Introduction

Inventory management is concerned with keeping enough products on hand to

avoid running out while at the same time maintaining a small enough inventory balance
at allow for a reasonable return on investment, proper inventory management is important
to the financial health of the corporation, being out of stock forces customers to turn to
competitors or results in a loss of sales excessive level of inventory, however results in
large inventory carrying costs, including the cost of the capital tied up in inventory where
house fees insurance etc. The objective of the chapter is to examine the impact of
inventory on the financial decision making.

Inventories constitute the most significant part of current asserts of a large

majorities of companies in INDIA. On an average inventories are approximately 60% of
current asserts in public limited companies in INDIA. Because of the large size of
inventories maintained by firms, a considerable amount of funds is required to be
committed to them.

The investment in inventory is very high in most of the undertaking engaged in

manufacturing wholesale and retail trade. The amount of investment is sometimes more
in Inventory rather than in other assets.

In India a study of 29 major industries has revealed that the average cost of
materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About
90% of working capital is invested in inventories. The main reason attributed for loss
making is financial indiscipline in managing the resources particularly in inventory
management for an organization, the product profitability considering standards and
budgets is of paramount importance needless to say that in this context, inventory
management assumes lot of significances.

The investment in inventory is very high in most of the undertaking engaged in

manufacturing wholesale and retail trade. The amount of investment is sometimes more
in Inventory rather than in other assets.
 In India a study of 29 major industries has revealed that the average cost of
materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About
90% of working capital is invested in inventories. The main reason attributed for loss
making is financial indiscipline in managing the resources particularly in inventory
management for an organization, the product profitability considering standards and
budgets is of paramount importance needless to say that in this context, inventory
management assumes lot of significances.

Hence, the inventory management determines and portrays the following factors
like what to purchase, how to purchase, from where to purchase, where to store etc., will
be critical factors. Hence forth it becomes a crucial factor to undergo a detailed analysis
to find an efficient system of the inventory.

Definition

The American production and inventory society defines:

“Inventory management as the branch of business management concerned with

planning and controlling inventories. The role inventory management is to maintain a
desired stock level of specific products or items”.

Types of study

Raw Materials:

An inventory of raw materials allows separation of production scheduling from

arrival of basic inputs to the production process. Factories affecting the amount the raw
materials inventory include proximately to the suppliers relationship with the suppliers,
predictability of the production process, lead time required to place on order, and
transportability and perish ability of raw materials.
WORK IN PROCESS:
An inventory of partially completed units allows the separation of different phases
of the production process, the amount of work in process inventory is in past a function
of the type of product, the measurement period and the nature of the product process.

FINISHED GOODS:
An inventory of finished allows separation of production from selling , with a
stock of finished merchandised on hand a firm can fill order as they are received rather
than depend upon the completion of production to satisfy customer demands.

FUNCTIONS OF INVENTORY:
The functions of the firm such as purchase of raw materials ,processing, and
having a finished goods available for sales, have a sequential physical dependence
maintenance of inventories allows the firm to decouple those functions so that each can
be planned, scheduled ,and operated independently. For retail firms inventory provides
customers with selection choice and decouple the purchasing functions from the selling
functions.

3.2 NEEDS FOR THE STUDY:

• To facilitate smooth production and sales operation (Transaction motive).
• To guard against the risk of unpredictable changes in usage rate and delivery time
“(Precautionary motive )
• To guard against the risk of unpredictable changes in usage rate and delivery time
“(Precautionary motive )
• To take advantages of price fluctuations(Speculative motive)

3.3 BENEFITS OF THE STUDY:

 • To ensure a continues supply of raw material to facilitate uninterrupted
production.
• To maintain sufficient stock of raw material in periods of short supply and
anticipate price changes.
• To maintain sufficient finished goods inventory for smooth sales operations and
efficient customer service.

LIMITATIONS:

• First there is a cost of information problem in keeping track of the physical

inventories of some goods
• Second because of number of variables involved it is very difficult to develop on
accurate measure of inventory turnover.
• The very nature of the organization places limitations on the collection of the data
and analysis thereof.
• The accounting procedure and other accounting principles are limited by the
company changes in them may vary the inventory performance.
• The study is limited up to the date and information provided by KAKATIYA
OVERSEAS and annual reports.

3.4 METHODOLOGY AND DATABASE:

• For this project the collection of data is by various sources. mainly
• primary
• secondary

PRIMARY DATA:
The information collected directly without any reference in primary data in the study it is
mainly through concerned offers or staff member either individually or collectively data
includes

®Conducting personal interview with officers of the company.

®Individual observation inference.
®From the people who are directly involved with the transaction of the firm.

SECONDARY DATA:
Study has been taken from secondary sources that is published annual report of
the editing, classifying and tabulation of the financial data for their.

PERIOD OF THE STUDY:

This study is confined for the period of approximately Three months that is from
January 2, 2009 to March 10, 2009.

REVIEW OF LITERATURE:
For this purpose, previous abstracts on inventory management, periodicals,
academic journals. Articles will be reviewed in this section.

STATISTICAL TOOL TO BE APPLIED:

Sampling statistical techniques like percentages, bar graphs, averages, chi-
squares, and z-test may be applied based on the data collected for the study.
3.5 OBJECTIVES:

• To maintain a large size of inventory of raw material and work in progress for
efficient and smooth production and of finished goods for uninterrupted sales
operations.

• To maintain a minimum investment in inventory to minimize profitability.

• Study of maintain optimum level of inventory investment.

• The primary goal is to minimize inventory investment while still meeting the
functional requirements.

SCOPE OF THE STUDY:

• Work in progress arising under construction contracts including directly related

service contract.

• Work in progress arranging in ordinary course of business of services provides.

 INVENTORY MANAGEMENT

4.1. INTRODUCTION:

The investment in inventory is very high in most of the undertakings engaged in

manufacturing, whole-sale and retail trade. The amount of investment is sometime more
in inventory than in other assets. In India, a study of 29 major industries has revealed that
the average cost of materials is 64 paisa and the cost of labour and overheads is 36 paisa
in rupee. In Industries like sugar, the raw materials cost is a s high as 68.75 percent of the
total of cost. About 90 percent part of working capital is invested in inventories. It is
necessary for every management to give proper attention to inventory management. A
proper planning of purchasing, handling, storing and accounting should form a part of
inventory management. An efficient system of inventory management will determine (a)
what to purchase (b) how much to purchase (c) from where to purchase (d) where to
store, etc.
 There are conflicting interests of different departmental heads over the issue of
inventory. The finance manager will try to invest less in inventory because for him it is
an idle investment, whereas production manager will emphasize to acquire more and
more inventory as he does not want any interruption in production due to shortage of
inventory. The purpose of inventory management is to keep the stocks in such a way that
neither there is over-stocking nor under-stocking. The over-stocking will mean a
reduction of liquidity and staring of other production processes; under-stocking, on the
other hand, will result in stoppage of work. The investments in inventory should be kept
in reasonable limits.

 Every enterprises needs inventory for smooth running its activities. It serves as a
link between production and distribution processes. There is, generally, at a time
lag between the recognition of a need and its fulfillment. The greater the time-lag,
the higher the requirement for inventory, the unforeseen fluctuations in demand
and supply of goods also necessitate the need for inventory. It also provides a
cushion for future price fluctuations.

 The investment in inventories constitutes the most significant part of current

assets/working capital in most of the undertakings. Thus it is very essentials to
have proper control and management of inventories. The purpose of inventory
management is to ensure a variability of materials in confident quantity as and
when required and also to minimize Investment in inventories.

