secure the most favorable profit for each year.
1. THE FIFO METHOD (FIRST-IN F1RST-OUT METHOD)

Under this method it is assumed that the materials or goods first received are the first to be
issued or sold. Thus, according to this method, the inventory on a particular date is presumed
to be composed of the items which were acquired most recently.
The value of inventory would remain the same even if the "perpetual inventory system" is
followed. Advantages-The FIFO method has the following advantages.
1. Value of stock nearer to current market prices since stock is presumed
to consisting of, the most recent purchases.
2 It is based on cost and, therefore, no unrealized profit enters into the
financial accounts of the company.
3. The method is realistic since it takes into account the normal procedure of
utilizing or selling those materials or goods, which have been longest in
stock
Advantages;
It takes into account the current market conditions while valuing materials issued to different
jobs or calculating the cost of goods sold. The method is based on cost and, therefore, no
unrealized profit or loss is made on account of use of this method. The
method
is
most
suitable for materials, which are of a bulkyard non-perishable type.

Disadvantages: - The method suffers from the following disadvantages. It involves
complicated calculations and hence increases the possibility of
clerical
errors.
Comparison between different jobs using the same type of material becomes sometimes
difficult.
A job commenced a few minutes after another job may have to bear an entirely
different charge when two different lots with different prices are to be charged for the same
material drawn.
35
The FIFO method of valuation of inventories is particularly suitable in the following

circumstances.
(i)
The materials or goods are of perishable nature.
(ii) The frequency of purchases is not large

(iii) There are only moderate fluctuations in the prices of materials or goods
purchased.
(iv) Materials are easily identifiable as belonging to a particular purchase
lot.
2. THE LIFO METHOD (LAST-IN FIRST-OUT METHOD)

This method is based on the assumption that last item of materials or goods purchased
are the first to be issued or sold. Thus, according to this method, inventory consists of items
purchased at the earliest cost. Advantages: - This method has the following
3. BASE STOCK METHOD:

This method is based on the contention that each enterprise maintains at all times a
minimum quantity of materials or finished goods in its stock. This quantity is termed as base
stock. The base stock is deemed to have been created out of the first lost purchased; therefore,
it is always valued at this price and is carried forward as a fixed asset. Any quantity over and
above the base stock is valued in accordance with any other appropriate method. As this
method aims at matching current costs to current sales, the LIFO method will be most
suitable for valuing stock of materials or finished goods other than the base stock. The base
stock method has the advantage of charging out materials / goods at actual cost. Its other
merits or demerits will depend on the method, which is used for valuing materials other than
the base stock.
36
4. WEIGHTED AVERAGE PRICE METHOD:

This method is based on the presumption that once the materials are put into a
common bin, they lose their identity. Hence, the inventory consists of no specific batch of
goods. The inventory is thus priced on the basis of average prices paid for the goods,
weighted according to the quantity purchased at each price.
Weighted average price method is very popular on account of its being based on the
total quantity and value of materials purchased besides reducing number of calculations. As a
matter of fact the new average price is to be calculated only when a fresh purchase of
materials is made in place of calculating it every now and then as is the case with FIFO,
LIFO methods. However, incase of this method different prices of materials are charged
from production particularly when the frequency of purchases and issues/sales is quite large
and the concern is following perpetual inventory system.
Valuation of inventories-impact on the flow of costs:

As should be quite evident, the different methods of calculating inventory values will
all have their impact on the flow of costs through the balance sheet into the income
statement. The dollars that are paid to acquire inventory are always divided between the
balance sheet (inventories) and the income statement (cost of goods sold), there is no other
place to put them. Thus if the different methods of calculating inventory produce differing
inventory values, they will also produce differing cost of goods sold figures, and the
differing cost of goods sold figures will naturally produce differing profit figures.
In order to show the impact of inventory valuation on cost flows, the preceding
exhibits are summoned. Each method produces a different figure for the transfer of raw
materials to work in process. These differences appear to be small, but the only reason for
this is that the dollar amounts have been kept small to make the illustration workable.
With the transfer of materials to work in process, the cost flow or transfer will have its
impact on the work in process inventory and the transfer of completed merchandise to
finished goods. Ultimately when goods are sold, the varying methods of valuing inventories
37
will have their impact on cost of goods sold and the profit. The effects of the cost flows on
cost of goods sold and profits can be accentuated further if the differing methods of valuing
inventories are applied to work in process and finished goods.
Different between evaluation methods

