UNIT 4 INVENTORY CONTROL
Structure
4.0 Objectives
4.1 Introduction
4.2 Meaning and Objectives of Inventory Control
4.2.1 Meaning
4.2.2 Objectives
4.3 Techniques of Inventory Control
4.3.1 ABC Analysis
4.3.2 Stock Levels
4.3.3 Re-Order Quantity
4.3.4 Stores Records
4.3.5 Perpetual Inventory System
4.3.6 Inventory Turnover Ratio
4.4 Let Us Sum Up
4.5 Key Words
4.6 Answers To Check Your Progress
4.7 Terminal Questions/Exercises
4.0 OBJECTIVES
After studying this unit, you should be able to:
●● define the term inventory control and list its objectives;
●● enumerate the various techniques of inventory control;
●● explain the various stock levels, and the methods of their calculation;
●● define the term ordering quantity and list the factors on which it
depends;
●● explain the record maintained by the store keeper and the costing
department;
●● define perpetual inventory system and explain its advantages; and
●● determine the stock turnover ratio to determine the fast and slow
moving stocks.
4.1 INTRODUCTION
You have learnt that inventories constitute a significant part of the total
production cost of a product. An inadequate stock of inventory leads to
holding up of production thereby leading to customer dissatisfaction, loss of
revenue etc. Excessive investment in inventory, on the other hand, leads to
locking up of capital results in losses due to deterioration and obsolescence
of products. Thus, control of inventory will go a long way in reducing the
cost of production and improving the profitability of a concern. In this
unit, you will study the various methods by which a firm exercises proper
control over inventories and avoids losses arising from under stocking and
overstocking of materials.
50
,4.2 MEANING AND OBJECTIVES OF INVENTORY Inventory Control
CONTROL
4.2.1 Meaning
Inventory control includes control over raw materials, stores supplies, space
parts, partly finished goods and finished goods. It is a system which ensures
the required quantity of inventories of the required quality, at the required
time and with the minimum amount of capital. The function of inventory
turnover is to obtain maximum inventory turnover with sufficient stock to
meet all requirements. The quantum of inventory to be kept is decided after
taking into consideration the availability of finance, the quantum of discount
allowed, the cost of storage and storage space available etc.
4.2.2 Objectives Inventory Control
The main objectives of inventory control are as follows:
i) To provide continuous flow of inventory for efficient and uninterrupted
flow of production.
ii) To avoid excessive investment in inventory and consequently reducing
carrying costs.
iii) To keep surplus and obsolete items to the minimum.
iv) To relieve the management in taking inventory decisions for various
items of inventory from time to time.
4.3 TECHNIQUES OF INVENTORY CONTROL
The following are the common techniques of inventory control:
1) ABC analysis
2) Setting of various stock levels
3) Economic order quantity
4) Use of perpetual inventory records and continuous stock verification
5) Use of control ratios and review of slow and non-moving items.
4.3.1 ABC Analysis
For the purpose of exercising selective control over materials, manufacturing
concerns find it useful to divide materials into three categories. An analysis
of the annual consumption of materials of any organisation would indicate
that a handful to top high value items (less than 10 per cent of the total
number) will account for a substantial portion of about 70 per cent of total
consumption value. Similarly, a large number bottom items (over 70 per
cent of the total number of items) account for only about 10 per cent of
the consumption value. Between these two extremes will fall those items
the percentage number of which is more or less equal to their consumption
value. Items in the top category are treated as ‘A’ items, items in the bottom
category are called as ‘C’ category items and the items that lie between
the top and the bottom are called ‘B’ category items. Such an analysis of
materials is known as ‘ABC analysis’ or ‘Proportional parts value analysis.
51
, Material and Labour The logic behind this kind of analysis is that the management should study
each item of stock in terms of its usage, lead time, technical or other problems
and its relative money value in the total investment in inventories. Critical i.e.,
high value items deserve very close attention and low value items need to be
devoted minimum expense and effort in the task of controlling inventories.
The material manager by concentrating on ‘A’ class items is able to control
inventories and show visible results in a short span of time. By controlling
‘A’ items and doing a proper inventory analysis, obsolete stocks are
automatically pinpointed. ABC analysis also helps in reducing the clerical
costs and results in better planning and improved inventory turnover. ABC
analysis has to be resorted to because equal attention to A, B and C items
will not be worthwhile and would be very expensive.
The following steps will explain to you the classification of the items into
A, B and C categories.
1) Calculate the unit cost and the usage of each material over a given
period.
2) Multiply the unit cost by the estimated usage to obtain the net value.
3) List out all the items by rupee annual issues and arrange them in the
descending value.
4) Accumulate value and add up number of items and calculate percentage
on total inventory in value and in number.
5) Draw curve of percentage items and percentage value.
6) Mark off from the curve the rational limits of A, B and C categories
The graphical representation of ABC analysis is shown in Figure 4.1.