Meaning and Nature of Inventory:

Supply of goods or materials on hand. In manufacturing, inventory consists of raw

materials, work-in-process, and finished goods. In wholesaling and retailing, inventory is
the stock of merchandise on hand. In direct marketing, inventory may refer to direct-mail
package components that are available for mailing when needed. In the broadcast and
print media industry, inventory is the time or space available for mailing when needed. In
the broadcast and print media industry, inventory is the time or space available for sale to
advertisers. In magazine publishing, inventory is the number of copies of each issue
available for distribution.
An ample inventory ensures that sales will not be lost or deadlines missed but can
require a substantial cash investment in both material and storage space. There are also
risks associated excessive inventory, such as a change in circumstances that reduces or
eliminates demand for an item in inventory or that renders the item obsolete or illegal, or
the risk of loss due to theft, fire, aging, and so forth. The costs and risks must be weighed
against the cost of lost sales and missed deadlines to determine the optimal inventory
level.

4.2 INVENTORY CONTROL AND ITS IMPACT ON COSTS:

Value wise inventory and consumption analysis are brought out on quarterly basis
indicating RM; SS, CT, PM are value at cost. A class items which are 70%, B class items
which are valuing 20% and C class items which are valuing 10%. Of the total inventory
are brought for verification of internal audit. The stores verified C class items and to that
extent certificate 4 is issued at the year end regarding the correctness. Physical balances
are verified with kardex and the difference is intimated to stores FAW of the group by the
internal audit.
FAW of the group verifies and gives the rectification in entries that is shortage
items values are charged of to physical inventory variation and the excess quantities are
adjusted in the inventory ledger after obtaining the competent authorities approval.

This system enables control on the inventories and at the same time costs on some
are checked.
Materials issued to subcontractors are booked to consumptions as and when
issued through MIRS. A record is being maintained at subcontracts section, park wise,
job wise and description of materials and quantities issued.

Impact of inventory on working capital

 Inventories are a component of the firm’s working capital and, as such, represent
a current accounting cycle, which is normally one year.

1. A CURRENT ASSET: It as assumed that inventories will be

converted to cash in the current accounting cycle, with is normally one year.
2. LEVEL OF LIQUIDITY: inventories are viewed a source of near
all cash. For most products, this description is accurate, at the same time most firms
hold some slow moving items that may not be sold for a long time. With economic
slows down or changes in the markets for goods the prospects for sale of entire
product lines diminished. In these cases, the liquidity aspects of inventories become
highly important to the manager of working capital. At the minimum the analyst must
recognize that inventories are the least liquid of the current assets.
3. LIQUIDIRY LAGS: inventories are tied to the firm’s pool of the
working capital in a process that involves three specific lags.
Creation lags: It most cases, inventories are purchased on credit, creating an account
payable. When the raw materials are processed in the factory, the case to pay
production expenses is transferred at future times. Whether manufactured or
purchases, the firms will hold inventories for some period before payment is made.
This liquidity lag offers a benefit to the firm.
Storage lags: once goods are available for resale, they will not be immediately
converted into cash. First the items must be sold. Evenly when sale are moving
briskly, affirm will hold inventory as a backup. Thus the firm will usually pay
suppliers, workers and overhead expenses before the goods actually sold.
This lag represents a cost to the firm.
Sale lag: once goods have been sold, they normally do not create cash immediately.
Most sales occur on credit and become accounts receivable. This lag also represents a
cost to the firm.
4. CIRUCLATING ACTIVITY: inventories are in rotating pattern with other current
asset. They get converted into receivables which generate cash is invested again in
inventory to continue the operate cycle.
NEED TO HOLD INVENTORY
Maintaining inventories involves tying up of the company’s funds and incurrence
of storage and handling costs. There are three are general motives for holding inventories.

1. Transactionary motive: every firm has to maintain some level of inventory

to meet the day-to-day requirements of sale, production process, customer demand
etc. transact nary motive makes the firm to keep the inventory will provide
smoothness to the operation of the firm. A business firm exists for business
transaction that requires stock of goods and raw materials.

2. Precautionary motive: a firm should keep some inventory for unforeseen

circumstances also. The firm must have inventory of raw materials as will as finished
goods for meeting any emergencies.

3. Speculative motive: the firm may be empted to keep some inventory in order
to capitalize an opportunity to make profit e.g., sufficient level of inventory may help
the firm to earn extra profit in case expected shortage in the market.

MAIN PURPOSE OF INVENTORY

The purpose of holding inventories is to allow the firm to operate the processes of
purchasing, manufacturing and marking in its primary products. The goal is to achieve
efficient in are where costs are involved and to achieve sales at competitive prices in the
marking place.

1. Avoiding loss sales: without goods on hand that are ready to be sold most firms
would lose business. Some clusters are ready to wait, particularly when an item
must be made on order or is not widely available from competitors. Affirm must
be prepared to deliver goods on demand. Shelf stock refers to items that are stored
by the firm and sold with little or no modification to the customers.
 2. Gaining quantity discounts: inurn for making bulk purchases many suppliers
will reduce the of supplies and component parts. This discount will reduce cost of
goods sold and increase the profits earned.
3. Reducing order cost: each time a firm place an order it incur certain good that
arrive must be accepted, inspected and counted. Later an invoice must be
processed and payment made. Each of these costs will vary with the order placed.
By placing fewer orders the firm will pay less to process each order.
4. Achieving efficient production runs: each time a firm sets up workers and
machines produce an item startup cost are incurred. These are the absorbed as
production begins. The longer the run the smaller the costs to begin producing the
goods.
5. Reducing risk of production shortages: manufacturing firm frequently produce
goods with blunders or thousands of components. If any these are missing entire
production operation can be halted with heavy expenses. To avoid starting a
production run and then discovering the shortage of vital raw material or other
component, the firm can maintain larger than inventories. Basically, inventory
management is concern of stores management, production management is
concerned. In case of raw material, the stores management and production
management is concerned. In case of finished goods, production and sales
management is concerned.

4.3 INVENTORY-CORPORATE FINANCE:

Value of a firm’s raw materials, work in process, supplies used in operations, and
finished goods. Since inventory value changes with price fluctuations, it is important to
know the method of valuation. There are a number of inventory valuation methods; the
most widely used are First In, First out (FIFO) and Last In, First out (LIFO). Financial
statements normally indicate the basis of inventory valuation, generally the lower figure
of either cost price or current market price, which precludes potentially overstated
earnings and assets as the result of sharp increases in the price of raw materials.
Personal finance;
 List of all assets owned by an individual and the value of each, based on cost, market
value, or both. Such inventories are usually required for property insurance purpose and
are sometimes required with applications for credit.
Securities:
Net long or short position of a dealer or specialist. Also, securities bought and
held by a dealer for later resale.
Inventory:
An inventory is a detailed, itemized list or record of goods and materials in a
company’s possession. “The main components of inventory, “wrote Transportation and
Distribution contributors David Waller and Barbara Rosenbaum, “are cycle stock: the
order quantity or lot size received from the plant or vendor; in-transit stock: inventory in
shipment from the plant or vendor or between distribution centers; [and] safety stock:
each distribution center’s inventory buffer against forecast error and lead time
variability.”