The differences in inventory values and cost flows for each of the method illustrated
result from only one factor that is, changing purchase prices or unit costs. If purchase prices
had remained stable or unchanged, each method would have produced the same inventory
value and cost flow.
Cost flows and inventory are exactly the same under stable prices. With a rising price
level, the LIFO method produces the highest cost flow and the lowest inventory. With a
felling price level, the LIFO method produces the lowest cost flow and the highest inventory.
The cost flow under LIFO follows the price level, LIFO produces larger cost flows when
prices are rising and smaller cost flows when prices are falling. A final item to consider is that
the average method produces results, which fell between the extremes of LIFO and FIFO.
Evaluation of methods-can we justify the differences

The best method of inventory valuation might be "specific identification", that is, the
units in inventory should be identified with the specific invoices and thus specific unit costs
to which they apply.
Fortunately, the FIFO method constitutes a very useful approximation to the specific
identification method if one can reasonably assume that the actual flow of materials is firstin first- out This assumption is not unreasonable and thus we have stated the main argument
for the FIFO inventory scheme, that is, the Physical flow of materials would match the flow
of costs under the first-in first-out method.
When the units in inventory are identical, interchangeable and do not follow any
specific pattern of physical flow, the average cost system would seem to be appropriate.
The primary difference between the FIFO and average methods is centered on the
physical flow since both methods could involve identical and interchangeable units. The
FIFO method fits a first-in first-out physical flow. The average method fits a system, which
has no specific pattern of physical flow. Finding a situation where there is no specific pattern
of physical flow should be quite difficult because of the fact that most inventory items are
38
subject to deterioration and any reasonable person would attempt to reduce such deterioration
by instituting a physical flow approximating first-in first-out. The major reason for the use of
the average method is something other than the lack of specific physical flow.
Ordinarily the LIFO method cannot be justified on the basis of the physical flow of
materials. Under conditions of changing prices, the advocates of LIFO say that the only
method, which matches costs and revenues, is the LIFO method. The LIFO method assumes
that the latest item is the first item out, and thus the current costs of materials are matched
with the current selling prices or current revenues. The FIFO method, on the other hand,
assumes that the first item in is the first item out, and thus the non-current costs of materials
are matched with current selling prices or current revenues. This matching current cost with
current revenues is the essence of the argument for the LIFO method.
As can be seen by the above comments, there is no one best method of valuing
inventories. The method chosen should fit the situation. A physical flow pattern comparable
to FIFO would force one to consider the FIFO method. The lack of a discernible physical
flow pattern would force one to consider the average method. Concentration on cost flows, as
distinct from physical flows, would force one to consider the LIFO method especially where
there appears to be a discernible trend towards rising prices (or falling prices) as has been the
case in our economy during recent years.
Inventories valued at standard cost:

A very useful method of valuing inventories is at a standard cost. With a standard cost
system there is no need for spending a great deal of time and money tracing unit costs
through perpetual inventory records.
PERPETUAL INVENTORY CARD UNDER A STANDARD COST

