UNITY UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Assessment of Inventory management in Textile Industry

(In case of KK Textile Industry)

BY:

MEKDES BEZUWORK

ADVISOR: ABDU

UNITY

MARCH/2021

ADDIS ABABA, ETHIOPIA

 Unity University
Facility of Business and Economics
Department of Accounting

Assessment of Inventory management in Textile Industry

(In case of KK Textile Industry)

A Research Report Submitted to Accounting department in Partial

Fulfillment of the Requirement for B.A Degree in Accounting.

MARCH/2021

ADDIS ABABA, ETHIOPIA

I
 APPROVAL
The undersigned certify that they have read and hereby recommended to the Unity University, to
accept this submitted Senior Research paper, entitled for partial fulfillment of the requirements
for the award of BA degree in Accounting.

Department Head: ______________ Signature__________ Date____________

Advisor: ______________________ Signature__________ Date____________
Internal Examiner: ______________ Signature__________ Date____________
External Examiner: ____________ Signature___________ Date____________

II
 DECLARATION
We, the researchers, do hereby declared that, this Senior Research paper is our original work that
has not been submitted partially or in full, by any person for an award of a degree in any
universities/ institutions.

Researchers: Mekdes Bezuwork

Advisor’s Declaration

This Senior Research paper has been submitted for examination with my approval as University
supervisor.

Name of Advisor:

Signature _________________

Date; _____________________

III
 ABSTRACT
This research paper tried to assess inventory managements of KK textile Industry. It addressed
four basic research questions designed to assess inventory management performance of the
industry. For this study the researcher used both primary and secondary data, but much focused
on in the primary data in which more information could be obtained by conducting unstructured
interview and structure questionnaires.

Specifically the study tried to examine the industry inventory management in appropriate way,
to compare and contrast the actual practice of KK textile industry inventory management with
the theoretical aspects of inventory management, and to determine the industry strength and
weaknesses with regarding to inventory management system. Accordingly, the study will have a
relevance at least for the organization to identify problems and strengths related to its inventory
management and practice, to look as any opportunity and treat and in turn to have a good
inventory management and practice.

The interpretation focus on the result of prevalent data under consideration, relevant
recommendation that helps the industry to redesign the current system and other areas the
industry should give specials attention will be made.

IV
 Acknowledgement
In the first and the most great would like thanks for my God, he gives the persistence of to
accomplish this paper.

Next, I would like to express out appreciation and indebtedness to my advisor , who contribute
to me necessary information as well as giving adviser to done this paper. And also, I would like
thanks Unity university especially faculty of Business and Economics for designing this program
through that students develop their knowledge.

Finally, I would like to sincere thanks the employees of KK textile Industry, who were willing to
respond to my interview and thanks for my friends and my family who helped me done this
paper.

V
Table of Contents
APPROVAL..............................................................................................................................................II

DECLARATION....................................................................................................................................III

ABSTRACT.............................................................................................................................................IV

Acknowledgement.....................................................................................................................................V

Chapter One...............................................................................................................................................1

Introduction...............................................................................................................................................1

1.1 Background of the study....................................................................................................................1

1.2 Background of the organization.........................................................................................................2

1.3 Statement of the problem...................................................................................................................3

1.4 Objective of the study........................................................................................................................4

1.4.1. General Objective......................................................................................................................4

1.4.2. Specific Objectives....................................................................................................................4
1.5 Research questions............................................................................................................................4

1.6 Significance of the study....................................................................................................................4

1.7 Scope of the study..............................................................................................................................5

1.8 Limitation of the study.......................................................................................................................5

1.9 Structure of the study.........................................................................................................................5

Chapter Two..............................................................................................................................................6

2.1 Literature Review................................................................................................................................6

2.2 Definition of Inventory Management.................................................................................................6

2.3 Nature of inventories.........................................................................................................................7

2.4 Why inventory hold by Organizations...............................................................................................7

2.5 Type of Inventory..............................................................................................................................8

2.5 Requirement for effective inventory management.............................................................................8

2.5.1. Inventory count (keep track) the inventory................................................................................9

2.5.2. Demand for cast and lead time information...............................................................................9
2.5.3. Cost information holding inventories.........................................................................................9

VI
 2.5.4. Ordering cost.............................................................................................................................9
2.6. Inventory management Techniques..................................................................................................9

2.6.1 Economic order quantity.............................................................................................................9

2.6.2. Stock level...............................................................................................................................10
2.6.3. Proper storage..........................................................................................................................11
2.6.4. Just –in-time inventory control:-..............................................................................................12
2.6.5. Out sourcing............................................................................................................................12
2.6.6. Inventory turnover...................................................................................................................13
2.7. Inventory control procedures......................................................................................................13
2.7.1. Perpetual inventory..................................................................................................................13
2.7.2. Periodic inventory....................................................................................................................13
Chapter Three..........................................................................................................................................15

Research methodology and Design.........................................................................................................15

3.1. Data type.........................................................................................................................................15

3.2. Subject of the study........................................................................................................................15

3.3. Source of data collection.................................................................................................................15

3.4. Method of data collection...............................................................................................................15

3.5. Sample size.....................................................................................................................................15

3.6. Sampling technique........................................................................................................................16

3.7. Data Processing and Analyzing......................................................................................................16

3.8. Method of presenting the outcome..................................................................................................16

Chapter Four...........................................................................................................................................17

Data Presentation, Analysis and interpretation....................................................................................17

4.1. Respondents’ Personal Information................................................................................................17

4.1.1. Respondents’ Sex distribution.................................................................................................17

4.1.2. Respondents’ educational level................................................................................................18
4.1.3. Respondents’ age distribution..................................................................................................18
4.2. Nature of inventory management of the Organization....................................................................19

4.3. The policies and procedures of inventory management..................................................................19

VII
 4.4. Inventory control system................................................................................................................21

4.5. Inventory management techniques of the organization...................................................................23

4.6. Five years data of inventory activity...............................................................................................24

4.6.1. Inventory Turn Over................................................................................................................24

4.6.2. Inventory turnover in days.......................................................................................................25
Chapter Five............................................................................................................................................27

Summary, Conclusion and Recommendation.......................................................................................27

5.1. Summary of Findings.....................................................................................................................27

5.2. Conclusion......................................................................................................................................28