Writing in production and Operations Management, Howard J. Weiss and Mark

E. Gershon observed that, historically, there have been two basic inventory systems and
the periodic review system. With continuous review systems, the level of a company’s
inventory is monitored at all times. Under these arrangements, business typically track
inventory until it reaches a predetermined point of “low” holdings, whereupon the
company makes an order (also of a generally predetermined level) to push its holdings
back up to a desirable level. Since the same amount is ordered on each occasion,
continuous review systems are sometimes also referred to as event-triggered systems,
fixed order size systems (FOSS), or economic order quantity systems (EOQ) .Periodic
review systems, on the other hand, check inventory levels at fixed intervals rather than
through continuous monitoring. These periodic reviews (weekly, biweekly, or monthly
checks are common) are also known as time triggered systems, fixed order interval
systems (FOIS), or economic order interval systems (EOI).
The dictionary meaning of inventory is stock of goods, or a list of goods. The
word Inventory is understood differently by various authors. In accounting language it
may mean stock of finished goods only. In a manufacturing concern, it may include raw
material, work in process, etc. to understand the exact meaning of the word, ‘inventory’
we may study it from usage side or from the ‘side of point entry’ in the operations.
Inventory
includes the following things:
Raw Material:
Unfinished goods used in the manufacture of a product. For example, a steelmaker
uses iron ore and other metals in producing steel. A publishing company uses paper and
ink to create books, newspapers, and magazines. Raw materials are carried on a
company’s balance sheet as inventory in the current assets section.
WIP (Work In-Progress):
Three-letter abbreviation with several meanings, as Described below:
• Work in Progress- generally signifies a project that will not be settled in one
attempt, or even several. Sometimes as WIP List, synonymous with a To-Do list.
• “WIP” as an asset means the portion of work that is complete but not yet billed.
WIP is a good or goods in various stages of completion throughout the plant,
including all material from raw material that has been released for initial
processing up to completely processed material awaiting final inspection and
acceptance as finished good inventory.

Finished Goods:
These are the goods which are ready for the consumers. The stock of finished goods
provides a buffer between production and market. The propose of maintaining inventory
is to ensure proper supply of goods to customers. In some concerns the production is
undertaken on order basis, in these concerns there will not be a need for finished goods.
The need for finished goods. The need for finished goods inventory will be more when
production is undertaken in general without waiting for specific orders.
Spares:
Spares also form a part of inventory. The consumption pattern of raw materials. The
stocking policies of spares are different from industry to industry. Some industry like
transport will require more spares than the other concerns. The costly spare parts like
engines, maintenance spares etc. are not discarded after use, rather they are kept in ready
position for furtherer use. All decisions about spares are based on the financial cost of
inventory on such spares and the costs that may arise due to their non-availability.
Consumables:
These are the materials, which are needed to smoothen the process of production.
These materials do not enter directly into production but they act as catalysts.
Consumables may be classified according to their consumption and critically. Generally,
consumables stores do not create any supply problem and form a small part of production
cost. There can be instances where these materials may account for much value than the
materials. The fuel oil may from a substantial part of the cost.
Cycle Inventory:
The portion of total inventory that varies directly with lot size is
called inventory. Determining how frequently to order, and in what quantity, is called lot
sizing. Two principles apply.

1. The lot size, Q, varies directly with the elapsed time (or cycle)
2. Between orders. If a lot is ordered every five weeks, the average lot size must
equal five week’s demand.
3. The longer the time between orders for a given item, the greater the cycle
inventory must be at the beginning of the interval, the cycle inventory is at its
maximum or Q. At the end of the interval, just before a new lot arrives, cycle
inventory drops to its minimum, or 0. The average of these two extremes:

Average cycle inventory = Q + o = Q

2 2

This formula is exact only when the demand rate is constant and uniform. However, it
does provide reasonably good estimate even when demand rates are not constant. Factors
other than the demand rate (e.g., scrap losses) also may cause estimating errors when this
simple formula is used.
Safety Stock Inventory:
To avoid customer service problems and the hidden cost of unavailable
components, companies hold safety stock. Safety stock inventory protects against
uncertainties in demand, lead time, and supply. Safety stocks are desirable when
suppliers fail to deliver the desired quantity on the specified date with acceptable quality
or when manufactured items have significant amounts of scrap or rework. Safety stock
inventory ensures that operations are not disrupted when such problems occur, allowing
subsequent operations to continue.
To create safety stock, a firm places an order foe delivery earlier than when the
item is typically needed. The replenishment order therefore arrives ahead of time, giving
a cushion against uncertainty.

Purpose and Benefit of Holding Inventory:

Although holding inventories involves blocking of a firm’s fund and the cost of
storage and handling every business enterprises has to maintain a certain level of
inventories to facilitate uninterrupted production and smooth running of business. In the
absence of inventories a firm will have to make purchases as soon as it receives orders. It
will mean loss of time and delay in execution of orders which sometimes may cause loss
of customers and business. Firms also need to maintain inventories to reduce ordering
cost and avail quantity discount, etc. generally speaking there are three main purpose or
motives of holding inventories:
I. The transaction motive which facilitates continuous production and timely execution of
sales orders.
II. The precautionary Motive which necessitates the holding of inventories for meeting
the unpredictable changes in demand and supplies of materials.
III. Speculative motive which induces to keep inventories for taking advantages of price
fluctuations, saving in re-ordering costs and quantity discounts, etc.

4.4 RISKS AND COSTS OF HOLDING INVENTORIES:

 The holding of inventories involves blocking of a firm’s funds and incurrence of
capital and other costs. It also exposes the firm to certain risks. The various costs and
risks involved in holding inventories are as below:

1. Capital costs: Maintaining of inventories results in blocking of the firm’s

financial resources. The firm has, therefore, to arrange for additional funds to
meet the cost of inventories. The funds may be arranged from own resources or
from outsiders. But in both the arranged from own resources or from outsiders.
But in both the cases, the firm incurs a cost. In the former case, there is an
opportunity cost of investment while in the later case, the firm has to pay inters tot
the outsider.
2. Storage and Handling costs: Holding of inventories also involves costs on
storage as well as handling of materials. The storage costs include the rental of the
go down, insurance charges, etc.
3. Risk of price decline: There is always a risk of reduction in the prices of
inventories by the suppliers in holding inventories. This may be due to increased
market supplies, competition or general depression in the market.
4. Risk of Obsolescence: The inventories may become obsolete due to improved
technology, changes in requirements, change in customer’s tastes, etc.
5. Risk Deterioration in Quality: The quality of the materials may also deteriorate
while the inventories are kept in stores.
Inventory and the Growing Company:
Most successful small companies find that as their economic fortunes rise, so too
do the complexity of inventory logistics. The increase in inventory management is
primarily due to two factors: 1) greater volume and variety of product, and 2) increased
allocation of company resources (such as physical space and financial capital) to
accommodate that growth in inventory “The transaction from seat-of –the –pants
ordering policies and little or no record keeping to a formal inventory system that
includes specific ordering policies and a formalized inventory record file is a difficult one
for most companies to make, ” stated Weiss and Gershon.” It is but one of the many
sources of growing pains that emerging company’s experience, especially those in the
fast-growing industries, such as fast food or high technology. This transition requires the
creation of new job functions to identify the costs (holding, shortage) associated with
inventory and to implement the inventory analysis.
The inventory record file also must be maintained by someone, and, on a periodic
basis, it must be audited by someone. In addition, the transition requires more
coordination between different company functions.” This transition, they note, often
leads into computerization of inventory management. This can be a daunting prospect,
particularly for companies lacking employees with appropriate data management
backgrounds.

Just In Time Inventory Control System:

“Just-in-time production is a simple idea that may be difficult to implement,
“wrote Gershon and Weiss.” The basic concept is that finished goods should be produced
just in time for delivery, and raw materials should be delivered just in time for
production. When this occurs, materials or goods never sit idle, which means that a
minimum amount of money is tied up in raw materials, semi finished goods ……. The
just-in-time approach calls for slashing production and purchase lot sizes and also buffer
stocks-bit incrementally, a little at a time, month after month, year after year. The result
is sustained productivity and quality improvement with greater flexibility and delivery
responsiveness.” This production concept, which originated in Japan and became
immensely popular in American industries in the early and mid-1990s, continues to be
hailed by proponents as a viable alternative for business looking for a competitive edge.

