Inventory, Valuation, Management and Control In Manufacturing Organisation

Till the recent years, literature on inventory, valuation, management and control care conspicuously absent form library bookshelves.Even now, the works of both indigenous and foreign authorizes are more of theirs and loss practical which implies that is of no practical benefit to organisation who may want to apply these controls.But invariably, the topic is now receiving growing awareness and industries alike are sponsoring a lot of seminars and workshops so as to alert the attention of people towards efficient effective and economic investment in inventories.

According to American Institute of chattered Accounts, the term is:-

The aggregate of those items of tangible property which are held for

They also include raw materials and supplies to be consumed in production, work-in-progress or partly finished or manufactured goods, finished stock of goods ready for sale which need to the controlled efficiently and effectively to achieve the desired objective and results.

Harold Bierman and T.R. Dyckman postulate the reason for holding inventory accounting, to them inventories are held for.

Transaction
Precaution
Speculative

This is basically because of the price fluctuations acuminated with inventory at any given time.

According to the cost and management journal it is a set-up and system used in the control of the firms investment in stock. It is accepted by Weldon’s cost accounting by L.W.J. Owler and J.L. Brown that in each industry and in different works vary according to particular ideas and conditions but the general procedure and principle are typical.

A large firm will require an efficient purchasing department while a small indigenous concern may have all function including purchasing carried out by owner.

Owler L.W.J. bough the idea that it is essential that in any firm, whether large or small, only one person or one department should be authorized purchase orders may be duplicated. They stressed heavily on the following conditions for an active inventory control and management.

An efficient organization of the purchasing department.

Purchase requisition
A specification of materials

iii. Quotation and orders

Possible routine of the purchase copies for:-

(a) The supplier

(b) Receiving department

(d) The department that initiated the purchase requisition

The purchase price considering:-
Value added tax (VAT)
Quantity discount
Trade discount
Cash discount

Vi. Transport and storage chargers.

Procedure on receipt of materials
The goods receive note
Checking inward invoice
Store routine and organisation of stores and stores control. M&E carters also suggested the actual stock analysis to be in operation.

From a case study on inventory controls carried out by Business & Administration student of inventory is an investing principle and practice based on the control of stock of a firm, that is, through this practice that the cost acquire on stock will be reduced. He dictated several methods which could be adopted to achieve efficient control such as ascertainment of economic order quantity (EOQ) and it’s underlying assumptions, analysis of cost associated with inventories and how they could be kept at the barest minimal point the ordering cost the racks and bin cards, cost of stock-out, lead time cost and provision for buffer stock to sustain the lead time. He also threw some light on the determination of re-ordering point and re-ordering level with some scientific touchier.

This is because the cost accountant training in model development is limited. He should have general understanding of the information need suggested that cost accountant role in the development his accounting parameter and it’s use to accomplish two purposes:-

Presenting the bases element of a particular control model that will be familiar with:
Indicating the problems encountered in supplying the relevant cost data for use in special sated models.

Many authors have undertaken different research studies and published or written books on stock and stock valuation, which has major role to play in determining actual profit to be arrived at in the income statement. Thus, American institute of certified accountants, in one of their publications stated that:-

A major objective of accounting for inventories is the proper determination of income through the process oaf matching appropriate cos and against revenue. In the same direction, meigs and meigs made it clear that the most important current assets in the balance sheet are inventory, cash and accounts receivables; of these, inventory or merchandise is usually the larges.

They acknowledge the importance of accurate valuation of inventory. As they put it “Because of the relatively large size of this assets an error in the valuation of inventory may cause a materials miss-statement of financial position and the net income. An error of 29% in valuing the inventory may have as much effect on the financial statement as would be complete omission of the assets cash.

Edward and thorn agreed that valuation f inventories oar stock is of uttermost importance to them inventory has value balance; they (stock) are assets that will provide future benefits to their value.

Milli Champ (1984) in his own contribution on stock valuation said that the objective of the valuation of stock and work in progress is to remove form costs of the year and order to match the remaining cost with sales of the year.

Inarge (1985) on his own holds that stock valuation becomes difficult when prices continue to change even for item of the same quantity and quality.

Some other authors like “Garbutt” declared that no method of stock is suitable for all types of business in all circumstance.