5.3. Recommendation............................................................................................................................29

Reference..................................................................................................................................................31

Appendix..................................................................................................................................................32

VIII
 Chapter One

Introduction
1.1 Background of the study
Inventory consists of the most important element of any system dealing with the supply,
manufacture and distribution of goods and service. The concept of inventory management is very
old but it came in light when harrie F.W published his work on classical order size model and the
work was extended by raymend F.F (1991) and Wilson R.M (1934). But only after the second
world war with the development of operational research and computer technology that the
theoretical concepts got a practical application

Holding inventory is often interpreted as carrying an asset, but also means carrying risk in terms
of obsolescence deterioration axed quality faults in financial terms inventory impacts the balance
sheet, cash flow, profit and loss account. Operationally inventories affect production efficiency
and on time delivery (coldratte, 1999) identifies inventory a key component for measuring
business performance in manufacturing environment. Thus good management of inventory,
essential to achieving business objective and building competitive advantage, Inventory
management refers to the events or activities that affect inventory during the process of trans
transferring in put resources and material to put goods. Achieving inventory management is a
precursor to inventory management which is concerned with the means used to balance inflicting
organizational objectives on the over all level of stock held to determine optimum inventory
level for each (Dabbker, 1982).

1|Page
1.2 Background of the organization
KK private limited company was established in 1992 by Mr, KetemaKebede, a pioneer in the
economic policy of Derge Regime debilitated. In view of the in adequate of its initial assets the
company adopted for the short term a strategy of engaging in the business that requires minimum
resources both in cash and in kind. It merely stated as distribution of imparted and locally
manufactured textile products, as well as an exporter of agricultural commodities.
Simultaneously, it sought to promote its business connections and diversify its operations to
improve its financial and human resources. After two years in the business, the company was
able to register a definite sign of growth. It leased and completely furnished a two room office
space, employed one qualified secretary and two salesmen.

The company principles are credo, charter, vision and mission is based on long- lasting core
values and clear strategic framework. The company strategy builds up on this strong foundation
with a focus on continued successful development of the company. All these principles set
district standards of behavior and provide a high degree of transparency, therefore giving life to
the “spirit of private limited company.

The company vision aspire to see the KK private limited company attained a significant position
in the regional and international trading house, in supplying and rendering a wide range of
commodities and services respectively, and there by, gain a strong presence in the world wide
business area. We will earn our customers’ enthusiasm through continues improvement driven
by the integrity, team work and innovation of KK private limited company people.

The mission of the company is together with our customers and partners, we develop,
manufacture, supply and render commodities and services which acquire, transmit, control and
record precess information enabling our customer to operate and manage processes in a safe
reliable economical profitable and environmentally responsible manner. Chemicals and other
dyestuffs are acquired from European countries like Germany, Switzerland, Spain, and Belgium.
The company sales and distributions are composed of five sales shops within the capital, Addis
Ababa, two branch offices in Shashemene, Dessie, three big ware houses, about ten delivery
trucks and competent personnel and more than 100 well known distributors throughout the
nation.

2|Page
One of the most produce in KK private limited company blankets these item the major
institutional buyers are ministry of defense, federal polices and Addis Ababa police, Ethiopian
red cross, Oxfam, trade union, associations and other regional offices. The company of facilitate
its business activity and fulfill its working capital requirement has relation ship with the well
known financier of Ethiopia, these are commercial bank of Ethiopia, Abyssinia bank, Awash
international bank and united bank.

The management and organizational structure of KK private limited company has been
characterized by several district trends interms of its organizational evaluation. As most of the
private business companies KK private limited company used to be managed by the far-signted
and visionary owner Mr. KetemaKebede. But due to the increase in the volume of business
transaction and the size of workable, the need to compete with huge local and forign
multinational business company it came to believe that it is necessary to have well-organized and
staffed organizational structure.

1.3 Statement of the problem

As the researcher browse the website related to inventory management, hold the following facts
that necessitate for this study to be conducted which has a research topic of assessment of
inventory management in textile industry, particularly KK textile industry. In the first place
inventory management is the process of tracking product orders keeping adequate amount of
products on hand and organizing products in warehouse and retail location. And also inventory
management is the active control program which allows the management of sales, purchases and
payments with good inventory management, companies are able to monitor what shipments they
have coming in and going out to customer, allowing them to keep just enough inventory in stock
to meet demand.

Then inventory management lets companies enjoy many benfits which include achieving
inventory balance, using resource wisely, cutting costs, saving time and becoming more effient
and planning a head for seasonal changes in demand.

According to these evidence this study is emphasize on how KK textile industry performs the
activity to come up with a good result along with attaining the main objective of the industry.

3|Page
1.4 Objective of the study
1.4.1. General Objective
The main objective of the study is to assess the inventory management of KK textile industry.

1.4.2. Specific Objectives

 To examine the industry inventory management in appropriate way.
 To compare and contrast the actual practice of KK textile industry inventory
management with the theoretical aspects of inventory management.
 To determine the industry strength and weaknesses with regarding to inventory
management .
 To give some constructive suggestions and recommendation based on the fact of the
study.

1.5 Research questions

1. Does the industry manage its inventory in appropriate way?

1. Does the industry inventory management policy, procedure and techniques are to
maintain the optimum level?
2. Does the industry very careful to buy the right items, at the right price and in the right
quantity?
3. Does the industry interrelated theoretical aspects of inventory management with the
actual practice of inventory management?

1.6 Significance of the study

The researcher has an expectation, the study will provide a clear picture about the value or
importance of inventory management in KK textile industry and to identify problem
concerning inventory management. It is believed that the study was clearly reflect, what to see
any opportunities to utilize, to give relevant recommendation, suggestion and solution that help
top management as well as the organization to make good decision concerning about inventory
management and help in designing a better systematic form for inventory management system.
In addition, to give an overview of the factory use of inventory management industry to
external bodies.

4|Page
1.7 Scope of the study
Since the main objective of the study is the assessment of inventory management in textile
industry particularly, KK textile industry, the study delimited to examining store department,
production department and purchasing department of the industry in order to investigate the issue
in-depth and to make the study manageable.

1.8 Limitation of the study

The research face a problem of time to collect all necessary data from employees of the industry
and some respondents are involuntary to give available information. In addition, the employer is
involuntary to tell the real information regarding the inventory management of the organization.