Setting an Inventory Strategy:

No single inventory strategy is equally effective for all businesses. Indeed, there
are many different factors that can impact the Usefulness of a given inventory strategy,
including positioning of inventory, rationalization, segmentation, and continuous
improvement efforts. Moreover, small business in particular often faces financial and
logistical limitations when erecting their inventory systems. And of course, different
industries have different inventory needs. Consumer goods producers, for instance, need
to have well-balance inventories at the point of sale, while producers of industrial and
commercial products typically do not have clients that require the same degree of
delivery lead time.
When a company is faced with a need to establish or reevaluate its inventory
control systems, business experts often counsel their corporate clients to engage in a
practice commonly known as “inventory segmenting” or “inventory partitioning.” The
practice is in essence a breakdown and review of total inventory by classifications,
inventory stages (raw materials, intermediate inventories, and finished products) sales
and operations groupings, and excess inventories. Proponents of this method of study say
that such segmentation break the company’s total inventory into much more manageable
parts for analysis.
Key Considerations:
According to business experts, perhaps no factor is more important in ensuring
successful inventory management than regular analysis of policies, practices, and results.
Companies that hope to establish or maintain an effective inventory system should make
sure that they do the following on a regular basis:

 Regularly review product offerings, including the breadth of the product line and
the impact that peripheral products have on invent.
 Ensure that inventory strategies are in place for each product and reviewed on a
regular basis.
 Review transportation alternatives and their impact on inventory / warehouse
capacities.
 Undertake periodic reviews to ensure that inventory is held at the levels that best
meets customer needs; this applies to all levels of business, including raw
materials, intermediate assembly, and finished products.
 Regularly canvas key employees for information that can inform future inventory
control plans.
 Determine what level of service (lead time, etc.) is necessary to meet the demands
of customers.
  Establish and regularly review a system for effectively identifying and managing
excess or obsolete inventory, and determining why these goods reached such
status.
 Devise a workable system wherein “safety” inventory stocks can be reached and
distributed on a timely basis when the company sees an unexpected rise in
product demand.
 Calculate the impact of seasonal inventory fluctuations and incorporate them into
inventory fluctuations and incorporate them into inventory management
strategies.
 Review the company’s forecasting mechanisms and the volatility of the
marketplace, both of which can (and do) have a big impact on inventory
decisions.
 Institute “continuous improvement” philosophy in inventory in inventory
management.
 Make inventory management decisions that reflect a recognition that inventory is
deeply interrelated with many other areas of business operation.
To summarize, inventory management system should be regularly reviewed from top
to bottom as an essential part of the annual strategic and business and business planning
processes. Indeed, even cursory examinations of inventory statistics can sometimes
provide business owners with valuable insights into the company’s foundations. business
consultants and managers alike note that if an individual business has an inventory
turnover ratio that is low in relation to the average for the industry in which it operates, or
if it is low in comparison with the average ratio for the business, it is pretty likely that the
business is carrying a surplus of obsolete or otherwise unsalable stock inventory.
Conversely, they note that if a business is experiencing unusually high inventory turnover
when compared with industry or business averages, then the company may be losing out
on sales because of a lack of adequate stock on hand.” it will be helpful to determine the
turnover rate of each stock item so that you can evaluate how will each is moving, “noted
the entrepreneur magazine small business advisor.” You may even want to base your
inventory turnover on more frequent periods than a year. For perishable items, calculating
turnover periods based on daily weekly or monthly periods may be necessary to ensure
the freshness of the product. This is especially important for food-service operations.”

4.5 INVENTORY ACCOUNTING:

The way in which a company accounts for its inventory can have a dramatic affect on
its financial statements. Inventory is a current asset on the balance sheet. Therefore, the
valuation of inventory directly affects the inventory, total current asset, and total asset
balances. Companies intend to sell their inventory, and when they do, it increases the cost
of goods sold, which is often a significant expense on the income statement. Therefore,
how a company values its inventory will determine the cost of goods sold amount, which
in turn affects gross profit (margin), net income before taxes, taxes owned, and
ultimately net income. It is clear, then, that a company’s inventory valuation approach
can cause a ripple effect throughout its financial picture.
One may think that inventory valuation is relatively simple. For a retailer,
inventory should be valued for what it cost to acquire that inventory. When an inventory
item is sold, the inventory account should be reduced (credited) and cost of goods sold
should be increased (debited) for each inventory item. This works if a company is
operating under the specific identification method. That is, a company knows the cost of
every individual item that is sold. This method works well when the amount of inventory
a company has is limited and each inventory item is unique. Examples would car
dealerships, jewelers, and art galleries.
The specific identification method, however, is cumbersome in situations where a
company owns a great deal of inventory and each specific inventory item is relatively
indistinguishable from each other. As a result, other inventory valuation methods have
been developed. The best known of these are the FIFO (first-in, first out) and LIFO (last-
in, first-out) methods.

First in, first out (FIFO):

 Method of accounting for inventory whereby, quite literally, the inventory is assumed
to be sold in the chronological order in which it was purchased. For example, the
following formula is used in computing the cost of goods sold:
Under the FIFO method, inventory costs flow from the oldest purchases forward, with
beginning inventory as the starting point and ending inventory representing the most
recent purchases. The FIFO method contrasts with the LIFO or last in, first out method,
which is FIFO in reverse. The significance of the difference becomes apparent when
inflation or deflation affects inventory prices. In an inflationary period, the FIFO method
produces a higher ending inventory, a lower cost of goods soled figure, and a higher
gross profit. LIFO, on the other hand, produces a lower ending inventory, a higher cost of
goods sold figure, and a lower reported profit.
In accounting for the purchase and sale of securities for tax purposes, FIFO is
assumed by the IRS unless it is advised of the use of an alternative method.

First in, first out (FIFO):

Method of inventory valuation that assumes merchandise is sold in the order of its
receipt. The first-price in is the first-price out. Hence cost of sales is based on older
dollars. Ending inventory is reflected at the most recent prices. Assume the following
data regarding inventory during the year:

(LIFO) last-in, first-out:

On the other hand, is an accounting approach that assumes that the most recently
acquired items are the first one sold? Therefore, the inventory that remains is always the
oldest inventory. During economic periods in which prices are rising, this inventory
accounting method yields a lower ending inventory, a higher cost of goods sold, a lower
gross profit, and a lower taxable income. The LIFO Method is preferred by many
companies because it has the effect of reducing a company’s taxes, thus increasing cash
flow. However, these attributes of LIFO are only present in an inflationary environment.
The other major advantage of LIFO is that it can have an income smoothing
effect. Again, assuming inflation and a company that is doing well, one would expect
inventory levels to expand. Therefore, a company is purchasing inventory, but under
LIFO, the majority of the cost of these purchases will be on the income statement as part
of cost of goods sold. Thus, the most recent and most expensive purchases will increase
cost of goods sold, thus lowering net income before taxes, and hence net income. Net
income is still high, but it does not reach the levels that it would if the company used the
FIFO method.
Given the importance differences that exist between the various inventory
accounting methodologies, it is imperative that the inventory footnote be read carefully in
financial statements, for this part of the document will inform the reader of the method of
inventory valuation chosen by a company. Assuming inflation, FIFO will result in higher
net income during growth periods and a higher and more realistic inventory balance. In
periods of growth, LIFO will result in lower net income and lower income tax payments,
thus enhancing a company’s cash flow. During periods of contraction, LIFO will result in
higher income levels, but will also undervalue inventory over time.
Small business owners weighing a switch to a LIFO inventory valuation method
should note that while making the change is a relatively simple process (the company
files IRS Form 970 with its tax return), switching away from LIFO is not so easy. Once a
company adopts the LIFO method, it can not switch to FIFO without securing IRS
approval.
Donating Excess Inventory:
In recent years, many small (and large) business have gained valuable tax
deductions by donating obsolete or excess inventory to charitable organizations,
churches, and disaster relief efforts. The type of deduction that can be claimed depends
on the business structure of the donating company. “If you’re organized as an S
corporation (S Corporation with a limited number of stockholders (35 or fewer) that
elects not to be taxed as a regular (C) corporation and meets certain other requirements
Shareholders include in their personal tax returns their pro Rata share of capital gains,
ordinary income, tax preference items, and so on. This form avoids corporate Double
Taxation while providing limited liability protection to shareholders of a corporation.)

