Inventory Control

Inventory Control is the volitional break of the operative material flow which is a collected stock developed. Inventory Control needs a storage that comprises of a room, building or area to store items. In this the in-pouring items are called storage input, the outpouring items storage output.

So supply control contains all activities and are considers as all consequences, which are connected with the storage of items. On the other hand there is a small technical and

logistical aspect of supply control as believed to be the storage layout. The general questions arise in terms of the total supply of a company.

An important decision was laid regarding the quantity of inventories is that a lot of mathematical models have been developed, which are summarized under the concept of supply Control inside the scope of Operations Research. In case of stock of a retail market, the outflow is induced through customer demand and the refill is secured through orders. It was believed that the stock disposal consists of ordering the right quantity at the right time. Small orders results in less production costs; but for a higher level of order quantity the storage costs increases. The advantage of a great inventory is that there is a high level of service and most customer requirements can be fullfilled. Real inventory problems are those, who deal with order costs, storage costs and the service level. Problems of long term supply control do not belong to this issue, because the order costs are considered international and not for each order.

In case of middle storages, there are strongly bound in production as it was difficult to talk of a proper supply problem. As the results of supply control theory, it can be used for the discarding of intermediate storages. The areas of application are all inventories of the retail market. But also the inventories of industrial purchasing and selling are pliable to the models of inventory control. Following to the inventory of finished items from industrial selling there is a system of distribution. The disposal of such hierarchical systems is in the domain of multi-echelon supply control; that is an extension of real supply control theory. It was seen that the problems of inventory control are characterised through the following:

1. Several items are managed in one stock as a result of order handling and storage, that occur collectively. Every item is singular disposed.

2. Demand and delivery time are often stochastic or not known.

3. Not only the disposal of costs has to be considered, but also non-monetary and non-quantitative aspects.

In an office, a Department Z has an stock of maintenance supplies. The department purchases 40 cans of floor chemical at Rs 6.00 per can, and pays Rs 4.00 in freight (Rs .10 per can) on the purchase. Total cost of the purchase is Rs 244.00.

Debit Inventory, Program FOPPS - account 0400xx Rs 244.00 Credit Cash (affected via PO/SPO voucher) Rs 244.00

Department Z used four cans of chemical. A journal entry is prepared to remove the four cans that were used from the inventory in a departmental FOPPS. The cost of each can includes the added burden for freight: Rs 244.00/40 cans = Rs 6.10 per can. Thus, the total cost for the four cans is Rs 24.40.

DebitExpense, Program FOPPS - account 515109 Rs 24.40 CreditInventory, Program FOPPS - account 0400xx Rs 24.40

The new inventory balance is Rs 219.60. This is comprised of 36 cans at Rs 6.10 each.

Department Z now sells 10 cans of floor chemical to Department Y at Rs 7.00 per can. An IN is used to record the sale; and a journal entry is used to remove the cans sold from inventory.

The IN to record the sale (10 cans at Rs 7.00 = Rs 70.00):

DebitDept Y Exp, Program FOPPS - account 515109 Rs 70.00 CreditDept X Rev, Program FOPPS - account 380100 Rs 70.00

The journal entry to record the cost of goods sold and to remove the cans sold from inventory (10 cans at Rs 6.10 = Rs 61.00):

DebitCost of Goods, Program FOPPS - account 450200 Rs 61.00 CreditInventory, Program FOPPS - account 0400xx Rs 61.00

Thus, Department Z has Rs 9.00 in net revenue (Rs 70.00 Revenue minus Rs 61.00 Cost of Goods) and has an inventory balance of Rs 158.60, 26 cans of floor chemical. Prior to the fiscal year end closing on July 31, Department Z completes its annual physical supply count and discovers that two cans of the floor chemicals were defective. A journal entry is used to adjust the physical inventory for the defective cans.

The journal entry to adjust the inventory (two cans at Rs 6.10 = Rs 12.20) is: Debit Physical Inventory Adjustment,

Program FOPPS - account 450300 Rs 12.20 Credit Inventory, Program FOPPS - account 0400xx Rs 12.20

Thus, the adjusted inventory balance for Department Z is Rs 146.40.

3.6.2 Issues

The issues arise in supply control system concerns more with infrequent large orders vs. frequent small orders. Large orders will increase the amount of supply on hand, which is costly, but may benefit from volume discounts. Frequent orders are costly to process, and the resulting small supply levels may increase the probability of stock-outs, leading to loss of customers. In principle all these factors can be calculated mathematically and the optimum found.

Secondly, the issue arises while changing in demand for the product. In case, if the needed merchandise on hand in order to make sales during the appropriate buying season(s). A classic example is a gift shop pre-Christmas. If one does not have the items on the shelves, one will not make the sales. And the wholesale market is not perfect. There can be considerable delays, particularly with the most popular gifts. So, the entrepreneur or business manager will buy on spec. Another example is a departmental store. If there is a six week, or more, delay for customers to get merchandise, some sales will be lost. And yet another example is a pub, where a considerable percentage of the sales are the value-added aspects of drinks preparation and presentation, and so it is rational to buy and store somewhat more to reduce the chances of running out of key ingredients.

And a third issue comes from the view that supply also serves the function of decoupling two separate operations. For example work in process inventory often accumulates between two departments because the consuming and the producing department do not coordinate their work. With improved coordination this buffer inventory could be eliminated. This leads to the whole philosophy of Just in Time, which argues that the costs of carrying supply have typically been underestimated, both the direct, obvious costs of storage space and insurance, but also the harder-to-measure costs of increased variables and complexity, and thus decreased flexibility, for the business enterprise.

Review Questions

1. Give the basic idea about inventory?

2. What are the basic types of inventory classification?

3. What are the different methods used to manage an inventory? 4. What is an inventory management?

Discussion Questions

Discuss Just in Time Method of Inventory Control with an Example.

Application Exercises

1. A hardware company has a nail storage drum. The drum was filled three times. The first filling consisted of 100 pounds costing Rs1.01 per pound. The second filling consisted of 80 pounds costing Rs1.10 per pound. The net restocking was 90 pounds at Rs1.30 per pound. The drum was never allowed to empty completely and customers have picked all around in the drum as they bought nails. It is hard to say exactly which nails are physically still in the drum. As one might expect, some of the nails are probably from the first filling, some from the second, and some from the final.

2. In the data shown, by using the information, calculate the value of inventory on hand on March 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.

Dec 1 Beginning Inventory 60 units @ Rs35.00 per unit 5 Purchase 140 units @ Rs 65.50 per unit 14 Sale 190 units @ Rs 49.00 per unit 27 Purchase 70 units @ Rs 36.00 per unit 29 Sale 30 units @ Rs 29.50 per unit