PURCHASING PROCEDURE

The buyer in any company has considerable responsibility and in a large concern, much money can save or cost by the department. He required a good training and knowledge and large measures of organizing ability.

This buyer must be provided with a schedule of technical specifications of the materials usually employed, each item having a code number, which will be quoted by those issuing purchase requisition. The department should keep filled suitably indexed, under the names, both of suppliers and of materials.

No purchase should be permitted except of dully-authorized purchase requisition received from the following;

The storekeeper for all standard materials stock of which required replenishment.
The production control department for all special materials, which are required for direct delivery of work-in-progress.
The plant engineer for materials required for capital expenditure or special indirect materials.

It is then the department concerned to prepare each purchase requisition in triplicate. These are then sent to (1) to the buyer. (2) To product department and the third copy retained in the department.

On recipe of the requisition, the buyer will obtain quotations for important requirements invite tenders for the supply. Consideration has to be given to factors other that price such as specification of delivery, various charges time of delivery, terms of payment and discounts.

Following the discussions made above, a purchase order is made which validates the contract of the purchase. The purchase order must be routed as follows:-

To the supplier
To the receiving department
To the accounting department
To the inspection department
To the initiating department
To retained in the purchasing department.

2.2 RECEIPT OF MATERIAL

The supplier ends a delivery note, which must be, passes to the Receiving clerk, then the invoice must be passed to the accounts department.

All materials going into the factory must be unloaded as special receiving center for cost reduction. This should be situated near the road and must also be accessible to any part of the organisation.

The goods received can checked with the details on purchase order and entered on goods received note.

When invoice are received, ti si useful to indicate each with a rubber stamp. The invoice register. Somebody say a clerk must check and certify the information contained there in, if the invoice (s) is in order, the buyer will sign and pass to the account department for payment.

2.3 ACCOUNTING TREATMENT

The central them here is the purchase ledger which is a subsidiary ledger consisting of records (accounts) relating to each supplier department, they will have to be checked as to whether the goods have been placed.

The invoices are recorded in the accounting department purchase journal which provides daily records of purchases ledger control account and to individual purchases account analyzed to expense code in the nominal ledger. The invoice indicates expense code by means of slip attached to them.

Supplier accounts are posted from invoices or the purchase journal.

The value of the purchases form individual suppliers is added to the outstanding balance which indicates the amount owing to them. A value added tax schedule is also compiled in respect of tax on each invoice. Invoice are then returned to the purchasing department for further processing.

Furthermore, the purchasing department is responsible for authorizing payment for purchase and accounting department receives sets of documents comprising on order copy, invoices, good received note and debt note for goods returned when appropriate.

The slip attached to the invoices is designed by a purchasing official authorizing payment. A remittance advice note and cheque or traders credit transfer are prepared and these are attached to the supplier. The remittance are recorded on a payments summary providing a daily records of cash payments. The total of the payment summary is debited to the purchase ledger control account and credited to the bank account to complete the double entry in the nominal ledger. The account of suppliers are debited with remittance they have received, thereby reducing the balance owing to them.

In manual or mechanized accounting system the three-in-one writing techniques is often used for recording invoice on suppliers, account purchase journal and the preparation of a remittance advice.

Similarly, purchase payment summary and the suppliers account.

2.4 STORES ROUTINE

Material pilferage, deterioration of materials and careless handling of stocks lead to reduced profit or even loss. Hence, in order to obtain maximum advantage of a cost accounting system, install an efficient will-equipped will offer the following advantages:-

Expert buying staff is concentrated in one department.
Combined purchasing power may result in reduced price of materials
Standardization of articles
A firm policy ca be initiated with regards to conditions of purchasing. If centralized storage is adopted in conformity with the above, the following advantages will are to:
Economy in staff concentration of exports in development.
Reduced clerical cost

iii. Better supervision

Better layout of stores
Facilitated inventory checks
The amount of capital invested in stock is minimized.

vii. Better security arrangement can be made.

2.5 INVENTORY CONTROL

What we will consider in the above heading is to explain why stocks or inventories are held and give the objective of inventory control and the basic definitions.

A. TYPES OF INVENTORY

Inventories can be classified as follows:-

Raw Materials:- The materials, components, fuel etc used in the manufacture of products.
Work-in-Progress (WIP):- partly finished goods and materials, sub-assemblies etc. held between manufacturing stages.
Finished Goods:- Completed products really for sale or distribution. It is necessary to note that what may be classified as finished goods in one company may be classified as raw materials for another.