SYSTEM;
Perpetual Inventory
Plant :
Standard Costs:
Order Quantity:
Order Point:
Location:
Date
Description
On order
Received
Issued
Available
On order On Hand
39
As shown above, there is need only for physical quantities since the inventory value is
the physical quantity multiplied by the standard cost. With the cost and value columns
disposed off, a perpetual inventory card can include additional data such as quantities on
order. Quantities reserved, and quantities available. These additional data are very useful for
inventory and production control purposes. On the basis of a few calculations concerning
actual units costs, inventories at a standard costs could easily be converted into inventories on
a FIFO, a LIFO, or an average cost basis.
Inventory of Obsolescence:
Obsolete inventories cannot be used or disposed off at "values carried on the books. Frequent
reviews should be made of all inventories, and when obsolescence is indicated a request for
revaluation should be prepared for approval by management. The difference between original
and obsolete value should be recorded by a charge to an operating account. Inventory
obsolescence, and a credit to inventory. If the material is scrapped, this will be for the Ml
inventory value of the material. If it is anticipated that the material can be sold at reduced
value or used in areas where it will be worth less than its original value, the entry would be
only for the amount of write down. Some companies carry a salvage inventory and transfer to
it materials, which may be sold or used at reduced values. Where this is done, the entry would
be:
Dr.
Salvage inventory
Dr. Inventory obsolescence

Cr. Raw material inventor/ or Supplies inventory.
In order to know the inventory management system of SCCL, a questionnaire analysis
has been served to the Company and got it filled up by stores Manager of the Company. The
questionnaire date has been presented below.
40
The organization structure of inventory and stores department is as

follows.
Organization structure of SCCL, Stores
Director
CGM Stores
Addl. GM (Stores)
Dy. GM (Stores)
SE (STORES)
Executive Engineer
Asst. Engineer
Organization structure of Area Stores
General Manager
Dy. GM (Stores
Executive Engineer
Store Keeper
Staff
41
The executive responsibilities to manage the inventory are to maintain inventory

without stock-cuts or hampering of production.
The company classifies inventory into FM's, WIP, SM's, stores and spares &
consumables.
The company purchase inventory from local, non-local and sometimes imports.
The objective of inventory management of this company are :

i)
ii)
in)
w)
Maintaining minimum inventory

Not to hamper the production
avoid stock out situation
Proper planning of materials
The Company plans for inventory requirements using ABC analysis technique. Items costing
70% are denoted as high level and grouped into 'A.' type, medium level items value 20% will
be grouped into *B' type and the low level items valuing 10% will be taken into 'Cf type.
The Company plans for inventory consumption on monthly basis. The company values the
materials applying FIFO and weighted average methods.
If there is any scrap materials, the company may sell to scrap dealers through MSTC
or it may re-utilize it. Sometimes some portion of scrap will be utilized for company's own
consumption and some other times some portion will be disposed and the same will be
accounted to Profit & Loss account.
In order to control the inventory the company follows ABC, VED analysis and EOQ
techniques.
The purchasing procedure of this company is centralized.
The method of purchasing applied by the company is through tenders.
42
The method adopted by the company for stock verification is done once in an year physically
with the help internal audit department. In general, this physical verification is done in the
month of January.
Verified balance will be certified on the bin card by internal audit. The bin card and ledger
balance should be tallied with verified balance.
The methods adopted for controlling the storage loss are checking with the stores
ledger, keeping detailed stock and stored ledger, periodic stock and comparing with
stores ledger.
The company is not maintaining any inventory norms, ratios.
The present level of investment in inventory is excessive because of non-moving

items and obsolete items also in stock. In some sections like auto section, bearings &
machine mining sections 10 to 20% of material can be counted as non-moving.
Now the above system is being done through SAP modules. Also, SCCL is planning
for perpetual auditing.
Stores Management
In Singareni, we have total 12 stores:
Area
KGM
YD
MNG
RGM
BHPL
BPA
MM
SRP
Total
Opencast Stores
Nil
Nil
1
3
Nil
Nil
Nil
Nil
4
Central Stores
1
Nil
Nil
Nil
Nil
Nil
Nil
Nil
1
Area Stores
1
1
Nil
1
1
1
1
1
7
Total
2
1
1
4
1
1
1
1
12
A calendar programme for purchase of various items in different months is prepared

at Corporate Level.
43
Calculation of net stock to be ordered (at area level)