1.9 Structure of the study

The study was arranged in four chapters. The first chapter deals with the introductory part mainly
about back ground of the study, background of the organization, statement of the problem,
objective of the study, significance of the study, scope of the study and limitation of the study.
The second chapter concerned with related literature review describes the detail theoretical
aspect of the study. The third chapter deals with data collection methods and methodology and
the fourth chapter provide data presentation, analysation and interpretation. Finally, the last
chapter provides summary, conclusion and recommendations.

5|Page
 Chapter Two

2.1 Literature Review

Literature review means locating literature in variety of sources reading it carefully and
thoroughly organizing it information themes along with the line of investigation. These purpose
is literature review to establish a familiarity with a body of knowledge and establishes
credibility. A review tells a reader that researcher knows the research in an area and knows the
major issue and also to show the path of prior research and how a current project is linked to it.
So the review shows application of inventory management which is given the information for use
in conducting the textile industry about inventory management and out lays in accordance with
accounting principle.

2.2 Definition of Inventory Management

The word inventory has been defined in many ways. Generally three definitions have been
chosen which to be more appropriate to the topic developed in this study.

Inventory are stock of raw materials, work in process and finished good. That appears at
numerous points throughout a firms production and logistic channel (Ballsu 2004, p.326).
According to chase Jocobs and Aquilando (2004, p.545) inventory is the stock of any item or
resource used in an organization. Whereas Mosich (1988 p.396) inventory is can be defined as
the amount of raw materials, finished goods and work in process to be stocked for the smooth
running of a plants operation. So a manufacture company will hold stocks as the adequate
amount of material resource in a transformation system. Many authors have defined the word
management in different ways. Plunket and Ather 1986 defined management as the process of
setting and achieving goals through the execution of five basic management functions (Planning,
organizing, staffing, directing and controlling that utilize human, Financial and material
resource. Therefore, inventory management is the process of tracking product orders keeping
adequate amount of products on hand and organizing products in Warehouse and retail location.
And also inventory management is the active control program which allows the management of
sales, purchases and payments.

6|Page
2.3 Nature of inventories
Inventories consist of good held for sale to customers, partially completed goods, and material
and supplies to be used in production. Inventory items are acquired and sold continuing by a
merchandising enterprise or acquired, placed in production, converted to a finished product, and
sold by a manufacturing enterprise. The sale of merchandise or finished products is the primary
source of revenue for most non service business enterprises (Mosich 1988 p.397).

2.4 Why inventory hold by Organizations

Particularly stevenson (1999 p.77) the reason for hold inventories are discussed in detail in the
following paragraphs.

First, inventory helps to project against stock outs, delayed delivers and expected increase in the
risk of shortages lays can occurs because of weather conditions, supplies stock outs, delivers of
wrong materials, quality problem and soon. The risk of shortage can be reduce by holding safety
stock which are stocks in excess of average demand to compensate for variability in demand and
lead time.

Second, to decuple perations, historically manufacturing firms have used inventories as buffers
between successive operation to maintain continuity of production that would other wise
distributed by events such as breakdown of equipment and accidents that cause apportion at
operation to shutdown of temporarily. The problem is resolved, firms have used buffers from
supplies and finished goods inventory to buffer sale operation from manufacturing descriptions
more recently, company have taken a closer book at buffer inventories recognizing the cost and
spaces they require and realizing that finding and eliminating sources of description can greatly
decreased the need for decoupling operations.

Third, it also helps to smooth product requirements in a firm may experience seasonal patterns in
demand often build up inventories during at seasonal periods to meets very high requirement
during certain period.

7|Page
2.5 Type of Inventory
Regarding types of inventory different literatures provide different description of inventory type
based on their own task objective. However, for this study the researcher favour the inventory
type provided by Stock and Manbert (2001, p 232-235)

Cycle stock is inventory that results from the replenishment process and is required in order to
meet demand under condition of certainty that is when the firm can predict demand and rends
times almost perfectly.

Inventories in transit are items that are in routs from one location to other. They may be
considered parts of cycle stock even though they are not shipment until after they arrive at the
destination.

Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead
time. The notation is that a portion inventory should be devoted to cover short range variation in
demand and lend time.

Seasonal stock is a form of respective stock that involve that accumulation of inventory before a
reason begins in order to maintain as table lab our force and stable in runs or in the case of
agricultural products, inventory accumulated as the result of a growing season that limits
availability through out the years.

Dead stocks inventories that no one want at least immediately. The question is why any
organization would incur the costs associated with holding these item rather than simply
disposing of them. One reason might be that management expected demand to resume at some
point in the future.

2.5 Requirement for effective inventory management

Regarding requirements for effective inventory management different literatures describe in
different ways based on their own task objective, but for this study the researcher favor
particularly Stephenson (1999, p.561-562) describe in his book about requirements for effective
inventory management in to four distinct mechanisms that are:-

8|Page
2.5.1. Inventory count (keep track) the inventory
This mechanisms to control the inventory, physical count has to be conducted. This count
enables to the manager to determine the quantity on hand. Then the manager estimate how much
will be demand period prior to the next delivery periods and bases the order quantity on that
information.

2.5.2. Demand for cast and lead time information

Inventories are used to satisfy demand requirement. So, it is essential to have reliable estimate of
the amount and timing of demand. Similarly, it is essential to know how long it will take for
order to be diverse. In addition, manager need to know the extend to which demand and lead
time (the time between submitting and order & receiving it might vary the greater the potential
variability the great or the need for additional stock to reduce the risk of shortage between
delivers. Thus, there is critical link between forecasting and inventory management.

2.5.3. Cost information holding inventories

Invites three basic cost holding transaction ordering and shortage costs holding or carrying costs
relates to physically having items in shortage costs.

2.5.4. Ordering cost

Are the cost of ordering and receiving inventory they are the cost that vary with the actual
placement on order. These includes determining how much is needed, preparing invoices,
shipping costs, inspecting goods up on arrival for quality and quantity and motive goods to
temporary storage ordering cost are generally expressed as fixed dollar amount per order
regardless of order size shortage costs result when demand exceed the supply of inventory on
hand.

2.6. Inventory management Techniques

Different literatures provide different description of inventory management techniques based on
their own task objective. However, for this study the researcher favor the inventory management
techniques provided by J.Gitman (1997, p.797-802).

