RIZWAN ALI KHAN

ROLL NO. 17067

REG. NO. 2013-GCUF-17067

CLASS: MS (Management) Business Administration

ASSIGNMENT OF AFM: Advanced Financial Management

TOPIC: inventory control and management techniques

SUBMITTED TO: Dr. Jeved

GOVERNMENT COLLEGE UNIVERSITY FAISALABAD, SAHIWAL

CAMPUS
 INVENTORY CONTROL MANAGEMENT AND TECHNIQUES

Inventory
A sto k or store of goods is alled i ve tory

OR Inventory is also defined as assets that are intended for sale, are to be used in
producing goods .

Equation rEprEsEnting Company’s invEntory

Beginning Inventory + Net Purchases - Cost of Goods Sold (CGS) = Ending Inventory

Why inventory control & management is important

It has 2 main reasons
1. Inventory basically represents the amount of money.
2. As it is concerned with the daily operations of an organization or firm.

On the basis of these two reasons we can conclude that some of the organizations are
very good and satisfactory condition in their inventory control and management, but
others who are not very good or unsatisfactory condition in this subject it may be a sign
that management does not recognize the importance of inventory control and
a age e t or la k of u dersta di g a also e the reaso .

Nature and types of inventory

1. Raw material
2. Purchased parts
3. Partially completed goods
4. WIP
5. Finished goods inventories ( for manufacturing firms )
6. Merchandise ( for retail goods )
7. Replacement parts, tools and supplies
8. Goods in transit to ware houses or customers.
The Functions of inventory control and management
1. To meet anticipated demand
2. To smooth out production requirements
3. To protect against stock outs
4. To take advantage of order cycle
5. To permit operations
6. To hedge against price increases
7. To take advantage of Quality discounts

Requirements for the effective inventory control and management

It has 2 basic requirements
1. To create a system to keep track of inventory on hand and on order.
2. To make decision about how much and when to order.

Different inventory control management Methods or Techniques

Or

How Do We Value Inventory?

1. ABC Approach
Classifying inventory according to some measures of importance and
allocating control efforts accordingly.
A = very important
B = moderate important
C = least important
2. EOQ Approach
The order size that minimize the cost
3. 2 BIN Approach/ Method / System
Two containers of inventory
Placing order at the time when 1st container is empty
4. JIT ( Just In Time )
Repetitive production system in which processing and movement of
materials and goods occur just at the time they are needed, usually in
small batches.
  The accounting method that a company decides to use to determine its inventory costs
can directly impact the balance sheet, income statement and statement of cash flow.
Three inventory-costing methods are widely used by both public and private companies:

 First In First Out (FIFO)

 Last In First Out (LIFO)
 Average Cost Method (AVCO)

Example of FIFO and LIFO accounting

5. First In First Out (FIFO)

This method assumes that inventory purchased first is sold first. Therefore, inventory cost
under FIFO method will be the cost of latest purchases.

Example
Use the following information to calculate the value of inventory on hand on Mar 31 and cost of
goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory
system.
Mar 1 Beginning Inventory 68 units @ $15.00 per unit

5 Purchase 140 units @ $15.50 per unit

9 Sale 94 units @ $19.00 per unit

 11 Purchase 40 units @ $16.00 per unit

16 Purchase 78 units @ $16.50 per unit

20 Sale 116 units @ $19.50 per unit

29 Sale 62 units @ $21.00 per unit

Solution
 FIFO Periodic

Units Available for Sale = 68 + 140 + 40 + 78 = 326

Units Sold = 94 + 116 + 62 = 272

Units in Ending Inventory = − = 54

Cost of Goods Sold Units Unit Cost Total

Sales From Mar 1 Inventory 68 $15.00 $1,020

Sales From Mar 5 Purchase 140 $15.50 $2,170

Sales From Mar 11 Purchase 40 $16.00 $640

Sales From Mar 16 Purchase 24 $16.50 $396

272 $4,226

Ending Inventory Units Unit Cost Total

Inventory From Mar 16 Purchase 54 $16.50 $891

 FIFO Perpetual

Purchases Sales Balance

Date
Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total
 Mar 1 68 $15.00 $1,020

5 140 $15.50 $2,170 68 $15.00 $1,020

140 $15.50 $2,170

9 68 $15.00 $1,020 114 $15.50 $1,767

26 $15.50 $403

11 40 $16.00 $640 114 $15.50 $1,767

40 $16.00 $640

16 78 $16.50 $1,287 114 $15.50 $1,767

40 $16.00 $640

78 $16.50 $1,287

20 114 $15.50 $1,767 38 $16.00 $608

2 $16.00 $32 78 $16.50 $1,287

29 38 $16.00 $608 54 $16.50 $891

24 $16.50 $396

6. Last In Last Out (LIFO)

This method assumes that the last unit making its way into inventory is sold first. The older
inventory, therefore, is left over at the end of the accounting period.
Example
Use LIFO on the following information to calculate the value of ending inventory and the cost of
goods sold of March.
Mar 1 Beginning Inventory 60 units @ $15.00
5 Purchase 140 units @ $15.50
14 Sale 190 units @ $19.00
27 Purchase 70 units @ $16.00
29 Sale 30 units @ $19.50
 Solution

 LIFO Periodic

Units Available for Sale = 60 + 140 + 70 = 270

Units Sold = 190 + 30 = 220

Units in Ending Inventory = 270 − 220 = 50

Cost of Goods Sold Units Unit Cost Total

Sales From Mar 27 Inventory 70 $16.00 $1,120

Sales From Mar 5 Purchase 140 $15.50 $2,170

Sales From Mar 1 Purchase 10 $15.00 $150

220 $3440

Ending Inventory Units Unit Cost Total

Inventory From Mar 27 Purchase 50 $15.00 $750

 LIFO Perpetual

Purchases Sales Balance

Date
Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total

Mar 1 60 $15.00 $900

5 140 $15.50 $2,170 60 $15.00 $900

140 $15.50 $2,170

14 140 $15.50 $2,170 10 $15.00 $150

50 $15.00 $750

27 70 $16.00 $1,190 10 $15.00 $150

70 $16.00 $1,120
 29 30 $16.00 $480 10 $15.00 $150

40 $16.00 $640

31 10 $15.00 $150

40 $16.00 $640

 Why is Inventory Important?

If inflation were nonexistent, then all three of the inventory valuation methods would
produce the exact same results. When prices are stable, our bakery would be able to
produce all of its bread loaves at $1, and FIFO, LIFO and average cost would give us a
cost of $1 per loaf.

Unfortunately, the world is more complicated. Over the long term, prices tend to rise, which
means the choice of accounting method can dramatically affect valuation ratios.

If prices are rising, each of the accounting methods produce the following results:

 FIFO gives us a better indication of the value of ending inventory (on the balance sheet),
but it also increases net income because inventory that might be several years old is
used to value the cost of goods sold. Increasing net income sounds good, but remember
that it also has the potential to increase the amount of taxes that a company must pay.
 LIFO isn't a good indicator of ending inventory value because the leftover inventory
might be extremely old and, perhaps, obsolete. This results in a valuation much lower
than today's prices. LIFO results in lower net income because cost of goods sold is
higher.
 Average cost produces results that fall somewhere between FIFO and LIFO.

(Note: if prices are decreasing, then the complete opposite of the above is true.)

Keep in mind that companies are prevented from getting the best of both worlds. If a company
uses LIFO valuation when it files taxes, which results in lower taxes when prices are increasing,
it then must also use LIFO when it reports financial results to shareholders. This lowers net
income and, ultimately, earnings per share.