Projected Requirement (PR)
Average monthly consumption x 15
(12 months requirement + 3 months safety stock)=A
Net Requirement (Actual)
P.R - stack-B.O (Balance in order) ^B
Example: Last three years consumption
(07-08 + 08-09 + 09-10)/3 for ascertaining yearly consumption After processing purchase
order - when actually order is placed before selected supplier -A reviewed requirement is sent
to purchase department by O/o. GM(Stores).
ADVANTAGES OF CODIFICATION:
1.
Eliminates stocking of same item under
different items, nomenclatures
or
by function or by use.
2.
eliminates unnecessary varieties for example - sizes.
3.
Enables proper storage and prompt issue of materials.
4.
Facilitates proper procurement and accounting.
5.
Facilitates introduction of modern inventory control.
6.
Facilitates
introduction
of
computerization
for
accounts
and reporting.
Codification into class of material is done taking into consideration the characteristics
and use etc. Accounting is done on a weighted average basis opening balance quantity
ANALYSIS:
Non-moving item analysis
Obsolete items
Insurance items
ABC analysis based on consumer value
XYZ analysis based on current value
Purchase Department - Head office
Objective:
Right quantity, right quality, right price, right supplier, right time at right destination.
44
Activities:
Procurement of various items according to calendar program & annual plans
Procurement of imported items
Establishment of rate contracts, open orders, department agreements, annual

maintenance contracts.
Vendor registration
Procurement of medicines and medical equipment
Processing and awarding of OB removal and drilling contract.
Coal transport, sand transport contracts
Material transport-rate contracts (that is rate per kilometer is decided)
The requirement of various materials at area stores is placed before purchase

department in the form of want sheet by Central Stores. After receiving this
department initiates purchase procedures.
In case of revenue items, 70% of previous year consumption can be processed by the
purchase department before receiving want sheet from stores. Thus, all processing can be
done beforehand.Then tender documents are prepared.
Notice inviting tender (NIT)., containing the general terms and conditions of the offer
is given in following modes;
Open tender or Global tender: If item is to be imported, then global
l.
Tender is given.
If value of tender>5 lakhs
If reliable source of supplier not known
Advertisement may bring better response.
To avoid connivance of tenders.
2. Limited Enquiry:- Limited enquiry is floated in following cases;
Value of tender < 5 Lakhs
Reliable source of supply is known with previous record
For value of tender > 5 lakhs- on emergencies.
After obtaining permission of finance and competent authority (usually the General
Manager of the Area) limitedtender can be floated.
45
Information to at least 5 firms. If less than 5 firms, reasons for such action to be
explained and permission of chief of purchase is to be obtained.
Now this limited tender process is differed and in Areas also tenders are being
displayed in their website.
3. Single tender:
If purchase is from original equipment manufacturer (or) sub-assembly
manufacturer, single tender is floated. If purchase is from authorized dealer
list
of
those persons to be obtained. If more than one authorized dealer in a particular area, discount
can be asked for.
4. Rate Contract:
For proprietary items and items procured regularly, long term contract (may be one year) is
entered to supply the material at a particular rate.
5. Repeat Order:
Normally this is undertaken to cut down lead time for procurement, but this is mostly
avoided.
The original order is undertaken in normal course.
Not more than 2 years gap in original order and repeat order.
There should not be declining price trend.
Repeat order could not exceed quantity procured by original order (cumulative value
considered)
Not more than two repeat orders to be placed.
Sanction of competent authority to be taken.