2.6.1 Economic order quantity

One of the major inventory management problems to be resolved is how much inventory should
be added when inventory replaced, if the firm is buying raw material. It has to decide lost in
which it has to be purchased on replacement. If the firm planning a production run the issue is

9|Page
how much production to schedule (how much to make) these problems are called order quantity
problems And the task of the firm is to determine the optimum or economic order quantity (or
economic /of size) determining on optimum inventory low involve two types of costs. i.e
ordering cost and caring cost.

Economic order quantity is that inventory level that minimize the toal ordering and caring cost.

Economic order quantity is that inventory level that minimize the total ordering cost and caring
(holding) cost. Ordering cost increase with the number of orders thus the more frequently
inventory, on other hand it the firm maintain large inventory levels there will be few orders
placed and ordering cost will be relatively small thus ordering costs decrease with increasing size
of inventory.

Caring cost vary with inventory size. This behavior is control to that of ordering costs which
decline with increase in inventory size, the economic size of inventory would thus depend on
trade off between caring costs and ordering costs.

Economic order quantity = 0 where C= Caring cost

C O= ordering cost

Thus the formula to determine the recording point when safety stock is maintained as follows:

Reorder point = lead x average usage safety stock

2.6.2. Stock level

Is one of material cost management techniques. In order to saved over stocking or under
stocking most of the larger companies adapt scientific approach of fixing stock level. Under
stock is when the material in stock is below the required amount over stocking is when excess
materials are held in store by the business organization. Therefore each item of materials should
be kept with in the appropriate level of materials by fixing stock level. The stock level are re
order level, minimum level, maximum level and economic order quantity or re order quantity.

Maximum level is the material at the lowest rate of consumption which could be expected, if
delivery was received in shortest possible time.

10 | P a g e
The additional of the reorder quality shows the highest point of material which would be allowed
the formula that determine maximum level is as follows.

Maximum level is as follows:

Maximum level = reorder + reorder = minimum x minimum

Level quantity consumption reorder
Reorder point is the problem how much to order is solves by describing the economic order
quantity. Yet the answer should be thought to the record problem when to order. This is the
problem of determining the reorder point. The reorder point is that inventory level at which on
order should be placed to replenish the inventory. To determine the order point under certainty to
be should know lead time, average usage and economic order quantity.

Lead time is the normal takes in replenishing inventory after the order has been placed by
cersainty that means usage and lead time do not fluctuate under such a situation reorder point is
simply that inventory level which will be:-

Reorder point:- Lead x average usage safety stock. It is difficult to redicate usage and lead time
accurately. The demand for materials may fluctuate from day to day or from week to week.
Similarly the actual delivery time may be different the delivery problem of stock out. Some
minimum or buffer inventory as cushion against un expected increased and delayed on delivery
time.

Record level is the level of materials at which purchase requisition is inittated for fresh supplies
this level is fixed by reordering when materials fail to the minimum. The formula is :-

Minimum level = reorder - minimum x minimum

Level consumption reorder period.

2.6.3. Proper storage

In the internal procedure for purchasing materials are matched by similar procedures for storing
and issuing material in order to safeguard the investment. The procedure include storage and
ionsurance materials must be carefully identified stored. Reordered and preserved by the store
room clerk. Material requision is prepared by the factory supervisor and indieates the quantity
job number description etc. when the materials are transferred fom the store room.
11 | P a g e
2.6.4. Just –in-time inventory control:-
The just-in-time inventory control is more just on inventory control system, it is a production and
management system. Not only is inventory cut down to minimum, but the time and physical
distance between the various production operation are also reduced. In addition management is
unwilling to trade off costs to develop close relation ship with suppliers and promote speedy
replenishment of inventory in return for the ability to hold less safety stock (pewon p. 728). The
just in time inventory system depends on how well companies manage in suppliers the system
puts tremendous pressure on suppliers. They will have to develop adequate system and
procedures to satisfactory meet the need of manufactures.

2.6.5. Out sourcing

A few years ago there was a tendency on the part of many companies to manufacture all
components in house now more and more companies are adopting the practice out sourcing.

Out sourcing is a system of giving attention to materials according to the degree of their
importance. It is not desirable take some degree of control on all the items. The firm should pay
maximum attention to those items whose value is highest for this purpose the item will be dried
in there categories A,B and C the higher value items are classified as ‘A” items and would be
under the highest control ‘C” item represent relatively least value and would be under simple
control “B” items fall in between these categories and require reasonable attension of
management. The A, B, C analysis can contracts on important items and also known as control
by importance and exception.

The following steps are involved in implementing the A,B,C analysis classify the items of
inventories determining the expected use in units and the price per unit for each item.

1. Determine the total value of each item by multiplying the expexted units by its units
price.
2. Rank the item in according with the total value giving first rank to the item, with highest
total value.
3. Combine items on the basis of their relative value to form three categories A, B, and C
(impandey p. 633)

12 | P a g e
2.6.6. Inventory turnover
The inventory turn over ratio indicate the efficiency of the firm in producing and selling its
product. It’s product calculated by:-

Inventory turnover = Cost of good sold

Average inventory

Generally a high inventory turnover is indicate of good inventory management. If the absolute
inventories have to be written off this will adversely affect the working capital and liquidity
position of the firm. A high inventory turn over may be the result of over low level of inventory
replacements are costly for the firm thus to high and too low inventory turnover ratios should be
investigated further (impandey, p.123-125).

2.7. Inventory control procedures

One of the most effective of ensuring out investment in inventory under control is to check all
item inventory on regular basic once physical check has been carried the result can to be
compared with theoretical or book inventories These are discussed in detail in the following
subsection paragraph.

2.7.1. Perpetual inventory

Is concerned with the recording at they occur of inventory in either quantity or quality and value.
The item perpetual inventory usually refers to a system of inventory monitor control rather than
an inventory taking procedure with prefectural inventory every item at inventory usually has it
own stores ledger card as any transaction affecting on item take place the balance in inventory at
the item is know and can simple be read from the stores ledger card.

