You are on page 1of 43

Objective of the Study

:
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 required. 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.

RESEARCH METHODOGY
Research methodology is the way to systematically solve the research problem. Objective of research study is Analysis of inventory of Delta Ltd. Analyzing of inventory, we determining following inventories1. 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 inventory. Working hypothesis of the objective is that inventories are the stock piles of goods .The all organization on their inventories. JOL 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. The particular method for data collecting used direct interview with assistants and telephone interview with friends to known about annual investment of inventories and other important data.

INTRODUCTION OF THE TOPIC INTRODUCTION
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.

MEANING OF INVENTORY: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 includes 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.

NATURE OF INVENTORIES: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: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.

WORK IN PROGRESS:These inventories are semi manufactured products. They represent products that need more work before they become finished products for sales.

FINISHED GOODS:Finished goods inventories are those completely manufactured products whichare 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 level 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.

SUPPLIES:
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.

MANAGEMENT OF INVENTORY
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 required. 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 be kept at a reasonable level.

CONCEPT OF INVENTORY MANAGEMENT
The term inventory management is used in two ways- unit control and value control. Production and purchase officials use this word in term unit control whereas in accounting this word is used in term of value control. As investment in inventory represents in many cases, one of the largest asset items of business enterprises particularly those engaged in manufacturing, wholesale trade and retail trade. Sometimes the cost of material used in production surpasses the wages and production overheads. Hence, the proper management and control of capital invested in the inventory should be the prime responsibility of accounting department because resources invested in inventory are not earning a return for the company. Rather, on the other hand, they

are costing the firm money both in terns of capital costs being incurred and loss of opportunity income that is being foregone.

OBJECTIVES OF INVENTORY MANAGEMENT
The basic managerial objectives of inventory control are two-fold; first, the avoidance overinvestment 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 improved. (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 materials. (7) Designing poorer organization for inventory management: Clear cut accountability should nbe fixed at various levels of organization.

Financial Objectives: (1) Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. The material purchased should be of the quality alone which is needed. Net order issue receive tender Quantity tenders quotation evaluations Inventory cycle 3. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets. TYPES OF INVENTORY 1. (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. (2) Reasonable Price: While purchasing materials.Buffer inventories:In Buffer inventories are held to protect against the uncertainties of demand and supply. . Their existence owes to the fact that transportation time is involved in transferring substantial amount of resources. it is to be seen that right quality of material is purchased at reasonably low price. deptt. Prod. The determination of maximum and minimum level of stock attempt in this direction. etc. Investment in inventories must not tie up funds that could be used in other activities. 2. Anticipation Inventories. Movement Inventories :Movement inventories are also called transit or pipeline inventories.B. Quality is not to be sacrificed at the cost of lower price. issue store inspect receive supplier Supplies Demand Inventory in Hand place Orders Purchase dep’t. An organization generally knows the average demand for various items that it needs.

(2) Proper and efficient use of raw materials. 3. ADVANTAGES OF INVENTORY CONTROL: (1) Reduction in investment in inventory. CONTROL OF MATERIALS : Rigid control over materials are necessary not only to guard against theft. .Materials will be protected against loss by proper physical control.All materials. is illustrated with reference to the purchase and issues procedures. There are certain prerequisites to an effective control system for materials: 1. at all times. (3) No bottleneck in production. and 7. and obsolescence. 4. and inventory control techniques.Materials will be purchased only when a need exists and in economical qualities. are all examples of anticipation inventories. which are obtained through it. The control of materials. IMPORTANCE OF INVENTORY CONTROL: The importance or necessity of inventory control is well explained in the terms of the objects of inventory control. (4) Improvement in production and sales. (5) Efficient and optimum use of physical as well as financial resources.Vouchers for the payments of materials purchased will be approved only if the materials have been received in good condition.Anticipation inventories are held for the reason that future demand for the product is anticipated. 6. fans while summers are approaching. umbrellas and raincoats before taints set in. will be charged. spoilage. Production of specialized times like crackers well before dewily. 2.Purchases of materials will be made at most favorable prices. (6) Ordering cost can be reduced if a firm places a few large orders in place of numerous small orders.Materials of the desired quantity will be available when needed. inventory systems. A proper inventory control lowers down the cost of production and improves profitability of enterprise. deterioration. over issue. as an element of cost of production.Issue of materials will be properly authorized and accounted for. 5. as the responsibility of some individual. or the piling up of inventory stocks when a strike is on the anvil. but also to minimize waste and misuse from causes such as excessive inventories.

new production technique. price-cut by the competitors etc. stores. the inventory line should be simplified. spoilage costs. Standardization. on the other . each item of the inventory must be assigned a particular code number and it must be classified in suitable group or sub-divisions. It refers to the elimination of excess types and sizes of items. specifications etc. insurance costs. improvements in product design. (c) Carrying Cost: This includes the expenses for storing and handling the goods. It comprises storage costs. The fewer the orders.(7) Maintenance of adequate inventories reduces the set-up cost associated with each production run. Major risks are: (a) Price decline: They may be due to increase in market supply of the product. To facilitate prompt recording the dealing. (b) Product deterioration: This may due to holding a product for too long a period or improper storage conditions. Simplification leads to reduction in classification of inventories and its carrying costs. cost of funds tied up in inventories etc. transportation and handling charges less any discount allowed by the supplier of goods. introduction of a new competitive product. (b) Ordering Cost: This includes the variables cost associated with placing an order for the goods. ESSENTIALS OF INVENTORY CONTROL SYSTEM For an efficient and successful inventory control there are certain important conditions that are a follows: (1) Classification and Identification of inventories: The usual inventory of manufacturing firm includes raw-material. (c) Obsolescence: This may due to change in customer’s taste. work-in-progress and component etc. the lower will be the ordering costs for the firm. (2) Standardization and simplification of inventories: In order to facilitate inventory control. ABC analysis of material is very helpful in this context. Risk and cost Associated with Inventories: Holding of Inventories expose the firm to a number of risks and costs. The Costs of holding inventories are as follows: (a) Material Cost: This include the cost of purchasing the goods.