4.6 OBJECTIVES OF INVENTORY MANAGEMENT:

 The main objective so inventory management are operation and financial. The
operational objective mean that the material and spares should be available in sufficient
quantity so that work is not disrupted for want of inventory. The financial objective
means that investments in inventories should not remain idle and minimum working
capital should be locked in it.

The objectives of inventory management are as follows:

 To ensure continuous supply of materials, spares and finished goods so that

production should not suffer at any time and the customers demand should also be
met.
 To avoid both over-stocking and under-stocking of inventory.
 To maintain investment in inventories at the optimum level as required by the
operational and sales activities.
 To keep material cost under control so that they contribute in reducing cost of
production and overall cost.
 To eliminate duplication in ordering or replenishing stocks. This is possible with
the help of centralizing purchases.
 To minimize losses through deterioration, pilferage, wastages and damages.
 To design proper organization for inventory management. Clear cut accountability
should be fixed at various levels of the organization.
 To ensure perpetual inventory control so that materials shown in stock ledgers
should be fixed actually lying in the stores.
 To ensure right quality goods at reasonable prices. Suitable quality standard will
ensure proper quality of stocks. The price analysis, the cost analysis and value
analysis will ensure payment of proper prices.
 To facilitate furnishing of data for short term and long term planning and control
of inventory.

Material Control:
 Most of the manufacturing concerns. The cost of raw materials represents a major
part of the total cost of production. Hence proper control over material is necessary from
the time the order is place with the supplier till they are actually consumed. An efficient
system of material control will lead to significant reduction in production cost.
Material control may be defined as the “Systematic control over the procurement,
storage and usage of materials so as to maintain an even flow of materials and avoiding at
the same time excessive investment in inventories”. Material control covers three stages
namely.

 Purchases of material

 Storing of material

 Issue of material

Objectives:
The objectives of material controls as follows:
1) To ensure regular and uninterrupted supply of materials i.e., to make materials
available as and when they are needed.
2) To keep investment in stock at a reasonable levels, so that there is no loss of
interest on capital.
3) To purchase the materials at a reasonable price without sacrificing the quality of
such materials.
4) To avoid abnormal wastage by exercising direct control.
5) To avoid the risk of spoilage and obsolescence of the materials by fixing the
maximum stock level.

Issue of Material Management:

As per major activity groups involved in material management in any
manufacturing organization.
• Issue related to materials planning.
• Issues related to purchase
• Issues related to stores or inventory.
• Issue related to material handling & display.

Issue Related to Material Planning:

 Material Identification

 Standardization

 Make or Buy

 Coding & Classification

 Quality specification

• By providing samples or prototype.

• By providing manufacturing operation specification.

• By brand or trade name.

• By specifying well accepted market grades.

• By specifying testing producer’s relevant standards.

• By specifying/ providing engineering drawing/blue prints.

4.7 TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

Effective inventory management requires an effective control system for

inventories. A proper inventory control not only helps in solving the acute problem of
liquidity but also increases profits and causes substantial reduction in the working capital
of the concern. The following are the important tools and techniques of inventory
management and control:

• Determination of stock levels.

• Determination of Safety Stocks.

• Selecting a proper system of Ordering for Inventory.

• Determination of Economic Order Quantity.

• A.B.C. Analysis.

• Inventory Turnover Ratios (Conversion period)

• Classification and Codification of Inventories.

• Preparation of Inventory Reports.

 Determination of stock levels.

 Determination of safety stock levels.

 Selecting a proper system of ordering for inventory.

  Determination of economic order quantity (EOQ)

 A.B.C. Analysis.

Determination of Stock Levels:

Carrying of too much and too little of inventories is determinate to the firm. If the
inventory level is too little, the firm will face frequent stock-outs involving heavy
ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital.
Therefore, an optimum level of inventory where cost is the minimum and at the same
time their Id. No. stock-out, which may result is loss of sale or stoppage of production.
Various stock levels are discussed as such.

Minimum Level:
This presents the quantity, which must be maintained in hands at all times. If
stock is less than the minimum level then the work will stop due to shortages of
materials.

Lead time:
A purchasing firm requires some time to process the order and time is also
required by the supplying firm to execute the order. The time taken in processing the
order and then executing it is known as lead-time. It is essential some inventory during
this period.

Rate of consumption:
It is the average consumption of materials in the factory. The rate of consumption
will be decided on the basis of past experience and production.
Nature of material:
 The nature of materials also affects the minimum level. If material is required
only against special orders of the consumers then minimum stock will not be required for
such materials minimum stock level can be calculated using the formula:

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

period).

Re-order level:
When the quantity of materials reaches at a certain figures then fresh order is sent
to get materials again. The order is sent before the materials reach minimum stock level.
Re-ordering level or ordering level is fixed between minimum stock level and maximum
stock level. The rate of consumption, number of days required on any day is taken into
account while fixing reordering level. Re-ordering level is fixed with the following
formula;

Re- order level = maximum consumption * maximum re-order period

Maximum level:
It is the quantity of materials beyond which a firm should not exceed its stock. If
the quantity exceeds maximum level limit then it will be over-stocking. A firm should
avoid over-stocking because it will result in high materials costs. Over stocking will more
blocking of more working capital, more space for storing the materials, more wastage of
materials and more chances of losses from obsolescence. Maximum stock level will
depend upon following factors:

 The maximum requirement of materials at any point of time.

 The availability of space for storing the materials.
 The rate of consumption of materials during lead-time.
 The cost of maintaining the stores.
 The possibility of fluctuation in prices.
  Availability of materials. If the materials are available only during seasons then
they have to store for the rest of the period.
 The possibility of change in fashion and production process will also affect the
maximum stock level.
The following formula may be used for calculating maximum stock level:

Maximum stock level = re-order level + re-ordering quantity – (minimum

consumption * minimum re-ordering period).

Danger level:
It is the level beyond which material should not fall in any case. If level arises
then immediately steps should be taken to replenish the stock even if more cost is
incurred in arranging the materials. If materials. If material is not arranged immediately
then there is a possibility of stoppage of work. Danger level is determined with the
formula:

Danger level = consumption * maximum re- order period for emergency purchases.

Average stock level:

The average stock level is calculated as such:

Average stock = minimum stock level + ½ of re-order quantity.

Determination of safety stock

The safety stock is a buffer to meet unanticipated increase in usage. The usage of
inventory cannot be perfectly forecasted. Ft fluctuates over a period of time. The demand
for materials may fluctuate and delivery of inventory may also be delayed and in such a
situation the firm can face a problem of stock-out. The stock-out can prove costly by
affecting the smooth working of the concern. In order to protect against out of usage
fluctuations, firms usually some margin of safety stocks. The basic problem is to
determine the level of safety stocks. Two costs are involved in determination of this
stock. I.e. opportunity cost of stock outs and the carrying costs. The stock-outs of raw
material cause production as the firm cannot provide stock-outs will occur resulting into
the large opportunity costs. On the other hand, the larger quantity of safety stocks
involves higher carrying costs.

Ordering system of inventory:

The basic problem of inventory is ton decide the re-order point. The point
indicates when an order should be placed. The re-order point is determined with the help
of these things

A.) Average consumption rate.

B.) Duration of lead time.

Economic order quantity, when the inventory is depicted to lead time

consumption, the order should be placed.
There are three prevalent system of ordering and a concern may use any one of these;

 Fixed order quantity system generally known as economic order quantity (EOQ)
systems.
 Fixed period order system of periodic re-ordering system or periodic review
system;
 Single order and schedule part delivery system.