2.7.2. Periodic inventory

This is the process of counting valuing , selected item at different items on routing basis. In this
way every inventory item has an equal chance of being checked at any time and in the long will
be checked at least once run all item in addition to the use of random numbers entering that all
item are checked at least once in accounting periods. In this way not only can the physical and
the theoretical balance be checked against each others , but also any discrepancies can be
corrected for after all investigation are carried out in to how they occurred any discrepancies that
arise must be reported and depict with immediately, the more serious discrepancies may be a

13 | P a g e
matter for a change of policy or policy action. Annual inventory check it is a periodic inventory
check and is most usually carried out as part of the annual audit all items is most usually carried
out as part of the annual inventory checked carried at one time because the annual inventory
checked usually carried out at part at the annual audit there will usually be an external auditors in
attendance at inventory check which insure that the results obtained are open to independent
security.

Analysis of investment in inventory it is a major responsibility of the finical manager to over see
the movement of inventory is an investment decision. The analysis should therefore, involve an
evaluation of the profitability of investment decision. The goal of the inventory policy will
maximize the firm value at a point the inventory policy will maximize at which intermental or
margional return from the investment in inventory equals the incremental or marginal cost of
funds used to finance the investment inventory.

The incremental analysis should be used to compute the value of operating profit investment,
inventory rate of return and cost of funds. A change in inventory policy is describe if the
incremental rate of return exceeds the required rate of return.

14 | P a g e
 Chapter Three

Research methodology and Design

This refer to the variables over which the data for the study has been collected and the method
that used in the data collection, analysis and interpretations.

3.1. Data type

The researcher tried to study about inventory management in KK textile industry. The data
gathered for study are both primary and secondary data.

3.2. Subject of the study

The researcher tries to study about inventory management for the achievement of the objective
of the study, the researcher used descriptive analysis of data.

3.3. Source of data collection

The researcher used the primary data and secondary data sources but more focuses on primary
data because obtained enough information in great depth, avoid on interpretation of the answer
for the question. And also, avoid refusal to give the right information as well as it is flexible. The
primary data source of this study included the employees and the related departments such as,
purchasing department, production department , store department and also the management.
Besides of primary data source, secondary data source and also included in this study. These
information has been obtained through last five years for financial statement.

3.4. Method of data collection

The data were obtained from two types of source. These are primary and secondary data source.
The researcher used the primary data collection technique in order to get first hand information
from the respondents. And the primary data can be collected by preparing a questionnaire. The
questionnaire types which the researcher used are structured questionnaireto get reliable
information because flexibility of questions to questioning and the researcher is allowed to
much freedom. The researcher in addition used the secondary data collected from the
consecutive last five years (2007-2011) financial statement of the industry.

3.5. Sample size

Using all population for data collection is difficult for one researcher. As sampling is using small
part of large population to make conclusion about the whole population,The researcher selected
15 | P a g e
20 respondents from different department such as store department, production department and
purchase department through establishing judgmental sampling technique.

3.6. Sampling technique

In this study the sampling method used to acquire the respondents was non-probability
judgmental sampling technique. This technique has been used sampling method, because to
selected respondents that have the expected good knowledge about the inventory management
in the industry as well as the researcher permit to have complete freedom of selecting individual
who can provide relevant data and to chose sample element according to the researcher
wish/desire.

3.7. Data Processing and Analyzing

After the necessary data has been collected from both primary and secondary sources, the next
assignment had data processing and analyzing. Thus, the researcher was used tabulation and
percentage which helps the researcher to present all the collected information in the simplest
form to arrive at effective conclusions and possible recommendations. Data processing is an
activity which involves editing, coding and classifying data to make it suitable for further
analysis, then the compiled data has processed. After all the relevant data has been collected and
processed, then they have been analysis has further transformation of the processed data groups.
Finally, the out cocme of the project would be presented on written material and detailed oral
presentation.

3.8. Method of presenting the outcome

Once the analysis process is completed, the interpretation of all data was follows, it has been
presented using different tools such as table and percentage to make clear the relation among
variable. Finally, the analyzed data has been presented in easy understand way to draw
conclusion and find out the major factors that affect inventory management.

16 | P a g e
 Chapter Four

Data Presentation, Analysis and interpretation

Primary data analysis are collected from the KK textile industry employees on the basis of
structure questionnaire and unstructured interview data. The respondents was selected based on
their employment status who controls inventory from store department, production department
and purchase department.

Secondary data are collected from secondary resources such as financial statement of the
company (balance sheet and income statement) for the last five years (2007-2011). Cost of good
sold and finished goods inventory are required on the income statement to calculate stock turn
over of the past five years.

4.1. Respondents’ Personal Information

In this point of the study the data gathered from primary sources are analysis and interpret. A
total of 16 questions were distributed to the employee of KK textile company and all respondents
are returned.

4.1.1. Respondents’ Sex distribution

Sex No Percentage
Male 12 60%
Female 8 40%
Total 20 100%
Table 4.1: Respondents’ Sex distribution
Source: Questionnaire

As its can been seen from the above information the respondents 60% are males and 40% are
females. From this table the researcher gets that most of the employees are males.

17 | P a g e
4.1.2. Respondents’ educational level
Alternative No Percentage
Degree and above 6 30%
Diploma 8 40%
Other specify 4 20%
Experience 2 10%
Total 20 100%
Table 4.2: Respondents’ educational level
Source: Questionnaire

As it can been seen from the above information 30% of the respondents have degree and above
8(40%) diploma 4(20%) other specify and 2 (10%) have experience. From this information, the
researcher gets the organization more employee by they have diploma and degree and above.
Hence, most of the employees are educated. So that the companies internal control over
inventory is strong.

4.1.3. Respondents’ age distribution

Age No Percentage
18 – 25 2 10%
26 – 35 12 60%
36 – 41 6 30%
42 – 66 0 0%
Total 20 100%
Table 4:3: Respondents’ age distribution
Source: Questionnaire

According to this table information 10% of the employees are found at the age of between 13-25,
60% of age between 26-35, 30% of age between 36-41 and 0% of age between 42-66. as the
researcher get the organization is more employees by age between 26-35. Hence, most of the

18 | P a g e
employees of the company are young. From this, the researcher conclude that the company have
strong labor force in order to achieve its objective.

4.2. Nature of inventory management of the Organization

A manufacturing enterprise has several types of inventories, raw materials, factory supplies,
good in process and finished goods are basic commodities or other products obtained directly
from natural resources or acquired from others, which will be incorporated physically in to a
finished product factory supplies are similar to material, but their relation to the end product in
indirect. Goods in process consists of partially completed products and includes the cost of direct
material, direct labor, and factory over head. Finished goods are items that are complete and
ready for sale and include the same cost elements as those in good in process.