production. Sufficient storage area and proper handling facilities should be organized. location. . the problem is one to set a balance between two opposite costs. It avoids the chances of over-investment as well as running a short of any item during the cost of producing. Statements forms and inventory records should be so designed that the clerical cost of maintaining these records must be kept a minimum. code for each item of inventory. reorder point. Hence.hand. In determining the EOQ. namely. 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. approving. (6)Adequate Reports and Records: Inventory control requires the maintenance of adequate inventory record and reports. receiving. storage and accounting departments. it is also essential to provide the adequate storage facilities. finance. refers to the fixation of standards of raw material to be purchased and specification of the components and tools to be used. sales and financial staff. (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. Reordering point should also be fixed beforehand. unit cost. This quantity should be fixed beforehand. safety level etc. such as purchase. Various inventory records must contain information to meet the needs of purchasing. quantities in transit. qualified. (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. (4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as how much to order at a time. experienced and devoted employees. the whole inventory control structure should be manned with trained. (5)Adequate storage Facilities: To make the system of inventory control successful and efficient one. These all departments have different outlook and objects in inventory management but financial manager has to coordinate them all. ordering costs and carrying costs. The typical information required about any class of inventory may be relating to quantity on hand. (8)Coordination: There must be proper coordination of all departments involved in the process of inventory control.

Preparation of budgets concerning materials. If the end product is a durable good. quality control of raw material is given more emphasis. FACTORS AFFECTING STOCK INVESTMENT LEVEL These factors can be put in two categories: General and Specific. high investment will be required because durable goods can be stored for a long period. the firm will require more funds for the purchase of raw material during season. (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. which affect directly or indirectly level of investment in any asset. (2) Length and Technical Nature of the production process: If production process is lengthy and of technical nature. supplies and equipment to ensure economy in purchasing and use of material is also necessary. 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. raw materials are available at cheaper rates during is production season. Hence. Usually. Following are the main factors: (1) Seasonal Character of Raw Materials: If supply of raw material used in the firm is seasonal. investment in inventory of such products is low.(9)Budgeting: An efficient budgeting system is also required. General Factors: These factors include those factors. (4) Nature of End Product: Nature of end product also influences investment in inventory. . In the technical nature production process. perishable goods cannot be stored for a long period. On the other hand. higher investment is required in raw material. (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.

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. change in taxation and export policy of governments etc. determination of maximum and minimum limits of inventory and ordering level is necessary. 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. if the prices of raw materials are expected to go down in future. it becomes necessary to be conversant with the different techniques of inventory control. The quantity is fixed keeping in view the disadvantages of overstocking. lesser investment would be required. (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. TECHNIQUES OF INVENTORY CONTROL TECHNIQUES OF INVENTORY CONTROL In managing inventories. (9) Other factors: Price control. . Longer the period. rationing. 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. higher will be the investment in inventories. To deal with the problems of inventory management effectively. On the contrary. In the absence of such loan facility. (6) Time Factor: The lead time of raw material time token in production process and sale of product also influence investment in inventories. high investment in inventories is not required. the firm should determine the optimum level of investment in inventory. the firm’s objective should be in consonance with the wealth maximization principle. (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. then comparatively lesser investment would be required.(5) Supply Conditions: If the supply of raw material is regular and there is no possibility of interruption in future. also influence investment in inventories. To achieve this. For this purpose.

stocks are kept at a much reduced level. (8) Likely fluctuation in prices.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. The maximum stock level is fixed by taking into account the following factors: (1) Amount of capital available for maintaining stores. Capital is blocked up unnecessarily in stores so there will be loss of interest. (3) Rate of consumption of the material. fire and explosion. 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. if there is the possibility of decrease in price in the near future. So these have to be stocked heavily during these periods. There are chances of deterioration in quality because large stocks will require more time for use is the factory. (2) Godown space available.g. (11)Risk of obsolescence. 4. (4) The time lag between indenting and receiving of the material. possibility of change in fashion and habit which will necessitate change in requirements of materials. 3. 2.e. 5. Certain materials are available only during specific periods of year. evaporation etc. There is danger of depreciation in market values. (9) The seasonal nature of supply of material. There is the possibility of loss due to obsolescence. For instance. (7) Cost of maintaining stores. In fact determination of this quantity . if there is a possibility of a substantial increase in prices in the coming period. (10)Restrictions imposed by the government or local authority in regard to materials which there are inherent risks. The following formula may be applied to calculate the maximum stock: (1) Maximum Stock = Minimum Inventory + Lot size (2) Maximum Stock = Reorder Level . On the other hand. More godown space is needed so more rent will have to be paid.The disadvantages of overstocking are: 1. a comparatively large maximum stock level will be fixed. There are certain stores.. (6) Possibility of loss in stores by deterioration. which deteriorate in quality if they are stored for longer period. i. (5) Length and technical nature of the production process. e.