Tender documents are purchased after paying requisite fees. Tenders are put in a
box. Normally they are opened on Wednesdays in RG1 area and there are specific days for
each area. Three cover basis is adopted for all tenders.
Part-A: Technical offer,
Part-B: Commercial terms &
Part-C: Price bid
First technical evaluation is done and then price is considered. (L1)
46
6. CIL order basis: For explosives, cap lamps & their spares and other heavy equipment
like dumpers, dozers rate paid by CIL is adopted.
DATA ANALYSIS
The SCCL inventory consists of stores and spares, stores in transit and under
inspection, stock of coal, stock of finished products. The various components of inventory
over a period of 5 years from 2005 to 2011 presented in the following table.
1.
COMPONENTS OF INVENTORY
Years
Stores & Spares
Stores in
Transit
Stock of Coal
Total
Rs In Lacks
2005-06
1818429
353864
165622
2337915
2006-07
2211537
265971
499440
3016548
2007-08
1874430
735184
110562
3645787
2008-09
2298029
416644
142547
2857220
2009-10
2478661
239998
966987
3685646
2010-11
2572563
375653
197745
3145961
INTERPRETATION:
47
From the above table it can be understood that the inventory of SCCL was recorded at Rs.
2337915 during the year 2005-06 and it was showed upward trend up to 2007-08.and
declined to `. 2857220, during the year 2008-09.
2.
COMPONENTIAL ANALYSIS:
The Componential analysis of inventory of SCCL from the year 2005-06 to 2010-11
is shown in the following table

COMPONENTIAL ANALYSIS
(Rupees in 000)
Years
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Stores &
Spares
1818429
(38.88%)
2211537
(36.89%)
21954.87
(82.19)
22980.29
(80.42)
24786.68
(67.24)
25725.63
(52.22)
Stores in
Transit
353864
(7.56%)
265971
(4.43%)
3252.47
(12.26)
4166.44
(14.5)
Stock of
Coal
165622
(3.54%)
499440
(8.33%)
1311.06
(4.94)
1425.47
(4.98)
2399.98
(6.5)
3756.53
(7.6)
9668.87
(26.23)
19774.51
(40.14)
Total
4675830
5993496
26518.4
28572.2
36855.53
49256.67
INTERPRETATION:
From the above table it can be interpreted that:
The investment in stores and spares, stores in transit, stock of coal were registered at52.22%,
48
7.6%, 40.14%, respectively during the year 2010-11, During the year 2005-06 the investment
in stores & spares, stores in transit, stock of coal, and stock of finished goods were registered
at 38.89%, 36.89%, 82.19%, and 52.22% respectively.
3. TREND ANALYSIS:
Trend analysis technique is applied to know the growth rate in investment of
inventory of SCCL over the review period which is shown in the following table.
TREND ANALYSIS
Year
Inventory (Amount in Crores)
2005-06
46675.30
2006-07
59934.96
2007-08
23977.84
2008-09
26139.55
2009-10
34831.46
2010-11
47354.67
INTERPRETATION:
49
It is observed thee investment on inventory was the highest in 2006-07. and swooning the
lowed in 2007-08, It is also pertinent to say that the inventory levels are not even during the
study period. Hence proper control is required to maintain equal inventory with a margin of
+/- 5%.
4. INVENTORY TURN OVER RATIO:

This ratio indicates the number of items the stock has been turned over during the
period and evaluates the efficiency with which a firm is able to manage its inventory. This
ratio is calculated by applying the following formula.
Inventory turn over ratio = Net sales /average inventory at cost
INVENTORY TURNOVER RATION:
Year
Net sales (Sales of coal

+ coke + coaltar fuel)
Average stock
(Closing Stock)
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
36291000
37905500
44996800
55004000
68538400
78584700
34157.68
32511.56
24021.09
26139.35
34831.46
47351.67
Ratio
1062.40
1165.90
1873.50
2104.26
1967.70
1659.49
INTERPRETATION:
50
From the above table it can be observed that inventory turnover ratio 1062.40 during
the year 2005-06 and it gradually increased to2104.26
in the year 2008-09. It
indicates that the stock has been turned into sales very quickly.The inventory turnover
ratio was shown fluctuating trend.
5. PERCENTAGE OF INVETORY OVER CURRENT ASSETS:

In the order to know the percentage of inventory over current assets the ratio
Of inventory to current assets is calculated and which is presented in the following tables:
Inventory over current ratio = (Inventory / Current assets) x100
Year
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Inventory
46675.30
59934.96
23977.84
26139.35
34831.46
47354.67
Current assets
877877.82
103436.20
157790.25
166466.97
162186.26
284046.69
Ratio (%)
0.053
0.579
0.151
0.157
0.214
0.166
INTERPRETATION;
From the above table it can be understood that the % of inventory over current assets ratio
was showing a declining trend except in the year 2005- 06. During the year 2005- 06the ratio
was 0.053% and it gradual/ increased to 0.151% .
51
6. PERCENTAGE OF INVENTORY OVER TOTAL ASSETS

(CURRENT ASSETS + FIXED ASSETS):
YEAR
INVENTORY
TOTAL ASSET
RATIO (%)
2005-06
46675.30
266934.48
0.18
2006-07
59934.96
285006.92
0.21
2007-08
23977.84
250713.68
0.09
2008-09
26139.35
299628.73
0.08
2009-10
34831.46
251418.41
0.138
47354.67
463328.88
0.10
2010-11
INTERPRETATION:
From the above table it can be understood that the percentage of inventory over total assets
ratio was showing declining trend. During the year 2007-08 the ratio was 0.09% and it was
52
increased to 0.138% in the year 2009-10 and the started declining up to 0.10 in the year 201011.
7.
QUICK RATIO;
The quick ratio is the relationship between quick assets to current liabilities. Quick
ratio is more rigorous test of liability position of a firm. It Js computed by applying
the following formula.
QUICK RATIO = Quick Assets/Current liabilities, where:
Quick Asset = Current assets Inventory
YEAR
Quick Assets
Current liabilities
Quick Ratio
2005-06
64,40,363
50096.67
0.804
2006-07
73,26,072
80750.40
0.907
2007-08
155005.47
217951.71
0.711
2008-09
160651.66
304621.99
0.527
2009-10
156997.80
89951.16
1.74
2010-11
275846.12
318291.92
0.0866
INTERPRETATION:
53
From the above table it can be understood that the % of quick assets to current liabilities i.e.,
the quick ratio was showing an increasing trend till 2009-10 and then was declining till the
year 2010-11.During the year 2005-06 the quick ratio was 0.804 and it gradually Increased to
0.907 till the year 2006-07 and then started declining to 0.527 during the year 2008-09.
FINDINGS
The inventory of SCCL was recorded at Rs. 2337915 during the year 2005-06 and it
was showed upward trend up to 2007-08
The investment in stores and spares, stores in transit, stock of coal were registered
at52.22%, 7.6%, 40.14%, respectively during the year 2010-11, During the year
2005-06 the investment in stores & spares, stores in transit, stock of coal, and stock of
finished goods were registered at 38.89%, 36.89%, 82.19%, and 52.22% respectively
Inventory turnover ratio 1062.40 during the year 2005-06 and it gradually increased to
2104.26 in the year 2008-09
Inventory over current assets ratio was showing a declining trend except in the year
2005- 06. During the year 2005- 06the ratio was 0.053% and it gradual/ increased to
0.151%.
The quick ratio was showing an increasing trend till 2009-10 and then was declining
till the year 2010-11.During the year 2005-06 the quick ratio was 0.804 and it
gradually increased to 0.907 till the year 2006-07 and then started declining to 0.527
during the year 2008-09.
54
SUGGESTIONS
Provision of internet facility to all the stores in SCCL to have effective on

line communication.
Stock transfers from one stores to others stores to be done effectively.
Disposal action for obsolete and non-moving items to be takes up on priority. Indent.
The percentage of inventory over the current assets during the year 2008-09 is 15.7%
and has increased to 16.67% during the year 2010-11.
55
CONCLUSION
On this chapter an attempt is made to give the conclusions at a glance on inventory
management of Singareni Collieries Company Limited. The Following conclusions
have been drawn:
Overall, the inventory management in SCCL is up to the mark, whereby adequate

supplies of materials and stores, minimization of stock outs and avoided costly
interruptions in operations.
It has kept down by Investment in inventories, inventory carrying cost and