Response No Percentage
Yes 16 80%
Do you known the term No 4 20%
inventory management? Total 20 100%
Table 4.4: the term inventory management
Source: Questionnaire
Show in table 4.4 16(80%) respondents, response that yes the tem inventory management
question and 4(20%) respondents response do not know the term inventory management. From
this information, the researcher can conclude that there is inventory management in the industry.

4.3. The policies and procedures of inventory management

Response No Percentage
Does your industry has Yes 16 80%
policies and procedures to No 4 20%
keep inventory that avoid Total 20 100%
excess inventory
Table 4.5: the industry policies & procedures
Source: Questionnaire

19 | P a g e
Shown in table 4.5, 16(80%) respondents response that KK textile industry has does polices and
procedure to keep inventory that avoid excess inventory and 4(20%) respondents said that the
industry does not polices and procedure to keep inventory level that ensure not going out of
excess inventory. Hence, the researcher conclude that, the industry has policies and procedures to
keep inventory that avoid excess inventory.

Response No Percentage
Is there optimal level of Yes 16 80%
inventory management in the No 4 20%
industry? Total 20 100%
Table 4.6: The industry regarding optimal level of inventory.
Source: Questionnaire
As can be observed from table 4.6, 16 out of 20 or 80% respondents respond that textile industry
has optimal inventory and 4 out of 20 or 20% of respondents respond that the industry has excess
inventory or stocking. From this information the researcher conclude that there is optimal level
of inventory management, particularly from table 5 the industry follows inventory management
policies, procedures and techniques.

Response No Percentage
Is there production - Delivery on time 18 90%
department delivery - Some time there late delivery
finished goods inventory? - Does not delivery on time 2 10%
Total
0 0%

20 100%

Table 4.7: Time delivered finished goods

Source: Questionnaire

As can be table 4.7, (90%) respondent that the industry in production department delivery
finished goods inventory delivery on time, 2(10%) respondents that some time late delivery and
no any one responds does not delivery on time the industry. Hence, the researcher conclude that

20 | P a g e
 there is enough working capital because of its cash is not hold by inventory as well as the
industry was not face problem of inventory obsolescent due to the fact that the inventory is
delivered on time.

Is there the coordination Response No Percentage

among production - There is strong coordination 14 70%
department, store - There is satisfactory coordination 6 30%
department and purchase - There is weak coordination 0 0%
department of the industry? - There is low coordination 0 0%
Total 20 100%

Table4. 8: Coordination among department

Source: Questionnaire
As shown table 4.8, 14 out of 20 or 70% respondents, response that coordination among
production, store and purchase departments are strongly coordinated and 6(30%) of respondents
response that the industry departments are satisfactory coordinated. No any one response that
industry department weak and low coordination for the question .

Due to respond of the respondents, there is strong coordination among the departments of the
industry. Therefore, the researcher conclude that the work of the industry is performed on time
and the customer orders satisfied on time. As a result, the level of sales inventory is increased as
well as its profit increase.

4.4. Inventory control system

Response No Percentage
Which inventory control Perpetual 0 0%
system does the industry Periodic 20 100%
use? Both 0 0%
Table 4.9: Control system
Source : Questionnaire

21 | P a g e
As shown in table 4.9, 20 out of 20 or 100% respondents response that the industry use Periodic
inventory system. But the industry of 0% response the industry use perpetual inventory system.
As per the response of respondents the industry recorded inventory when it occur and every item
has its own store ledger card and inventory counted periodically. The researcher understand that
on KK textile industry there is a huge quantities and low unit price of its inventory.

Response No Percentage
How many time the industry Quarterly 18 90%
count (check) its inventory? Semi annually 2 10%
Annually 0 0%
Total 20 100%
Table 4.10: Checking inventory items
Source: Questionnaire

As can be shown from table 4.10, 18 out of 20 or 90% respondents respond that industry count in
quarterly 2(10%) respondents response that the industry count its inventory in semi annually.
From the above information, the researcher conclude that the industry used periodic inventory
system.

Response No Percentage
How often is inventory Always 0 0%
returned by customers a result Most often 0 0%
of defect? Few 13 65%
None 7 35%
Total 20 100%
Table 4. 11: Inventory returned by customer
Source: questionnaire
As can be observed from table 4.11, 0 out of 20 (0%) respondents response that the inventory
returned by customers as a result of defect the question for always and most often, 13 out of 20
or 65% that respondents respond inventory returned by customer as a result of defect for the
question. Few and 7 out of 20 or 35% the respondents respond inventory returned by customer.

22 | P a g e
4.5. Inventory management techniques of the organization
Response No Percentage
Which type of inventory -Economic order quantity 5 25%
management technique does - Just in time 4 20%
the firm follow? - ABC 4 20%
- Stock level 7 35%
- All of the above 0 0%
Total 20 100%
Table 4.12: Inventory management technique
Source: Questionnaire

As can be seen from table 4.12, 5 out of 25% respondents respond the industry follow economic
order quality. This inventory management technique determines that how mach inventory is add.
When inventory replaced and when to order determine that the recorder point at which an order
should be placed an inventory. 4 out of 20 or 20% respondents respond the industry follow just
in time, and ABC technique, 7 out of 20 or 35% respondents respond the industry follow stock
level its technique in order to guard over stocking or under stock kept material with the
appropriate level of the material by fixing stock level, 0(0%) the inventory management
technique follow economic order quantity, ABC techniques stock level and just in time.

From this information, the researcher understand that the industry follow good inventory
management techniques because in stock level technique there are re order level, minimum level
maximum level and economic order quantity or reorder quantity.

Response No Percentage
Does the industry manage it’s Yes 18 90%
inventory in appropriate way? No 2 10%
Total 20 100%
Table 4.13: managing inventory
Source: Questionnaire

23 | P a g e
Shown in table 4.13, 18 out of 20 or 90% respondents response that KK textile industry has
manage it’s inventory in appropriate way and 2 out of 20 or 10% the industry is does not manage
it’s inventory in appropriate way. Hence, the researcher understand that the industry minimize
cost and obsolescent inventory because of the industry manage it’s inventory in appropriate way.