(b) Rate of consumption of the material during the lead time. time lag between intending and receiving the 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 factors: (a) Rate of material usage: Generally this rate is found out as usage rate per day. (c) Re-order Level The following formula is applied to calculate Minimum Stock: Minimum Stock = Re-order Level .e.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. (iii) Normal or average Usage Rate: It implies quantity of material required at capacity production under normal business conditions. In some concerns this period may be significant but in large concerns this period is significant because before placing the order the .is significant because of uncertainty in respect to material usage rate and delivery period. pre week or per month. the storekeeper should initiate the purchase requisition for fresh supply of material. The quantity of production fluctuates according to demand of the product which results in variation in usage rate. Hence. (b) Ordering Period: The time taken in preparing the order for purchase of material is called ordering period. 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. (ii) Minimum usage rate: It implies quantity of material required at capacity production in most unfavorable business conditions. The main purpose of this level is to ensure that production is not held up due to shortage of any material. Re-ordering Level (Ordering Level) It is the point at which if the stock of the material in stores reaches. the following three factors: (i) Maximum usage rate: It implies quantity of material required at maximum capacity production.

(ii) Re-order point = Rate of usage x Maximum Lead Time. after that only he places the order. Calculation of Re-order Point: After taking into account the above facts re-order quantity is ascertained. (i) Re-order point = Minimum Inventory + Average usage during lead period. (ii) Re-order point = Maximum Usage rate x Maximum Lead time. (D)Minimum Stock Level: This is the level of stock below which stocks should normally not be allowed to fall. Situation4: When the rate of usage and lead time are known and are variable. Situation2: 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.purchase manager has to trace out the best suppliers. The maximum. Situation3: 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. For this purpose. 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. (ii) Re-order point = Maximum Usage rate x Lead time. Re-order point = Rate of usage x lead time. 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. © Delivery. minimum and average procurement time should also be determined. Danger Level This means a level at which normal issues of the material are stopped and issues made only under specific instructions. the following formula is applied: Situation1: When rate of usage and lead time are known with certainty. It is determined as follows: .

If the firm is buying raw materials. Ordering and Carrying Costs trade-off: The optimum inventory size is commonly referred to as economic order quantity. The storage costs comprise cost of storage space (warehousing cost). The economic size of inventory would thus depend on trade-off between carrying costs and ordering costs. Ordering costs increase in proportion to the number of order placed. transporting. taxes. the higher the firm’s ordering costs. It is that order size at which annual total costs of ordering and holding are the minimum. Ordering costs increase with the number of order. We can follow three . it has to decide lost in which it has to be purchased on replenishment. They include costs incurred in the following activities: requisitioning. receiving. If the firm is planning a production run. Ordering costs decrease with increasing size of inventory. 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. insurance. They include storage. Ordering costs: the term ordering costs is used in case of raw materials (or supplies) and includes the entire costs of acquiring raw materials. the issue is how much production to schedule (or how much to make). 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 Obsolescence Carrying costs vary with inventory size. thus the more frequently inventory is acquired. 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). Carrying costs: Costs incurred for maintaining a given level of inventory are called carrying costs.Danger level = Average Consumption x Maximum Re-order period for Emergency Purchase ECONOMIC ORDER QUANTITY TECHNIQUE One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. deterioration and obsolescence. stores handing costs and clerical and staff service costs (administrative costs). purchase ordering. inspecting and storing (store placement).

c. approach is somewhat tedious to calculate the EOQ.000 (600*Rs50) If we choose the multiple order than we order 100units on monthly basis Average inventory . is constant The total carrying costs will be the product of the average inventory units and the carrying cost per . 500 Many other possibilities can be worked out in the same manner. the formula approach and the graphic approach-to determine the economic order quantity (EOQ).Rs 30.approaches-the trial and error approach.(100+0)/2 = 50units) Average value . If a represents total annual requirements and Q the order size. (Re) 1 Average inventory .50 Carrying cost per unit. Let us assume the following data for a firm. 1200 1000 800 Q/2 600 stock 400 200 50 0 2 4 6 8 10 15 Time Inventory level over time Order.50 * Rs 50 = 2. or analytical. is fixed.formula approach: The trial error. O.200 units Purchasing cost (per order).(1200 + 0)/2 = 600 units Average value . Trail and Error Approach: The trail and error. (Rs. Estimated annual requirements. or analytical. A 1. Let us illustrate this approach. (Rs) 50 Ordering cost (per order). Suppose the ordering cost per order.) 37. the number of orders will be A/Q and total order costs will be: Total ordering cost = (Annual requirement * Per order cost) Order size TOC = AO/ Q Let us further assume the carrying cost per unit. An easy way to determine EOQ is to use the orderformula approach. The total order costs will be number of orders during the year multiplied by ordering cost per order. approach to resolve the order quantity problem can be illustrated with the help of a simple example.

the total cost function represents a trade-off between the carrying costs and ordering costs for determining the EOQ. then. we obtain: Economic order quantity = 2* quantity required * ordering cost Carrying cost EOQ = 2AO C Graphic approach : The economic order quantity can also be found out graphically. Thus. On the other hand. Figure illustrates the EOQ function. a larger inventory level will be maintained. on an average. because. is the sum of total carrying and ordering costs: Total cost = Total carrying cost + Total order cost TC = Qc + AO 2Q Equation (4) reveals that for a large order quantity. ordering and total. In the figure. costs-carrying. the average inventory will be. Q. and ordering costs decline with increase in order size means less number of orders. Average inventory = order size = Q 22 And total carrying costs will be: Total carrying cost = Average inventory * Per unit carrying cost TCC = Qc 2 The total inventory cost.unit. Equation (4)is differentiated with respect to Q and setting the derivative equal to zero. the carrying cost will increase. If Q is the order size and usage is assumed to be steady. but the ordering costs will decrease. To obtain the formula for EOQ. the carrying costs will be lower and ordering cost will be higher with the order quantity. We note that total carrying costs increase as the order size increasers. The behaviors of .are plotted on vertical axis and horizontal axis is used to represent the order size.

