Question based on Jain MBA Assignment Solution and other course
Answer:
Inventories are resources of any kind having an economic value.
S.E. Bolten defines it as “The term ‘Inventory’ refers to the stockpile of the product, a firm is offering for sale and the components that make up the product.”
The Accounting Research and Terminology Bulletin defines the term inventory as “The aggregate of those items of tangible personal property which;
- are held for sale in the ordinary course of business,
- are in the process of production for such sales or
- are to be currently consumed in the production of goods or services to be available for sale.”
ICMA defines it as “The function of ensuring that sufficient goods are retained in stock to meet allrequirements without carrying unnecessarily large stocks.”
The following items are included in inventory:
- Raw Materials:- These are goodsthat have not yet been committed to production in a manufacturing firm i.e. stored for use in future production.
- Works-in-Progress:- This category includes those materials that have been committed to the production process but have not been completed at the end of a financial year. Thus, these are neither raw materials nor finished goods.
- Finished Goods:- These are completed products awaiting sale. For a trading concern inventory always means finished goods, while for a manufacturing firm theyare the final output of the production process.
- Consumables and Stores:- Loose tools, cotton, lubricant, oil, grease etc. which are required for running and maintenance of plant and machineries are called consumables and stores. Though these are not held for sale, but have significant importance.
The problems of managing inventories in manufacturing enterprises are relatively complex.
Inventory Management:- The area of inventory management covers the following individual phases: determining the size of inventory to be carried and lot sizes for new orders, establishing timing schedules and procedures, ascertaining safety levels, providing proper storage facilities, co-ordinating inventorypolicies with sales and production, arranging the procurement and disbursement of materials, record keeping,assigning responsibilities for carrying out the inventorycontrolfunctions and providing necessaryreports for supervising the overall activity. Within these individual phases acquisition, Unit/physical control i.e. material handling and production related decision are made by persons within purchasing and production departments. The financial executive is only one of the persons in top management who is concerned with the levels and fluctuations of investment in inventories. He is concerned with any aspect of inventory management that is controllable from the stand point of reducing inventory costs and risks. This is also called value control.
As per Gordon B. Carson, “Inventory control refers to the process by which the investment in materials and parts carried in stock are regulated within pre-determined limits set in accordance with the inventory policy established by the management”.
Thus, inventory management refers to a system which ensures the supply of required quantity and quality of inventory at the required time and at the same time prevents unnecessary investment in inventories.