Does the industry very carful Response No Percentage

to buy the right item, at the Yes 20 100%
right price and in the right No 0 0%
quantity? Total 20 100%
Table 4.14: Purchased inventory
Source: questionnaire
As can be observed from table 4.14, 20(100%) respondents respond that the industry apply very
carful to buy the right item, at the right price and in the right quantity So, not any one response
(0%) respond. The industry is nothing to done this question. Hence, the researcher concludes that
the industry purchased the right items and the right quantities. Thus, help to minimize wastage
inventory additionally, industry purchased at the right price that help to minimize production
cost.

4.6. Five years data of inventory activity

4.6.1. Inventory Turn Over
To determine how effectively the firm managing inventory and also to gain an indication of
liquidity of inventory, we compute the inventory turn over ratio. Inventory turn over is one
aspect of ration analysis which measure how effectively managing its inventories.

Inventory turn over = cost of goods sold

Ending finished goods inventory

This ratio tell as how many time inventory is turned over in to receivable through sale during the
year. The higher the inventory turnover, the more efficient the inventory management of the
firmThe following schedules show the industry is turn over ratio (actual)

Year Cost of good sold Ending finished Inventory turn over

goods inventory

24 | P a g e
2007 3,232,472 2,107,259 1.53
2008 2,732,310 2,001,351 1.37
2009 20,095,293 13,749,285 1.46
2010 51,728,976 16,742,453 3.09
2011 48,314,651 12,279,605 3.95
Table 4.15: Inventory turn over
Source: Financial statement of the industry from 2007-2011
The above table shows the inventory turn over ratio of the industry. The turn over of inventory in
the industry varies from year to year. The inventory turn over ratio in 2007 was 1.53 times. In
2008 the industry turnover ratio shows in 1.37 times and it is the lowest ratio compared with the
rest four years turn over ratio. Hence, inventory interface with operating efficiency and customer
service additionally, the inventory sold before an expiration date.

4.6.2. Inventory turnover in days

It tells how many days on average, before inventory is turned in to account receivable through
sale.

Average age of inventory = Day in the year

Inventory turn over

Year Cost of goods Ending finished Inventory turn Average

sold goods inventory over inventory
2007 3,232,472 2,107,259 1.53 235
2008 2,732,310 2,001,351 1.37 262
2009 20,095,293 13,749,285 1.46 246
2010 51,728,976 16,742,453 3.09 116
2011 48,314,651 12,279,605 3.93 96
Table 4.16: Average of inventory
Source: financial statement of the industry

25 | P a g e
Table 4.16 shown that inventory turn over rate and the average of inventory on the industry are
inversely proportion. The higher the inventory turn over ratio, the lower inversely stay in the
industry. In 2008 the industry is stock is turned with in 262 days and it’s the largest days an
inventory stay in the industry relative to the succeeding for years. In the 2007, the improve in
turn over became apparent which reduce the average age of inventory in industry to 235 days. In
2009, the inventory average age of inventory 246 days.

The industry experienced high average age of inventory on 2007, 2008 and 246 are with 235,262
and 246 days respectively, this shows that there was saw stock turnover according to the data
obtained from the industry. To the current year average age of inventory is more better than in
which the industry enjoy high profit resulted from large sale volume. From this information, the
researcher conclude that the amount of holding inventory decrease due to the increasement of
inventory turn over.

In the year 2009 turn over was increases on preceding year and its was 1.46 times. In the two
years 2010 and 2011 turn over ratio is 3.09 and 3.93 respectively.

As it is in dedicated in table above the inventory of five years fluctuated with large variance. The
inventory ratio of 2011 was better that indicates the effective and efficient control of inventory in
the industry. But in all the preceding year the industry experience with relatively low inventory
turnover. The turnover in 2011 indicates the cost of goods sold in above 3.93% times finished
goods inventory on other hands the lowest turn over ratio in 2008 show that finished goods
inventories recycled 1.37 time with respect to cost of goods old. Although the inventory turn
over of the past three years fit the standard of the industry’s inventory turnover indicate the
factory had high, stock of inventory.

Generally, both the inventory turnover and overage age of inventory point that there was slow
moving items in industry which is turn result a cost problem lived storage and depreciation in the
past four years. Conversely the industry’s present performance in inventory control is better than
the past years, the less the inventory is turned count receivable. This may arise storage and
depreciation cost that will be change against the profit of the industry perishable goods and age
controls must sold before an expiration date. The usual simplifying assumptions made in
inventory controls that holding cost are proportional to the size of inventory investment

26 | P a g e
 Chapter Five

Summary, Conclusion and Recommendation

In this section the researcher conclude the major finding of the study focusing on the existing
strengths and weaknesses of inventory management in KK textile industry. And also on the basis
finding the researcher give suggestions and recommendations to maintain the strengths and to
tackle or reduce the problem are forwarded.

5.1. Summary of Findings

To sum up, inventory management is basically defined as the active control program which
allows the management of sales, purchases and payments with good inventory management,
companies are able to monitor what shipments they have coming and the going out to customer,
allowing them to keep just enough inventory in stock to meet demand. The researcher motivated
in this finding for the purpose of knowing the inventory management system and evaluating
efficiency and effectiveness of KK textile industry.

The main objective of the finding is to assess the crucial problems currently prevailing in KK
textile industry. In KK textile industry there is an effective and efficient inventory management.
The industry has implemented various technique of control system in controlling raw material in
progress and finished goods inventory. Particularly finished goods are controlled by the concept
stock level item the industry selected this technique in such way that high value item are strongly
controlled and great emphasis is given than lower level items. The industry selected this method
for cost consideration. There are also scientific techniques made by the industry cyclical and
fixed order quantities. The former concept has been developed for consume able materials
which are required by production section to smoother out of the production activity, while the
later system has been used the control high value items closely to maintain relatively low
investment in inventory.

Store department is responsible for receiving and issuing of materials in KK textile industry, like
raw material, finished goods etc represent a very large investment. The main objective of store
room is to reduce loss and detoration of materials. Accordingly the interview methods, the store
department the following procedure to receipt the raw material that reach at the industry site. The

27 | P a g e
store department maintain appropriate accounting for inventory control purpose. some of these
are physical count and bin care.