the firm’s operating profit is maximized at point Q*. preparing drawings and specifications. Minimum total Cost 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. and (c) economic order quantity. is solved by determining the economic order quantity.total costs line is noticeable since it is a sum of two types of cost which behave differently with order size. This is a problem of determining the reorder point. tooling machines set-up. but they start rising when the decrease in average ordering cost is more than offset by the increase in carrying costs. The reorder point is that inventory level at which an order should be placed to replenish the inventory. Set-up costs include costs on the following activities: preparing and processing the stock orders. The economic order quantity occurs at the point Q* where the total cost is minimum. when to order. Production runs but carrying costs will increase as large stocks of manufactured inventories will be held. Reorder Point: The problem. how much to order. Lead time is the normally taken is . tools. The total costs decline in the first instance. equipment and materials. handling machines. Thus. over time etc. Two costs involved are set-up costs and carrying costs. yet answer should be sought to be second problem. To determine the reorder point under certainty. we should known: (a) lead time (b) average usage. The economic production size will be the one where the total of set-up and carrying costs is minimum.

The firm would. The carrying costs are the costs associated with the maintenance of inventory. The effect of increased usage and/or slower delivery would be shortage of inventory. the firm would disrupt production schedule and alienate the customers. Conversely. at certain points of time the demand may exceed the anticipated level. a discrepancy between the assumed (anticipated/expected) and the actual usage rate of inventory is likely to occur in practice.replenishing inventory after the order has been placed. be defined as minimum additional inventory to serve as safety margin/buffer/cushion to meet unanticipated increase in usage resulting form unusually high demand and/or uncontrollable late receipt of incoming inventory. inventory . The stock-out and carrying costs are counterbalancing. That is: Reorder point = Lead * Average usage Safety stock: The demand for inventory is likely to fluctuate from time to time. Under such a situation. reorder point is simply that inventory level which will be maintained for consumption during the lead time. Such stocks are called safety stocks. In other words. additional carrying costs are involved. Safety stock may. The larger the safety stock. the smaller the stock-out costs. max. That is. be will advised to keep a sufficient safety margin by having additional inventory to guard against stock-out situation. therefore. By certainty we mean that usage and lead time do not fluctuate. the larger the safety stock. In particular. thus. Since the firm is required to maintain additional inventory. the larger the carrying costs and vice versa. This would act as a buffer/cushion against a possible shortage of inventory. in excess of the normal usage.

(ii) The usage rate of material is steady.average usage EOQ avg. then stocking of these spares can be avoided. The E types of spares are also necessary but their stocks may be kept at low figures. The demand for spares depends upon the performance of the plant and machinery. The vital spares are a must for running the concern smoothly and these must be stored adequately. A-B-C analysis may not be properly used for spare parts. The classification of spares should be left to the technical staff because they know the need. it is assumed that: (i) Total demand is known with certainty. (iv) The ordering cost per order and holding cost per unit are constant.usage safety stock ------------------------------------------------------weeks lead time re-order point under safety stock VED Analysis: The VED analysis is used generally for spare parts. The classification of spares under three categories is an important decision. If the lead time of these spares is less. urgency and use of these spares. (iii) Orders for replenishment on inventory are placed exactly when inventories reach ordering level. . Spare parts are classified as: Vital (V). The stocking of D types of spares may be avoided at times. Assumptions: In applying EOQ formula. The non-availability of vital spares will cause havoc in the concern. The requirement and urgency of spare parts is different from that of materials. A wrong classification of any spare will create difficulties for production department. Essential (E) and Desirable (D). inventory---------------------------------------------------re-order point----------------------------------------------------max.

Arrangement of proper verification: In this system a detailed and more reliable checking of the store is exercised because of the continuous and . 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”. 2. Total inventory cost is the sum of material purchase cost. The basic object of this system is to make available details about the quantity and value of stock of each item at all times. at fist we should calculate EOQ and find out TIC without considering discount offer. 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. That quantity will be EOQ at TIC is the lowest. Hence. Then we should calculate TIC of each alternative offer. Advantages of Perpetual Inventory system: 1. interim and final financial accounts can be prepared with greater convenience. 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. According to Weldon.EOQ and Total Inventory Cost: At EOQ level total inventory cost is minimum. Saving in time: The long and costly work of stocktaking is avoided. PERPETUAL INVENTORY CONTROL TECHNIQUE 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.