Economic order quantity (EOQ):

The quantity of material to be ordered at one time is known as economic ordering
quantity. This quantity is fixed in such a manner as to minimize the cost of ordering and
carrying the stock. Carrying cost is the cost of holding the materials. The quantity to be
ordered should be such which minimizes the carrying and ordering costs. The order for
the material to be purchased should be large to earn more trade discount and to take
advantage of bulk transport, but at the same time it should not be tool large to incur too
heavy a payment on account of interest, storage and insurance cost. If the price to be paid
is stable, quantity to be ordered each time can be ascertained by following formula:

Q = √2CO\I.
Where: q = quantity to be ordered.

C = consumption of the material concerned in units during a year

O = cost of placing and order including the cost of receving the goods i.e. cost of getting
an item into the firm’s inventory.

I = interest payment including variable cost of storing per unit per year i.e., holding costs
of inventory.

Economic order quantity is determined keeping in view the ordering costs and carrying
costs. With the interaction of these two costs, the economic ordering costs
During a particular period are equal to carrying costs during that period and total cost to
order and carry is lowest.

There are many variations on the basic EOQ model. I have listed most useful once
below,
Quantity discount logic can programmed to work in conjunction with the EOQ
formula to determined optimum order quantity. Most systems will require this additional
programming.

Additional logic can be programmed to determine max quantities for subject to

spoilage or to prevent obsolescence on items reaching end of their product life cycle.
 When use in manufacturing to determine lost size where production runs are very
long and finished product is being released to stock and consumed /sold through out the
production run you may need to take into account the ratio of production consumption to
more accurately represent the average inventory level.
Assumptions:
There are a number of assumptions that must be made with the EOQ. These include:

 Only one product is involved

 Deterministic demand(demand is known with certainty)
 Constant demand (demand is stable throughout the year)
 No quantity discounts.
 Constant costs (no price increase or inflating)
 While these assumptions would seem to make EOQ irrelevant for use in a realistic
situation, it is relevant for items that have independent demand .this means that
the demand for the items is not derived from the demand for something else. For
example, the demand for steering wheels would be derived from the demand for
automobiles but the demand for purses is not derived from anything else; purses
have independent demand.

Inventory Turnover Ratio:

Every firm has to maintain a certain level of inventory of finished goods so as to
be able to meet the requirements of the business. But the level of inventory should neither
be too high nor too low. It is harmful to hold more inventories for the following reasons.
 It unnecessarily blocks capital which can otherwise be profitably used
somewhere else.
 Over-stocking will require more go down space, so more rent will be paid.
 There are chances of obsolescence of stocks. Consumers will prefer goods of
latest design, etc.
 Slow disposal of stacks will mean slow recovery of cash also which will
adversely affect liquidity.
  There are chances of deterioration in quality if the stocks are held for more
periods.
 It wills there fore, be advisable to dispose off inventory as early as possible.
On the other hand, too low inventory may mean loss of business opportunities.
Thus, it is very essential to keep sufficient stocks in business.
Inventory turnover ratio also known as stock velocity is normally calculated as
sales/ average inventory or cost of goods sold/ average inventory. It would indicate
whether inventory has been efficiently used or not. The purpose is to see whether only the
required minimum funds have been locked up in inventory. Inventory turnover ratio
indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which a firm is able mange its inventory
Inventory turnover ratio is calculated to indicate whether inventories have
required minimum funds in inventory. The inventory turnover ratio also known as stock
velocity is normally calculated as sales/average inventory or cost goods sold/ average
inventory cost. Inventory conversion period may also be calculated to find the average
time taken for clearing the stock.

Inventory turnover ratio = cost of goods sold/ average inventory at cost

Inventory turnover ratio = net sales / average inventory.

And
Inventory conversion period = days in year / inventory turnover ratio.
Generally, the cost of goods sold may not be known from the published financial
statements. In such circumstances, the inventory turnover ratio may be calculated by
dividing net sales by average inventory at cost. If average inventory at cost is not known
then inventory at selling price may be taken as denominator and where the opening
inventory is not known the closing inventory figure may be taken as the average
inventory.

Inventory turnover ratio = net sales / average inventory at cost

Inventory Turnover ratio = Net sales/ Average inventory at selling cost.
Inventory Turnover ratio = Net sales / Inventory.

Inventory Conversion Period:

It may also be of interest to see average time taken for clearing the stocks. This
can be possible by calculating inventory conversion period. This period is calculated by
dividing the number of days by inventory turnover.

Inventory Reports:
From effective inventory control, the management should be kept informed with
the latest stock position of different items. This usually done by information necessary for
managerial action. On the basis of these reports management takes corrective action
wherever necessary.

Valuation of Inventory:
The value of materials has a direct bearing on the income of a concern, so it is
necessary that a method of pricing of materials should be such that it gives a realistic
value of stock the traditional method of valuing materials cost price or market price
which ever is less is no longer the only method. If management is interested to show
more profits then it can choose such methods which will more stock of vice versa. To
safe guard public interest the government of India has instituted statutory controls to
prevent frequent change of material valuation methods. A concern will have to use a
particular valuation method for least three years and any changes there from must be
approved by the board.
The following methods of pricing material issues or generally used:

First in First out method (FIFO method)

 Last in First out method(LIFO method)

 Average price method
  Weighted Average price method
 Simple Average price method
 Base stock method
 Standard price method
 Market price method

Average Cost Method:

In average cost method of pricing all materials in stock or so mixed that a price
based on all costs are formed. Average cost may be of two types.

Simple Average Method:

In this method the prices of all lots in stock are averaged and the materials are
issued on that average price. Though this is simple method of pricing materials but
particularly this method does not give good results. The total cost of materials is not
observed in this method.

Weighted Average Method:

In this method that the total cost of all materials is divided by the total number of
items in stock. The price calculated in this way has not been for issue of materials up to
the time a fresh purchase has not been made. After a fresh purchase, the quantity will be
added to earlier balance quantity and material cost will be changed total cost. A fresh
price is calculated by dividing the changed total cost by the number of units in stock after
the purchase. A new price list calculated where even a fresh purchase is made.

Base Stock Method:

In this method some quantity of materials is assumed to be necessary for keeping
the concern going. The quantity is not issued unless otherwise there is an emergency.
This material which is not issued as is kept in stock is known as base stock.
Standard Price Method:
The issue price of the materials is pre determined or estimated in this method. The
standard price is based on market conditions, usage rare, handling facilities, storage
facilities, etc. The materials are priced at standard price irrespective of price for various
purchases

Market Price Method:

In this method the prices charged to production are not costs incurred on the
materials but latest market prices. The market prices may either be replacement prices or
realizable prices. The replacement prices are used for the materials which are kept in
stock for use in production and realizable prices are used for the goods kept for resale.
The prices of issue for materials are always the replacement prices.

4.8 SYSTEM OVERVIEW

Before analysis is attempted, it is proposed to present material accounting
practices along with documentation at kakatiya overseas.
The main objective of inventory accounting and valuation of inventories are:

Accurate and regular recording of all transactions in the books.

Proper valuation of material receipts, issues, return and balances.

System Overview:
The following system is being followed in Kakatiya overseas, and the main features
of the system are as follows:
1. Receipt vouchers are prepared on receipt of materials.
2. Issues voucher are prepared for all issues of out of stores.
3. All receipts, issues and returns are recorded in priced stores ledger (PSL).
4. Stock transfer voucher (STV) is used for recording transferring raw materials
from one division/ group to another. Transfers are made at weighted average
prices.
 5. Finished goods delivery notes (FGDN) are used for transferring finished
production in shop floor to finished stores.
6. Physical verification is carried out at regular interval and discrepancies and
reconciles and recorded.
7. Finished goods, work in progress valuation is as per the accounting policy of
company.