In the reorder point of inventory level are determine how many inventory are reorder for a selling
and production activity. The industry used the minimum inventory level used for each store
departments and its important the supplier are leads that products.

The inventory turnover ratio of the five years periods fluctuation was large variance, the
inventory turnover of 2010 (3.93) it indicate the industry effective and efficient control on
inventory. But proceeding years inventory turnover, the industry experience with relative low
turnover. The decline in turn over indicates the industry has high stock inventory. Generally both
the inventory turnover and the average value show that there was slow moving items in the
industry in turn result a cost problem such as storage and depreciation cost in the past four years.

5.2. Conclusion
Concerning the application of inventory management in KK textile industry most of managing
attempt to apply, like:-

Regarding to delivering finished goods there is enough working capital because of its cash is not
hold by inventory as well as the industry was not face problem of inventory obsolescent, due to
the fact that the inventory is delivered on time.

Regarding coordination among departments, the work of the industry is performed on time and
the customer orders satisfied . As a result, the level of sales inventory is increased as well as its
profit increase.

Regarding to purchased inventory, the industry purchased the right items and the right quantities.
Thus, help to minimize wastage inventory. Additionally, industry purchased at the right price
that help to minimize production cost.

Regarding to policies and procedures of inventory management, the industry was follows
policies and procedures to keep inventory that avoid excess inventory, that attain optimal level of
inventory management. Whereas, regarding to inventory control system the industry used
periodic inventory system that control huge quantities and low unit price of inventory. Finally,

28 | P a g e
regarding to inventory turn over there increasing inventory turn over through 2007-2011.so there
is effective inventory management in the industry.

Based on information gathered from interview questioner and secondary data analysis the
following paragraphs are discussed the strength and weakness of the industry.

First, there is strong coordination among department of the industry. Thus, help to facilitate the
operational activities and the industry can maintain optimal level of inventories due to avoid
excessive inventories. .
Second, there is qualified man power, good inventory management polices and procedures and
the industry carefully purchased raw materials select the right items, the right quantity and the
right price that are help to attain its own objective.
Finally, the industry are weak practice in producing department because inventory is returned by
customers as a result of defect and to redesign on inventory should rest with to top management
of the industry.

5.3. Recommendation
Based on the finding and conclusion the following recommendation are for ward in order to
solve the problems identified and strength the existing section for effective inventory
management. To solve the problem should take the following major action.

 The management of the factory should give attention for material displaced a very where
in the department of the industry. That is they should prepare appropriate storage area, so
that deprecation, this can be minimize.
 Quantity and quality of goods received should be specified before payment is authorized.
 Proper authorization exists for inventory quantity removed from stock.
 Inventory issues should be valued according to an acceptable method and the costs
should be accounted for in a manner that provides adequate information for management
including variance from standard.
 There should be fully accountability for both units and birr for inventory quantity
received on hand and issued or sold.
 Difference between book and physical inventories are as certained differences adjusted
and the amount of over age or shortage should be properly accounted for.

29 | P a g e
 Incoming shipment should be accepted only if the receiving department has authorization
in the form of a copy of purchase order.
 All transactions pertaining to the issue of sales of inventories quantity should be
accounted for and entered in the controlling period.
 Terms, prices, and clearical accuracy of redors invoice should be correct before payment
is all authorized.
 Inventory quantity should be adequately protected against losses from theft, spoilage,
unauthorized withdrawal by employee.
 The industry should use material requirement plan since its fastness system thinking and
become the corner stone of production system with the limit of its metrology, if will
review what is needed, how many needed, when they are needed and when they should
be order.

30 | P a g e
 Reference
Duncan Williamson (1998), Cost and management accounting, 6thed. New delhi prentice
Hal’ india .
Mosich A.N (1988), Intermediate Accounting. 6th ed. United state of America.
Stephen A. Ross etal (1998), Fundamental of corporate Finance, 6th ed. United state of
Amercia.Van.Hoftman.
Lawrence J.Gitman (1997), Financial management, 8th ed. United state of America.
Willaistevensson (1999), Operational management.6thedn.Bitson Mc Grawhill .
Internet Web sites
Http://www. Inventory Management.Com. Accessed 03/03/2012.
www. Fishbowl.Inventory management.Com . Accessed 05/03/2012

31 | P a g e
 Appendix
Unity University
Faculty of Business and Economics
Department of accounting
Dear respondents
The purpose of this questionnaire is to collect data for the thesis project tin requirement for
partial fulfillment of B.A degree in accounting in Unity University. You genuine response for the
following questions is extremely important for the successful completion of this paper, the
information yourprovideis used only for the purpose indicated and will be kept highly
confidential.
I would like to thank you in advance for your cooperation and for enviable time.
Part one general information
Education status
Diploma Degree Other specify Experience
Age 18 – 25 26 – 35 36-42 42- 66
Sex : Male Female
Part two
Questions regarding to inventory management in KK textile industry
Instructions
Wherever there is alternative answer tick in the box
If the question require open ended answers write briefly
1. Do you known the term inventory management?
Yes No
2. Does your industry has policies and procedures to keep inventory level that avoid excess
inventory?
Yes No
3. Is there optimal level of inventory management the industry?
Yes No
4. Does the industry have control inventory in using inventory procedure?
Yes No
5. Is the production department delivery finished goods inventory?

32 | P a g e
 Delivery on time
Some time there is late delivery
Does not delivery on time
6. Is there the coordination among production department, store department, and purchase
department of the industry?
There is strong coordination
There is satisfactory coordination
There is weak coordination
There is low coordination
7. Your answer for the above question 6 other than strong coordination state the reason
---------------------------------------------------------------------------------
8. Which inventory system procedure does the industry use?
Perpetual procedure
Periodic procedure
Both
9. How many time the industry count/check its inventory?
Monthly Semiannually Annually
10. How often is inventory returned by customer as result of defect?
Always Most often Few None
11. Which type of inventory management technique does the industry follow?
Economic order quantity Just in time
ABC technique Stock level All the above
12. Does the industry manage it’s inventory in appropriate way?
Yes No
13. Does the industry very carful to buy the right item, at the right price and in the right
quantity ?
Yes No
14. If no question no. 13 to specify the reason?
----------------------------------------------------------------------------------------------------------------
----------------

33 | P a g e
34 | P a g e