thus misuse of material can be avoided. Some inventory items. This gives an opportunity for preventing a recurrence in many cases. 7. and their level can be . minimum and other levels. although not expensive. double control is maintained. They are discouraged from committing dishonesty. 8. Category A will include more expensive items (in cost of product) with high investment and it will require more intensive control. this system serves as a moral check on the stores staff. THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF CONTROL Most manufacturing firms find themselves confronted with virtually thousands of different inventory items.B. 6. The ‘B’ items can be controlled using less sophisticated technique.C category items. 4. effective control on issue of material is possible. turnover slowly and therefore. Most of these items are relatively inexpensive. Lack of misuse of Material: Under this system. Loss of stock due to obsolescence: It is detected at an early stage and so timely action can be taken to prevent recurrence. Moral Check on Stores staff: Due to continuous checking. The ‘B’ group will consist of the items accounting for the next largest investment.random checking. The ‘C’ group will consist of a large number of items of inventory accounting for small investment. Double control: Due to separate records in Bin card and stores ledger. 3. The ‘A’ items require intensive inventory control and most sophisticated inventory control techniques should be applied to these items. they require a high average investment. 5. Verification of Errors: Errors are easily located and rectified. while other items are quite expensive and account for a large portion of the firm’s investment. Optimum size of material: Overstocking and under stocking can be avoided because perpetual inventory system covers verification of stock with regards to maximum. The firm should classify them into A.

they should be preferably treated as one item. . Certain items of inventory may be inexpensive but may be critical to the product in process and cannot be easily obtained. Although. 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. they may require special attention. (2) More emphasis should be given to the value of consumption and not to price per unit of the item. (3) Stock records. (4) Priority treatment to different items. These types of items must be treated as “A” class items even though. using the broad framework. The following points should be kept in mind for ABC analysis: (1) Where items can be substituted for each other. 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. (3) All the items consumed by an organization should be considered together for classifying as A. B and C. The various stages where it can be applied are: (1) Information of items which require higher degree of control. the ABC system is an excellent method for determining the degree of inventory control efforts required to expand each item of inventory. Therefore. they would be “B” or “C” class items. (2) To evolve useful re-ordering strategy. Though the ABC technique is a good technique but it cannot be universally applied. B or C instead of taking item as spare. raw materials. not perfect. (5) Determination of safety stock items. semi-finished and finished items and then classifying as A.viewed less frequently than ‘A’ items.

Poor quality material or complements could halt the production. and thus. System of Accounting for Material Issued/Inventory Systems Either the periodic inventory system or the perpetual inventory system may be used to account for materials issued to production and ending materials 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 . The materials available for use during a period equal purchases plus opening inventory. is recorded in a separate Materials Inventory.Opening Account. The system requires perfect understanding and coordination between the manufacturer and supplier in terms of the timing of delivery and quality of the material. the purchase of materials is recorded in Purchase of Raw Materials Account. if any. JIT system eliminates the necessity of carrying large inventories. 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.(6) Stores layout. They will have to develop adequate system and procedures to satisfactory meet the needs of manufacturers. saves carrying and other related costs of manufacturer. The system puts tremendous pressure on suppliers. The JIT inventory system complements the total quality management (TQM). (7) Value analysis. Periodic Inventory System Under the periodic inventory system. The opening/beginning inventory. (2) Just-in-time (JIT) System: Japanese firms popularized the just-in-time (JIT) system in the world. The delivery of material is synchronized with the manufacturing cycle and speed. The success of the system depends on how well a company manages its suppliers.

It is assumed that goods not on hand at the end of the period have been sold. (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 . and they can be discovered only at the end. These ratios are calculated to asses the efficiency in use of inventories. INVENTORY TURNOVER RATE TECHNIQUE One important technique of inventory control is to use inventory turn over ratios. (A) Raw Material Turnover Ratio = Raw Material Consumed/ Average stock of Raw material.+ Purchases = Materials available for use . There is no system and accounting period. 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. Following control ratios can be computed for inventory analysis: (i) Inventory Turnover Ratio = Cost of goods sold/ Average Inventory Where Average Inventory = (Opening Inventory + Closing Inventory)/2 Inventory Turnover Ratios ca be calculated separately for raw materials and finished goods.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.

He must monitor Inventory levels and see that only an optimum amount is invested in Inventory. VALUATION OF INVENTORIES OBJECTIVE: . FINANCIAL MANAGER’S ROLE IN INVENTORY MANAGEMENT Inventory represents a large investment by manufacturing concern: therefore. minimize safety stock. He should introduce the policies which reduce the lead time. but only tools of sound Inventory Management. 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. the financial manager must also be concerned with all types of inventories. However. Though. The ratios also indicate the situation and trend. work-in-progress and finished goods. the limitation of ratios should be kept in mind. 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.raw materials. the operative responsibility for Inventory management lies with the inventory manager.(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. great emphasis must be placed on its efficient management. regulate usage and thus. They are not an end themselves. All these techniques of Inventory management lead to the goal of wealth maximization. He should be familiar with the Inventory control techniques and ensure that Inventory is managed well.

DEFINITIONS 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. (c) Shares. or workin- . Inventories also encompass finished goods produced. or (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. 1. including the ascertainment of cost of inventories and any write-down thereof to net realizable value. 2. agricultural and forest products and mineral oils. (d) Producer’s inventories of livestock. (b) Work-in-progress arising in the ordinary course of business of service providers. for example. or land and other property held for resale. 1. merchandise purchased by a retailer and held for resale. The inventories referred are measured at net realizable value at certain stages of production.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. (b) In the process of production for such sale. for example. This occurs. Inventories encompass goods purchased and held for resale. debentures and other financial instruments held as stock-in-trade. ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in those industries. This statement should be applied in accounting for inventories other than: (a) Work-in-progress arising under construction contacts. These Inventories are excluded from the scope of this statement. including directly related service contracts. when agricultural crops have been harvested or mineral oils. This statement deals with the determination of such value. computer software held for resale. 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.