Materials Documentation and Cost Controls:

The materials accounting and cost accounting system have been designed the
frame work of accounts codes and accounting policies which would facilitate identifying
direct elements of cost, such as direct material, direct labour and directly allocable
expenses (such as expenses of sub contracting) which are booked manually to the direct
material.

The following documentation and system is being followed in kakatiya overseas:

Receipt documents:
Certified Stores Receipt Voucher (CSRV) : This is issued by stores personnel to
bills section to F&A wing in order to classify the material into raw material stores and
spares, consumable tools, packing materials, sub contractors services, and other
operational expenses. Based on the purchase order, the bill section does the provisional
valuation by using fixed percentage for freight, insurance, and other incidental and regard
to customs duty the percentages as per tariff is adopted and purposed the following entry:

Stock A/c Dr
To
Sundry Creditors A/c

Material code, quantity etc which is fed to EDP which calculates the value based on
monthly weight average method.
Based on MIR data the WIP is brought out by collating material analysis. The direct
material is booked job wise in WIP ledger and the same is reconciled with financial
records. Thus, the direct materials job wise may be traced from WIP ledger.
In the similar fashion, some other receipt document and issue document are operated like;

1. Cash purchases receipt voucher for cash purchases.

2. Finished goods issue note for the finished products
3. Stock transfer voucher for any stock transfer transactions.
4. Material return note for any materials being returned.

Based on the above documentations EDP generates the following prints outs for
material viz.
Priced stores ledger is brought out on monthly basis consisting of that months
receipts, issues, balance stock available with value and with summary and cumulative
receipts, issues and consumption values for materials like raw materials, stores and
spares, consumable tools and packing materials.
Inventory is brought on monthly basis comprising of materials codes in seriatim
along with material description unit code. Quantity available as at the end of the month
rate of the material and total value and also indicating cumulative receipts and cumulative
consumption.
Job wise material analysis is brought out on monthly basis for those jobs, for
which materials have been consumed along with value and description of the material in
order to have monthly record of material used for each job.
Inventory Control and its Impact on Cost:
Value wise inventory and consumption analysis are brought out on quarterly basis
indicating RM; SS, CT, PM are valued at cost. A class items which are 70%, B class
items which are valuing 20%, C class items are verified by the stores and to the extent
certificate are issued at the year end regarding the correctness. Physical balance is
verified with kardex and the difference is intimated to stores. FAW(Farm workers) of the
group verifies and gives the rectification entries i.e., shortage items value are charges off
to physical inventory variation and the excess quantities are adjusted in the inventory
ledger after obtaining the component authority’s approval.
The system enables to control the inventories and at the same time costs on some
are controlled.

CHAPTER-V
DATA ANALYSIS AND INTERPRETATION
ABC analysis:
The material is divided into a number of categories for adopting a selective
approach for material control. It is generally seen that in manufacturing concern, a small
percentage of items contribute a large percentage of value of consumption and a large
percentage of items of materials contribute a small percentage of value. In between these
two limits there are some items which have almost equal percentage of value of material.
Under ABC analysis, all the materials are divided in to three categories viz. A, B&C. past
experience has shown that almost 10% of items contribute to 70% of value of
consumption and this category is called category A. about 20% of the items contribute
about 20% of value of consumption and this is known as category B. category C covers
about 70% of items of material which contribute only 10% of value of consumption.
There may be some variation in different organizations and an adjustment can be made in
these percentages.

5.0 MAKING OF ABC ANALYSIS:

The entire procedure for making ABC analysis can be summarized in the following steps:
 Determine the number of units sold or used in the past 12-months period.
 Determine the unit-cot standard for each item.
 Compute the annual consumption value (in rupees) of each consumed item by
multiplying annual consumption (of units) with the unit price.
 Arrange these items in descending order of the usage value compute above.
S.NO DESCRIPTION RATE VALUE RANKS
1Desert Black Limestone
600x600x2cm,Calibrated:Natural and Vibration
1 Surface:150sqms.
60x60x2cm ,honed,qty 700sqms. 50 850 13
Granite:black galaxy,800x800x2cm
Quantity:850sqm.
2
50 850 14
Slate:Peacock Slate,600x600x2cm
3 Natural/Calibrated:870sqm. 15 945 12
4 Black lime hand cut:900x900.25-35mm 30 3,150 10
Tandur yellow Natural and
Calibrated:400x600cms,2.5cm gauged-roman
5 pattern:edges:hand cut. 119 77,376 5
Kadapa Black Natural:400cmx500cm,free
lengthx2cm gauged;hand cut.850qty.
6 101.90 1,366,784.70 1
Limestone:Crème White Honed,280x280x2cm
gauged,qty:500cms and tandur grey
7 naturals:400cmx500cm,hand cut.
8.8 250140 2
Tandur yellow Natural and Vibration
8 Machine:390x590cms:190x390cm.
5cm gauged-roman pattern;edges:handcut. 21.31 24,868.77 7
9 Limepink,320x140x4cm bullnose,qty:1750.
Lime green 400x600x25-35cm,qty:1000sqm. 18.53 36,744.99 6
10 Cudappah Natural Surface:200x200x4cm
Edges Machine Cut,qty:600cms. 13.90 16,763.40 8
Premium Quality Kashmir
White:505x505x20mm,qty:360tilesx8pallets and
11 belved and calibrated.
16.21 203,224.77 3
Absolute Black:505x505x20mm,
12 qty:360tilesx8pallets and belved and calibrated.
8.80 194,427.20 4
Cuddapah Black Limestone:half+tumbled in
13 vibration M/C;500X600X4cm,hand cut.
15.20 8,299.20 9
Green roofing stone:50x70x8-2.cm,edges hand
14 cut,70cm side,round corner on one 50 cm side.q
56 2,912 11
Sandstone Gurden items:rainbow
sphere,50cm,40cm,30cm.teak
 CONSUMPTIO
CONSUMPTIO CLAS
N VALUE
Rank Description N VALUE S VALUE IN
EACH PERCENTAGE
CLASS
Kadapa Black
Natural:400cmx500cm,free lengthx2cm
1 gauged;hand cut.850qty 1,366,784.70
Limestone:Crème White
Honed,280x280x2cm gauged,qty:500cms
and tandur grey
2 naturals:400cmx500cm,hand cut.
250,140.00
Premium Quality Kashmir
White:505x505x20mm,qty:360tilesx8pall
3 ets and belved and calibrated. A 2014576.67 91
203,224.77
Absolute Black:505x505x20mm,
qty:360tilesx8pallets and belved and
4 calibrated
194,427.20
Tandur yellow Natural and
Calibrated:400x600cms,2.5cm gauged-
5 roman pattern:edges:hand cut. 77,376.00
Limepink,320x140x4cm
CLASS NO.OF.ITEMS PERCENTAGE OF CONSUMPTION VALUE
6 bullnose,qty:1750. ITEMS VALUE PERCENTAGE
Lime green 400x600x25-
35cm,qty:1000sqm. 36,744.99
A 4 27 2,014,576.67 91%
Tandur yellow Natural and Vibration
7 Machine:390x590cms:190x390cm. B 1,55,753.16 6
5cm gauged-roman
pattern;edges:handcut. 24,868.77
Cudappah
B Natural 4 27 1,55,753.16 6%
8 Surface:200x200x4cm
Edges Machine Cut,qty:600cms. 16,763.40
Cuddapah Black
Limestone:half+tumbled in vibration
C 4 27 17,636.22 3%
9 M/C;500X600X4cm,hand cut.
8,299.20

10 Black lime hand cut:900x900.25-35mm 3150.00

Green roofing stone:50x70x8-2.cm,edges
hand cut,70cm side,round corner on one
11 50 cm side. 2912.00
ABC Classification of Items:

Graphical presentation:
5.1 Inventory, Materials, Sales and Production at a Glance.
2002- 2003- 2004- 2005- 2006- 2007- 2008-
2003 2002 2003 2004 2005 2006 2009
particulars
Raw materials 5307 4735 5630 5267 1645 1616 1616

