Skip to main content

What is Inventory Management?

Inventory Management: It is a management of required inventory level in a company. To maintain enough stock of raw material and finished goods in a company helps to reduce the chances of shortage of stocks or excess stock in a company. If there is a shortage of stock, then the company is not able to satisfy its customer needs which leads decreases the sales volume and loses its customers because the customers will go some other places to fulfil their needs. If there is an excess stock then it leads wastage of company’s funds because that stock will not be converted into cash.

Types of inventory:
·         Raw material: It is an unprocessed item which is going for processing and converted into finished goods.
·         Work-in-progress: The raw material is under processed stage that is known as work in progress.
·         Finished goods: The goods are available or ready for sale to customers to fulfil their needs.
       
      Company also maintain some stock of spare parts like nuts, bolts. And it also maintains the stock of packaging items or some other items which help to prepare the finished goods.

Importance of inventory management:
·         It protects the company from the stage of losing its customers due to lack of stocks.
·         It helps to maintain the sales volume of a product.
·         It reduces the time gap between ordering the goods and delivering to customers.
·         It helps to maintain the reputation of the company.
·         It reduces the wastage of funds by holding extra stock in a warehouse which is not going to convert into cash.
·         It helps to maintain continuous flow of goods for every stage, when raw material is converted into finished goods.

Types of Inventory Cost:

·         Ordering cost: The cost associated with the ordering of a stock from supplier. If lesser the quantity ordered higher the ordering cost and higher the quantity ordered lesser the ordering cost.

·         Carrying cost: This cost is associated with the time of holding of a stock in an inventory till it converted into sales. Increases the ordering quantity increases the carrying cost or decreases the ordering quantity decreases the carrying cost.

·         Other Cost: It is directly or indirectly related to stock like insurance cost; to protect the stock from theft, fire etc during holding period of stock in warehouse. Warehouse cost for maintaining the stock in warehouse etc.

Below the diagram shows how the carrying cost and ordering cost are related to each other:


The diagram shows the inverse relationship between ordering cost and carrying cost.

Inventory Management System: It is a system based management of inventory level of a company. With the help of computer software company manages all its inventories activities like ordering the stock, maintain the warehouse record, checking the inventory level time to time, and update every record related to stock when sales or purchases happened and it is also used for billing purpose etc. The software used for inventory management is:

ERP (Enterprise Resource Planning): This software is use by manufacturers for maintaining multi warehousing easily. It also helps control the inventory level.
Now there is lots of software are available for inventory management.


                                                                                                                                           

Comments

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
89 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to b...
Post a Comment
Read more

Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
Post a Comment
Read more