Accounting for Fixed Assets. 3. maintenance supplies. 6. Variable production overheads are those indirect costs of production that vary directly. such as depreciation and maintenance of factory buildings and the cost of factory management and administration.progress being produced. or nearly with the volume of production such as indirect materials and indirect labour. inwards and other expenditure directly attributable to the acquisition. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. such machinery spares are accounted for in accordance with Accounting Standard (AS) 10. 2. 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). 5. Inventories should be valued at lower of cost net realizable value. The allocation of fixed production overheads for purpose of their inclusion in the costs of . Cost of Inventories The cost of inventories should comprise all costs of purchase. Costs of Conversion The costs of conversion of inventories include costs directly related to the units of production. duty drawbacks and other similar items are deducted in determining the costs of purchase. freight. such as direct labour. consumables and loose tools awaiting use in the production process. 4. Trade discounts. costs of conversion and other costs incurred in bringing the inventories to their present location and condition. rebates. 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. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production. by the enterprise and include materials.

When this is the case. 7. when joint products are produced or when there is a main product and a by. As a result. taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. they are often measured at net realizable value and this value is deducted from the cost of the main product. This is the case. The allocation may be based. for example.conversion is on based on the normal capacity of the production facilities. Most by.product.products as well as scrap or waste materials. When the costs of conversion of each product are not separately identifiable. or at the completion of production. on the relative sales value of each product either at the stage in the production process when the products become separately identifiable. . Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances. A production process may result in more than one product being produced simultaneously. the carrying amount of the main product is not materially different from its cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. for example. are immaterial. Unallocated overheads are recognized as an expense in the period in which they are incurred. In periods of abnormally high production. by their nature. they are allocated between the products on a rational and consistent basis. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost.

therefore.8. This is an appropriate treatment for items that are segregated for a specific project. 3. However. usually not included in the cost of inventories. regardless of whether they have been purchased or produced. Exclusions from the cost of Inventories In determining the cost of inventories in accordance with paragraph 3. 11. 9. 10. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are. 1. Selling and distribution costs. when there are large numbers of items of inventory which are ordinarily interchangeable. Examples of such costs are. 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. For example. 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. 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. Abnormal amounts of wasted materials. It is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. 12. Specific identification of cost means that specific costs are attributed to identify items of inventory. labour. unless those costs are necessary in the production process prior to a further production stage. 2. Storage costs. and 4. or other production costs. specific identification of . Administrative overheads that do not contribute to bringing the inventories to their present location and condition.

or weighted average cost formula. and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. 15. 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 condition. 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. first-out (FIFO). Standard costs take into account normal levels of consumption of materials and . may be used for convenience if the results approximate the actual cost. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first. should be assigned by using the first-in. 13. The cost of inventories. 14.costs is inappropriate since. The average may be calculated on a periodic basis or as each additional shipment is received. in such circumstances. Techniques for the measurement of the cost of inventories. other than those dealt with in paragraph 11. such as the standard cost method or the retail method. 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 formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. Under the weighted average costs formula. depending upon the circumstances of the enterprise.

It is not appropriate to write down inventories based on a classification of inventory. Inventories are usually written down to net realizable value on an item-by-item basis. In some circumstances. efficiency and capacity utilization. for example. An average percentage for each retail department is often used. labour. 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. however. finished goods. 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. or if their selling prices have declined. revised in the light of current conditions. The percentage used takes into consideration inventory which has been marked down to below its original selling price. or all the inventories in a particular business segment.supplies. 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. The cost of the inventory is determined by reducing from the sales value of the inventory the appropriate percentage gross margin. They are regularly reviewed and if necessary. 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. it may be appropriate to group similar or related items. 18. The cost of inventories may not be recoverable if those inventories are damaged. 17. . 16. if they have become wholly or partially obsolete.

the materials are written down to net realizable value. An assessment is made of net realizable value as at each balance sheet date. 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. 20. If the sales contracts are for less than the inventory quantities held. The financial statements should disclose: The accounting policies adopted in measuring inventories. In such circumstances. 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. 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 net realizable value of the excess inventory is based on general selling prices.19. the net realizable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. . contingencies and events occurring after the balance sheet date.S) 4. For example. 22. However. 21. 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. 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. including the cost formula used. Estimates or net realizable value also take into consideration the purpose for which the inventory is held. the replacement cost of the materials may be the net available measure of their net realizable value. Disclosure.

24. spares and loose tools. Inventory systems as perpetual and periodic systems.For the daily information about the items We show the MRN. 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 . Companies website FINANCIAL STATEMENTS . PRIMARY DATA – Primary data are those data that are originated very first time or fresh data . We collect the primary and secondary data.then We collect primary data.and The total carrying amount of inventories and its classification appropriate to the enterprise. 3. Stock levels etc. 1. work in progress. ledger register and daily issue slip of materials the purchase register and other documentary evidence used for the findings. Inventory control techniques used by the company 2. 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. DATA COLLECTIO N DATA COLLECTION In analysis of inventory of JOL. We collect the data by the different sources. stores. finished goods. 4. Primary data are the accurate attainable reliable and useful data. Common classifications of inventories are raw materials and components.with the help of primary data formulated the research objectives. In the analysis of inventory the secondary data are not sufficient .