REASONS FOR HOLDING STOCK

The main reason for holding stocks can summarized as follows:-

To ensure that sufficient goods are available to meet anticipated demand
To absorb variation in demand and production.
To provide a buffer between a production process.

This is applicable to work-in-progress stock, which effectively double operation.

To take advantage of bulk purchasing discount.
To meet possible shortages in future.
To absorb seasonal fluctuations in usage or demand.
To enable production process to show smoothly and efficiently.
As a necessary part of the production process.
As a deliberate investment policy, particularly in times of inflation or possible shortages.

ALTERNATIVE REASONS FOR THE EXISTENCE OF STOCK.

The afore-mentioned reasons are the deliberate decisions, but stocks accumulates for the following reasons:-

Obsolete items are retained in the stock.
Poor or non-existence inventory control resulting over-large orders, replenishment orders being out-phase with production etc.
Inadequate or non-existence stock records
poor liaison between the production control purchasing and marketing.
sub-optional decision making example the production department might increase W.I.P. stocks, so as to improve production.

2.6 STOCK COSTS

Stock represents an investment by an organization. As with any other investment, the cost of holding stock must be related to the benefit to be gained. To do this effectively the cost must be identified ad this can be done in three categories, cost of holding stock, cost of obtaining stock and stock out cost.

COST OF HOLDING STOCK

These cost also known as carrying cost include the following:-

(a) Interest on capital invested in the stock.

(b) Storage changes (rent, lighting, hearing, refrigeration, air conditioning etc.)

(d) Audits, stocktaking or perpetual inventory cost.

(e) Insurance, security etc.

(f) Deterioration and obsolesce

(g) Pilferage ad vermin damage.

COST OF OBTAINING STOCK

These are the cost associated with running of stock. The avoidance of these stocks is the basic reason why stocks are held in the first instance. These costs include that following:-

(a) Lost contribution through the cost caused by the stock out.

(b) Loss of future sales because customers go else where

(d) Cost of production stoppages caused by stock out of WIP or raw materials.

(e) Labour frustration over stoppages

Extra cost associated with urgent, often small quantity, replenishment, purchase, many f these cost are difficult to quantity, but they are often significant.

INVENTORY CONTROL TERMINOLOGY

(a) Lead or procurement time: The period of time expressed in days, weeks, months etc. Between ordering either externally or internally, and replenishment, that is when the goods are available for use.

(b) Demand: The amount required by sales, production etc. usually expresses as a rate of demand per week or month etc estimates of the rates of factors in inventory control systems.

(c) Economic order Quantity (EOA) or Economic Band Quantity (EBQ): This is calculated ordering quantity which minimizes the balance of cost between inventory holding cost and re-order costs.

(d) Physical Stock: The number of items physically in stock at a given time.

(e) Free stock: It is physical stock plus outstand replenishment orders minus unfilled requirement.

(f) Buffer stock or Minimum Stock or safety stock

A stock allowance to cover errors in forecasting the lead tome or the demand during the lead-time.

(g) Re-Ordering Level: The level of stock at which a further replenishment order should be placed. The re-order level is dependent upon the lead-time ad the demand during the lead time.

Re-order Quantity: The quantity of the replenishment order. In some type of inventory control system, a different value is used.

TYPES CONTROL SYSTEM

We will discuss under the above heading two main inventory control system, the re-order level and periodic review system explain in hat circumstances which system is likely to be more appropriate.

RE-ORDER LEVEL SYSTEM:

This is also known as “Two bin system”. Its characteristic is as follows.

(a) A predetermined re-orders level is set for each item.

(b) When the stock levels fails to the re-order level, a replenishment order is issued.

(d) The name “Two bin system” comes from the simplest method of operating the system where by the stock is aggregated intro two bins. Stock is initially drawn from the first bin and a replenishment order issued when it becomes empty.

(e) Most organization operating the re-order level system maintain stock records which calculated re-order levels which trigger of the required replenishment order.

This article was extracted from a Project Research Work Topic

“INVENTORY, VALUATION, MANAGEMENT AND CONTROL IN MANUFACTURING ORGANISATION.”

Inventory, Valuation, Management and Control In Manufacturing Organisation