Page 285 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Optimum Level of Inventory: It is the level where the total costs of inventory is less.
Raw Materials: It is the input that is converted into finished goods through a manufacturing or
conversion process.

Work-in-progress: It is the stage of stocks between raw materials & finished goods.

12.6 Review Questions

1. Why is inventory management important?
2. Describe briefly three types of inventory costs associated with economic order quantity
and reorder point compensation.
3. What is meant by a reorder point? What factors affect the inventory reorder point?
4. How does uncertainty affect inventory management?
5. What is meant by the ABC Inventory Control System? On what key promise is this system
based? What are its limitations?
6. What are likely to be the new points of each of the following managers about the levels of
the various types of inventories: field, marketing, manufacturing, purchasing? What is
inventory investment?

7. What factors make managing inventory more vital for companies regarding the issue of
effective working capital management?

Answers: Self Assessment

1. optimum size 2. Sale lag
3. safety stock 4. stores and spares

5. minimum 6. Minimum level
7. Input Output ratio 8. EOQ
9. A

12.7 Further Readings

Books Chandra, P., Financial Management – Theory and Practice, New Delhi, Tata McGraw
Hill Publishing Company Ltd., 2002, p. 3.
Dr Pradeep Kumar Sinha, Financial Management, New Delhi, Excel Books, 2009.
Van Horne, J.C. and Wachowicz, Jr, J.M., Fundamentals of Financial Management,
New Delhi, Prentice Hall of India Pvt. Ltd., 1996, p. 2.

280 LOVELY PROFESSIONAL UNIVERSITY