4 99.0 1861.3 1182.2 .5 411.7 719.2 966.00 0.3 481.9 -0.0 1426.5 649.7 879.8 -17.0 1650.9 1044.6 1292.3 1153.0 6304.0 5113.1 7501.9 Expenditure Cost of materials 8158.7 Depreciation 513.1 3118.8 Domestic Sales 9102.7 220.4 381.2 Share of Profit / (Loss) in Associate 0.3 1641.2 623.7 8592.1 2054.00 PAT after share of profit / loss FY 2002 6598.7 4443.7 7853.6 787.5 Manufacturin 1597.2 237.4 11869.1 232.6 841.9 166.7 4.5 879.00 Minority Interest 7.0 9626.00 0.7 212.9 Excise 1189.5 255.5 7173.9 1209.00 -8.7 3649.4 5948.7 1313.8 Tax 392.4 326.9 6177.0 9 456.6 179.4 2243.4 1171.6 1323.2 468.4 4201.5 11702.9 Interest 172.3 641.7 2287.3 0.7 2022.3 44.1 7041.4 PAT 1288.1 PBDT 2194.7 5161.1 1281.3 Total Expenditure 12883.0 1394. general and administrative expenses 3127.4 431.5 Other Income 196.8 PBIT 1854.3 International Sales 5951.4 357.1 Total Income 15250.0 7134.6 PBT 1681.3 1973.4 1034.Profit & Loss Account Particulars FY 2006 FY 2005 FY 2004 FY 2003 Gross Sales 16242.6 402.4 Net Sales 15053.3 864.1 4766.6 -19.7 5992.0 160.5 39.4 g expenses Selling.9 12737.4 5892.0 0.1 8691.2 PBIDTA 2367.0 929.

34 1477.70 227.45 106.8 0 Net Cash Used in Financing Activities 5438.00 786.27 101.43 2595.82 1116.37 691.3 200503 200403 200303 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year 375.8 232.9 375.27 Financial Ratios Ratio FY 2006 FY 2005 FY 2004 FY 2003 .00 Cash and Cash Equivalents at End of the year 1364. (Curr: Rs in Million) 2006.7 1191.90 60.60 Net Inc/(Dec) in Cash and Cash Equivalent 0.14 436.00 Net Cash Used in Investing Activities 4607.50 106.35 0.74 227.4 480.00 148.70 843.2 Cash Flow FINANCE -CONSOLIDATED CASH FLOW .47 Net Cash from Operating Activities 141.Jubilant Organ.9 782.60 4.68 1122.in associate and minority interest 1296.

59 1.90 1.31 2.77 Debtors 6.45 3.56 22.83 6.61 27.73 19.32 15.75 7.74 Interest Cover Ratio 10.91 15.59 Return on Net Worth (%) 19.04 6.63 DATA ANALYSIS AND INTERPRETATIO N INVENTORY TURN OVER RATIOTotal sales Inventory turn over ratio = Average inventory The sales of JOL in year 2007 is 720 million & its investment on inventory is 126 million .17 24.74 8.01 2.38 33.32 7. 6 million worth inventory for operation. sales Sales = 6 million * 5.74 3.87 43.58 17.79 3.09 Current Ratio 2.33 1.87 0.90 Return on Capital Employed (%) 15. It could generates additional sales.21 1.14 20.16 6.79 Profit Before Interest and Tax Margin (%) 12.41 14.52 Earning Before Interest Tax and Depreciation Margin (%) 15.04 12.16 1.17 19.63 6.23 Inventory 4.64 10.99 37.71 JOL used Rs.26 million .97 14.56 10.71 = 34.51 Working Capital Days 90 61 80 85 84 TURNOVER RATIOS Assets 0.21 17.54 5.34 9.79 2. Then inventory turn over ratio = 720/126 = 5.07 6.88 Net Profit (after minority interest) Margin (%) 8.21 1.18 17.70 2.74 2.49 Profit Before Depreciation and Tax Margin (%) 14.05 8.28 5.28 15.FY 2002 Debt : Equity Ratio 0.40 2.

63 Inventory turn ratio in year 2004 Total sales in 2004 = 615 million Investment on inventories = 100 million Turn over ratio = 615 / 100 = 6.67 Inventory turn over in year 2005Total sales in 2005 = 620 million Investment on inventories = 110 million Turn over ratio = 620/ 110 = 5. Inventory turn in year 2006Total sales in 2006 = 670 million Investment on inventories = 118 million Turn over ratio = 670/118 = 5. Sales EMBED Excel. then company increases their sales.Chart. then total sales increases year by year. increases investment on their inventories.10 21000 .15 Investment of inventories & sales on wards 2004year Investment on inventories in million total sales in million 2004 100 615 2005 110 620 2006 118 670 2007 126 720 Jubilant Organosys Ltd.If JOL increases investment more on their inventories . Every year.8 \s 2004 2005 2006 2007 Years VALUE UNDER FIFO METHOD 645 670 720 615 Date Qty Cost Value Qty Cost Value Qty Cost Value Jan 1 1000 0 2.

41 4820 8000 .14160 29 4000 2.22340 May 12 1000 2.22560 17 4000 2.10 4200 9000 .27600 18 4000 @ 9340 6000 0 .23210 12 2000 2.21 2210 1100 0 .19010 27 1000 2.29 9160 1000 0 .21320 Feb 10 4000 2.40 2400 9000 .41 4820 1000 0 .17740 March 3 2000 2.40 2400 1100 0 .00 6000 1200 0 .23540 30 2000 2.12920 16 2000 2.27580 .18260 23 2000 2.25940 Jun 10 1000 2.9 1000 2.10 8400 6000 .10 8400 6000 .04 4080 1000 0 .02 4040 1300 0 .14 4280 1200 0 .31 2310 1000 0 .19940 24 3000 2.23320 Apr 4 2000 2.