obsolescence losses to the minimum through purchasing economies by the
measurement of requirements on the basis of recorded experience.
It also enables the management to make cost and consumption. Comparisons between
operations and periods
The total of the components of inventory recorded in the year: 2010-11is 31,45,961,
(Rs in 000) and has increased to 36,85,646 (Rs in 000) by the year 2009-10
The component analysis has shown a declined trend and its total is 49256.67 (Rs. In
000) during the year 2010-11
Trend analysis of the inventory has increased at 2010-11 47354.67 has declined to
34831.46during the year 2009-10.
The inventory turnover ratio has shown a fluctuating trend and by the year 208-09 it
is 2104.26%,
The inventory
1659.49
conversion
period
has
been
during
the
year
2010-11
56
The percentage of inventory over the current assets during the year 2010-11 is
0.1667% and has declined to 0.157% during the year 2008-09.
The percentage of inventory over the total assets is 0.10% during the year 2010-11,
which has increased to 0.138% by the year 2009-10
BIBLIOGRAPHY
Books:
Management Accounting
R.K.Sharma
Principals & Practice
Shashi K. Gupta
Theory & Practice
Prasanna Chandra
Management Control
S.N.Murthy
Websites:
2. www.scclmines.com
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INTRODUCTION

MBA Department, AIZZA College Of Engg & Tech

NEED AND SCOPE OF THE STUDY

MBA Department, AIZZA College Of Engg & Tech

To discuss pattern, levels and trends of inventories in SCCL.

To understand the various inventory control techniques followed by

To know the performance of inventory management of the SCCL by

To minimize investment in inventories keeping In view operating requirements.

LIMITATIONS OF THE STUDY:

The study has the following limitations:

There may be approximations in calculating ratios and taking the

The study is purely based on secondary data.

The study is confined to 45 days

The limitations of ratio analysis can be applicable to the study.

MBA Department, AIZZA College Of Engg & Tech

by road. After getting down at Yellandu railway station, many of the

authorities concerned carried

The assistance is by tripartite agreements between SCCL and

MBA Department, AIZZA College Of Engg & Tech

MBA Department, AIZZA College Of Engg & Tech

LAWS SPECIFIC TO THE COAL SECTOR

Mine Regulation, 1957 and Coal Mines

The onus of administering the Mines Act,

ROLE OF SCCL IN NATIONAL SCENARIO

MBA Department, AIZZA College Of Engg & Tech

Opencast mining, launched in SCCL in 1975 now it contributes to more than

availability of coal. Apart

from the above, steps like installation

mechanical weighbridges; joint sampling methods etc

were also taken.

MBA Department, AIZZA College Of Engg & Tech

MBA Department, AIZZA College Of Engg & Tech

ADMINISTRATIVE SET UP OF SCCL:

Special Chief Secretary

DISTRIBUTION OF VARIOUS FUNCTIONAL WINGS OF SCCL

CGM (F&A) CGM (E&M)OCPS

EE (MM&PR) CGM PURCHASE CGM RG.1

GM AUDIT CGM (E&M) UGMS

HYD OFFICE CGM CIVIL

MBA Department, AIZZA College Of Engg & Tech

MBA Department, AIZZA College Of Engg & Tech

There can be instances where these materials may account for

MBA Department, AIZZA College Of Engg & Tech

BENEFITS OF HOLDING INVENTORIES

The transaction motive: which facilitates continuous production and timely

the unpredictable changes in demand and supplies of materials,

RISK AND COSTS OF HOLDING INVENTORIES

Capital costs: Maintaining of inventories results in blocking of the firms financial

The firm has therefore to arrange for additional funds

to meet the cost of

This may be due to increased market

supplies, competition or general depression in the market,

Risk of obsolescence: The inventories may become obsolete due to improved

Objects of Inventory Management

MBA Department, AIZZA College Of Engg & Tech

The following are the objectives of inventory management;

Suitable quality standards will ensure

MBA Department, AIZZA College Of Engg & Tech

fresh supply at any cost.

Average stock level:

Determination of safety stocks

MBA Department, AIZZA College Of Engg & Tech

unnecessary tie up of capital.