Figure 4.1: ABC Analysis
Check Your Progress A
1) Indicate whether the following statements are True or False:
i) In ABC analysis ‘A’ group of items consist of those materials
the value of which is not high but which are used in large
quantities.
ii) ABC analysis is based on the principle of management by
52
Structure
4.0 Objectives
4.1 Introduction
4.2 Meaning and Objectives of Inventory Control
4.2.1 Meaning
4.2.2 Objectives
4.3 Techniques of Inventory Control
4.3.1 ABC Analysis
4.3.2 Stock Levels
4.3.3 Re-Order Quantity
4.3.4 Stores Records
4.3.5 Perpetual Inventory System
4.3.6 Inventory Turnover Ratio
4.4 Let Us Sum Up
4.5 Key Words
4.6 Answers To Check Your Progress
4.7 Terminal Questions/Exercises
4.0 OBJECTIVES
After studying this unit, you should be able to:
●● define the term inventory control and list its objectives;
●● enumerate the various techniques of inventory control;
●● explain the various stock levels, and the methods of their calculation;
●● define the term ordering quantity and list the factors on which it
depends;
●● explain the record maintained by the store keeper and the costing
department;
●● define perpetual inventory system and explain its advantages; and
●● determine the stock turnover ratio to determine the fast and slow
moving stocks.
4.1 INTRODUCTION
You have learnt that inventories constitute a significant part of the total
production cost of a product. An inadequate stock of inventory leads to
holding up of production thereby leading to customer dissatisfaction, loss of
revenue etc. Excessive investment in inventory, on the other hand, leads to
locking up of capital results in losses due to deterioration and obsolescence
of products. Thus, control of inventory will go a long way in reducing the
cost of production and improving the profitability of a concern. In this
unit, you will study the various methods by which a firm exercises proper
control over inventories and avoids losses arising from under stocking and
overstocking of materials.
50
,4.2 MEANING AND OBJECTIVES OF INVENTORY Inventory Control
CONTROL
4.2.1 Meaning
Inventory control includes control over raw materials, stores supplies, space
parts, partly finished goods and finished goods. It is a system which ensures
the required quantity of inventories of the required quality, at the required
time and with the minimum amount of capital. The function of inventory
turnover is to obtain maximum inventory turnover with sufficient stock to
meet all requirements. The quantum of inventory to be kept is decided after
taking into consideration the availability of finance, the quantum of discount
allowed, the cost of storage and storage space available etc.
4.2.2 Objectives Inventory Control
The main objectives of inventory control are as follows:
i) To provide continuous flow of inventory for efficient and uninterrupted
flow of production.
ii) To avoid excessive investment in inventory and consequently reducing
carrying costs.
iii) To keep surplus and obsolete items to the minimum.
iv) To relieve the management in taking inventory decisions for various
items of inventory from time to time.
4.3 TECHNIQUES OF INVENTORY CONTROL
The following are the common techniques of inventory control:
1) ABC analysis
2) Setting of various stock levels
3) Economic order quantity
4) Use of perpetual inventory records and continuous stock verification
5) Use of control ratios and review of slow and non-moving items.
4.3.1 ABC Analysis
For the purpose of exercising selective control over materials, manufacturing
concerns find it useful to divide materials into three categories. An analysis
of the annual consumption of materials of any organisation would indicate
that a handful to top high value items (less than 10 per cent of the total
number) will account for a substantial portion of about 70 per cent of total
consumption value. Similarly, a large number bottom items (over 70 per
cent of the total number of items) account for only about 10 per cent of
the consumption value. Between these two extremes will fall those items
the percentage number of which is more or less equal to their consumption
value. Items in the top category are treated as ‘A’ items, items in the bottom
category are called as ‘C’ category items and the items that lie between
the top and the bottom are called ‘B’ category items. Such an analysis of
materials is known as ‘ABC analysis’ or ‘Proportional parts value analysis.
51
, Material and Labour The logic behind this kind of analysis is that the management should study
each item of stock in terms of its usage, lead time, technical or other problems
and its relative money value in the total investment in inventories. Critical i.e.,
high value items deserve very close attention and low value items need to be
devoted minimum expense and effort in the task of controlling inventories.
The material manager by concentrating on ‘A’ class items is able to control
inventories and show visible results in a short span of time. By controlling
‘A’ items and doing a proper inventory analysis, obsolete stocks are
automatically pinpointed. ABC analysis also helps in reducing the clerical
costs and results in better planning and improved inventory turnover. ABC
analysis has to be resorted to because equal attention to A, B and C items
will not be worthwhile and would be very expensive.
The following steps will explain to you the classification of the items into
A, B and C categories.
1) Calculate the unit cost and the usage of each material over a given
period.
2) Multiply the unit cost by the estimated usage to obtain the net value.
3) List out all the items by rupee annual issues and arrange them in the
descending value.
4) Accumulate value and add up number of items and calculate percentage
on total inventory in value and in number.
5) Draw curve of percentage items and percentage value.
6) Mark off from the curve the rational limits of A, B and C categories
The graphical representation of ABC analysis is shown in Figure 4.1.
Figure 4.1: ABC Analysis
Check Your Progress A
1) Indicate whether the following statements are True or False:
i) In ABC analysis ‘A’ group of items consist of those materials
the value of which is not high but which are used in large
quantities.
ii) ABC analysis is based on the principle of management by
52