31 2310 2000 2.41..400 8... January 9 .19 4170 0 1600 0 .9340 Interpretation The FIFO method of valuation of inventory is based on the assumption that the inventory consumed in chronological order .21 2210 1000 2..41 4820 Total 4000 .1000 units at rs 2. therefore the cost of the 13000 inventory on June 30 is composed of the received of March 29 April 4 and 23 .31 ..50 9350 . From the table with an opening inventory of 10000 units at rs 2..50 3400 600 4950 .1200 10050 9Jan .. that is received first are issued / consumed first and value fixed accordingly .May 24 and June 30 and the value is the sum of the cost of these receipts.50 1700 1000 8350 15Jan . and February 16 .21. January 27 1000 units at rs 2.200 1400 6Jan .2000 units at rs 2... the 1000 each issued on May 12 and June 10 are costed on the basis of the 2000 units received on March 3 ..Total 1900 0 2.200 8..10. Valuation under perpetual inventory systemDate Receipts Issues Balance QRAQRAQA 1Jan . the first 10000 units issued are charged to the cost of goods sold at this opening inventory rate rs 2..3514 0 Where @ is 1000 2. the April 18 issue or consignment of 4000 units is costed on the basis of first received of the year ..100 7 700 100 700 8Jan 1100 8.10 .

. 3..(59 units * 12 days) = 267 units Maximum stock level = (re-order level + re-order quantity ) . The minimum stock level of JOL is 267 units..( min.900 7650 27Jan . After calculation the re-order level of JOL is 975 units but the actual re-order quantity is 878 units. .700 6080 The value of inventory after 31 January is 6080 /rs Interpretation :The value of inventory under periodic & perpetual inventory system is different.(55 units * 15 days) = 1028 units Average stock level = minimum stock level + ½ of Re-ordering Quantity = 267 units + ½ * 878 units = 267 units + 439 units = 706 units Interpretation of result : 1.300 8.20 3680 .. DETERMINATION OF STOCK LEVELS Data of concentrate at JOL 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 = Maximum consumption * Maximum Re-order period Re-order level = 65 units * 15 days = 975 units Minimum stock level = re-order level – (normal consumption * Normal re-order period) = 975 .. 2..25Jan 300 9 2700 .50 2550 300 240 300 9 2700 0 31Jan 400 9. consumption – order period) = ( 975 units + 878 units ) . The value of inventory under perpetual system is more than periodic system. The maximum stock level of JOL is 1028 units.

03 240 780 50 2000 0. There is no proper staff in HR/ Personnel department for listening grievances of . Organization facing the problem of proper skilled employees in the production department. faces the problem of competition.04 80 0 500 20000 0.It is not good when external auditing held in company. PROBLEMS AND SUGGESTIO NS PROBLEMS FACED BY THE ORGANITION JOL faces the following problems1.4. It is not good for operating profit of the company. Jubilant Organosys Ltd.10 200 Expected stock out cost == stock out cost * probability of stock out . 5. 2.03 180 50 450 18000 0.04 160 50 2000 0.02 320 250 1000 0. In organization store assistants have no proper knowledge about engineering goods & raw materials. Of expected total stock out(units) out stock stock out expt.02 240 580 150 6000 0.02 280 200 8000 0. Calculation of expected stock out cost – Safety stock stock prob.02 120 220 100 400 16000 0.01 160 300 12000 0.01 40 40 250 250 10000 0. The average stock level must be 706 units.01 180 350 14000 0.03 300 1180 100 4000 0. 4. Organization have no record of wastage items. 6. 3.01 100 150 6000 0. There is no proper sequence &acknowledgement board for certain items in store department .01 200 400 16000 0. level cost(40/unit) out cost SOC 500 0 0 0 0 0 400 100 4000 0.

return 3. therefore the firm should consider: 1.the . Organization should have proper staff in HR/Personnel department. 5. Store manager give the proper knowledge about engineering & raw materials. The objectives of the inventory management should be the maximization of the value of the firm. 6. & to take advantage of price fluctuations (speculative motive ). SUGGESTIONS TO THE ORGANISATION: . It is not good for any organization. 4. Inventories represent investment of a firm’s funds. to guard against the risk of unpredictable changes in usage rate and delivery time ( precautionary motive ) . In store department items should placed their proper sequence & acknowledgement. There should be proper record of wastage.employees. 3. Inventories facilitate smooth production and sales operation (transaction motive). 1. CONCLUSIO N CONCLUSION The goal of the wealth maximization is affected by the efficiency with which inventory is managed. 2. cost 2. It is good for the company. So employees get rid of the organization without any notice.So employees could not left the organization. work in progress and finished goods. Inventories constitutes about 60% of current assets of companies in India. Personnel manager should listen grievances of the employees personnel . The manufacturing companies hold inventories in the form of raw materials . The organizations give proper knowledge & training for unskilled employees about their work. risk factors In inventory maintenance two types of costs are involved carrying cost & ordering cost .

firm should minimize the total cost ( carrying plus ordering cost ). Sahibabad . Advanced Accountancy Ninth Edition S N Maheshwari . Financial Management Ninth Edition I M Pandey Vikas Publishing House Pvt. S K Maheshwari Vikas Publishing House Pvt. Ltd 3.The firm follows inventory control techniques as A-B-C technique EOQ & JIT techniques for better holding inventories. 4. BIBLIOGRAPHY 1. Management Accounting Third Edition M Y Khan. Purchase . Sales Boucher & Other Documents of the Company Moon Beverage Ltd. Ltd. P K Jain Tata Mc-Graw Hill Publishing Company Ltd. 2.