Page 246 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 11.4.1 Use of Perpetual Inventory Records and Continuous Stock
Verification

Perpetual inventory represents a system of records maintained by the stores department. It
comprises Bin Cards and Stores Ledger.
Bin cards maintain quantitative records of receipts, issues and closing balances of each item of
stores. Separate bin cards are maintained for each item. Each card is filled up with the physical
movement of goods i.e., on its receipt and issue.
Like bin cards, the stores ledger is maintained to record all receipts and issue transaction in
respect of materials. It is filled up with the help of goods received note and material issue
requisitions.

A perpetual inventory is usually checked by a programme of continuous stock taking. Continuous
stocktaking means the physical checking of these records (which are maintained under perpetual
inventory) with actual stock. Perpetual inventory is essential for material control. It helps
continuous stocktaking.
Stock verification may be periodical or continuous. Annual stock taking has certain inherent
shortcomings e.g., all the items have to be covered in a given number of days, either the
production dept. has to be shut down during these days to enable thorough checking of stock, or
else the verification has to be of limited character. On the other hand, the system of continuous
stocktaking consists of counting and verifying the number of items daily throughout the year,
so that during the year all the items of stores are covered three or four time. The stock verifiers
are independent of stores and stores staff has no knowledge as to the particular items that are
being checked on a particular date.

11.4.2 Determining Economic Order Quantity

Economic Order Quantity (EOQ) is the order size for some particular inventory item that results
in lowest total inventory cost for the period. Total inventory cost consists of inventory ordering
cost and investment carrying cost. An EOQ may be computed for each inventory item.

EOQ assumes that the relevant costs of inventory can be divided into order costs and carrying
costs (the model excludes the actual cost of the inventory). Each of them has certain key
components and characteristics. Order costs include the fixed costs of placing and receiving
orders, the cost of writing, a purchase order, of processing the resulting paper work, and of
receiving an order and checking it against the invoice. Order costs are stated in rupees per order.
Carrying costs are the variable costs per unit of holding an item of inventory for a specific
period of time. Carrying costs including storage costs, insurance costs, the cost of deterioration
and obsolescence, and the opportunity or financial costs of having funds invested in inventory
these costs are stated in Rupees per unit per period.
Order costs decrease as the size of the order increases. Carrying costs, however, increase with
increases in order size. The EOQ model analyzes the trade-off between order costs and carrying
costs to determine the order quantity that minimizes the total inventory cost.

Several methods for finding EOQ are available. One is trial and error, which requires computing
the total inventory cost at various order sizes. Eventually, the EOQ can be found or closely
approximated by repeating the computation enough time. Another approach is to graph the
cost. Although both methods can be used, the first is time-consuming and the second lacks
precision.

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