Work progress 6193 8350 3877 4260 3372 3799 3233

Finished goods 1059 1446 651 1183 946 649 634

Total 12559 14531 10158 10710 6622 6064 5247

Sundry debtors 19865 16681 31344 42946 58073 79469 98870

Materials 26248 32701 49307 47247 72229 38917 47446

consumed

Net sales 47002 57115 89218 84177 72230 65188 91790

Gross sales 56875 67412 100056 93455 77067 70029 100590

Cost of 56671 70315 89218 86935 72781 68046 76112
Production(-) 1209 1934 8058 13055 5071 5204 19214
profit
Total 55462 62381 81160 73880 67710 61842 56897

RAW MATERIAL

Particulars 2002 2003 2004 2005 2006 2007 2008

2003 2004 2005 2006 2007 2008 2009

Raw material 5307 4735 5630 5267 2304 1616 1878

Material 26248/ 32701/12 49307/ 47247/ 41979/ 38917/ 47447/

Consumed(per 12 12 12 12 12 12
Month)
Monthly 2187 2725 4108 3937 3939 3243 3954
Consumption(2)

No. of months
Raw material
Stock available
w.r.t. monthly 2.43 1.74 1.37 1.34 o.66 0.50 0.47
consumption(3)
=R.M/monthly
Consumption(1/2)
 WORK IN PROGRESS:

Particulars 2002- 2003- 2004- 2005- 2006- 2007- 2008-

2003 2004 2005 2006 2007 2008 2009
Work progress 6193 8350 3877 4260 3372 3799 3233

Cost of 55462/1 62381/1 81160/1 73880/1 67710/1 62842/1 56897/

production (per 2 2 2 2 2 2 12
month)
Monthly 4647 5298 6763 6157 5643 5237 4741
consumption(2)
No .of months 1.33 1.61 0.57 0.69 0.6o 0.73 0.68
work in progress
held in
Inventory=W.I.P
/M
Monthly
Consumption
 Graph presentation for work in progress:

FINISHED GOODS:

Particulars 2000 2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006 2007

Finished goods 1059 1446 651 1183 946 945 649

Net sales 47002/12 57111/12 89218/12 84177/12 72231/12 65787/12 91791/12

Monthly 3917 4760 7435 7015 6019 5482 7649

Consumption

No. of
Months F.G
Held in 0.27 0.30 0.09 0.17 0.16 0.17 0.08
inventory

INTERPRETATION: the average F G stock held during the period of study is 0.17

SUNDRY DEBTORS:

particulars 2000 2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006 2007

Sundry debtors 19865 16681 31344 42946 36774 74468 98871

Gross sales 56875/12 67412/12 10056/12 93455/12 77067/12 70029/12 10059/12

Monthly 4740 5618 8338 7788 6422 5836 8383
consumption

No of month 4.19 2.97 3.76 5.51 5.73 12.76 11.79

Of sales

INTERPRETATION: the credit of the corporation is one month credit. However the
study revealed the organization has never maintained one month credit the study of the
project
For arriving no.of months gross working capital and each components including
raw material, work in progress, finished goods are co-related as follows:

a. Raw material stocks are co-related to material consumption

b. WIP is co-related to cost of production

Finished goods are co-related to net sales

INTERPRETATION ABC
The corporation held a maximum stock of Raw material in the year 2002-2003
and improved year by year and reached 0.73 months at the end of 2008-2009.
Work –in-progress:
The corporation held a peak WIP during the year 2006-2007 and around 0.68
months on a average every year during the next 4 year
Finished goods:
The average finished goods stocks held during the period of study is 0.20 month
with peak – finished goods stock of 0.30 months and lowest to the turn of 0.16 months
per month.
The ITR has increased from 6.70 in the year2003 to 2004 to 7.57 in the year 2004
to 2005 which indicates that the inventory is managed in a good manner.
 The ITR (inventory turnover ratio) has increased from 4.09 to 6.07 from the year
2002-2003 to 2003-2004 which shows that the inventory is efficiency managed.
In the similar ways thee ITR has increased from 7.57 in the year 2004-2005to
8.09in the year 2004-2005 which indicates that the inventory has been managed
efficiency n the year 2006-2007 has increased from 8.9211

5.2 CALCULATION OF INVENTORY TURNOVER RATIOS:

Inventory turnover ratio=Cost of goods sold/average inventory
Cost of goods sold=sales/gross profit.
Average inventory = (Opening stock+ closing stock)/2.
 INVENTORY TURNOVER RATIO:
Particulars 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2003 2004 2005 2006 2007 2008 2009

Sales(A) 56874.67 67411.65 100055.98 93455.40 77066.76 70029.03 100590

Gross profit(B) 4564.18 9937.16 82683.22 78965.66 70139.75 6222.80 20702

Cost of Goods 52310.49 57474.49 82683.22 78965.66 70139.75 63806.23 79888

sold(C)(A-B=C)

Inventory opening 13035.73 12559.82 14531.93 10158.94 10710.86 6622.64 7681

stock(D)

Closing stock(E) 12559.85 14531.93 10158.94 10710.86 6622.64 7681.96 6855

Average 12797.78 13545.88 12345.44 10434.9 8666.75 7152.30 7268

inventory(F)
(D+E/2=F)
Inventory turnover 4.009 4.24 6.7 7.57 8.09 8.92 10.99
ratio(C/F)

INTERPRETATION:
From the above calculation it is found that the inventory turnover has gradually
increased from 4.09 to 8.92 from the year 2000-2001 to 2006-2007 which is indicative of
good inventory management.
 Inventory conversion period
Years Days in year/ No of days
Inventory turnover ratio
2002-2003 365/4.09 14.92
2003-2004 365/4.24 15.47
2004-2005 365/6.70 24.45
2005-2006 365/7.57 27.63
2006-2007 365/8.09 29.52
2007-2008 365/8.92 32.55
2008-2009 365/10.99 33.21
 CHAPTER-VI
SUGGESTIONS, CONCLUSIONS AND BIBILIOGRAPHY
FINDINGS & SUGGESTIONS

• A-category of products must be taken care of properly as it forms a major part

and appropriate method of valuing the product must be used.
• The credit policy of the corporation is one month credit. However the study
revealed that the organization has never maintained one month credit during
the study of the project so my request is to check on credit period
• Keep check on creditors as it effects the working capital, which may even
leads to losses
• Organization has to pay attention on the amount of% of raw material on cost
of production, which is high when compared to earlier and slightly low when
compared to ideal percentage.
• Suggestion must be taken form all department of the organization for proper
different department in the organization
• Under-stocking will results in stoppage of work the investment in inventory
management should be kept in reasonable limits.
CONCLUSIONS

• As KAKATIYA is a multi product organization catering to different

customers on divergent technologies the inventory procurement for
various ranges of product is quite high.
• Inventory procurement is also based on and does not conform to
economic batch quantities leading to surplus inventories and non moving
inventories.
• A preventive measure there should be a regular monitoring mechanism at
the stage of procurement, whether there is a control exercised in
purchasing materials in line with estimates, to have a better control on
the inventory levels.
• A regular reporting system on inventory should be placed to highlight on
carrying cost and opportunity cost.
• Organization needs to up grade of the technology, which in turn
increases effective utilization of material.
There is a regular physical verification for A and B class items by internal
audit department to highlight on non-moving inventories

BIBILIOGRAPHY

S.N.CHARY (2001), PRODUCTION AND OPERATION MANAGEMENT

CHUNAWALLA PATEL (2004), PRODUCTION AND OPERATION MANAGEMENT
I.M.PANDEY (1999), FINANCIAL MANAGEMENT
Website Referenced
www.kakatiyayaoverseas.com

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