Page 173 - DMGT409Basic Financial Management

Basic Financial Management

Notes 2. Work-in-Process: Work-in-process is a stage of stocks between raw materials and fi nished

goods. Work-in-process inventories are semi-finished products. They represent products
that need to under go some other process to become fi nished goods.
Components of Inventory

Raw Materials Work-in-Process Finished Products Stores & Spares

3. Finished Products: Finished products are those products, which are completely
manufactured and ready for sale. The stock of finished goods provides a buffer between

production and market.
4. Stores & Spares: Stores & spares inventory (include office and plant cleaning materials

like, soap, brooms, oil, fuel, light, bulbs etc.) are purchased and stored for the purpose of
maintenance of machinery.

Notes Inventory Management Motives
There are three general motives for holding inventories:
1. The Transaction Motive: Transaction motive includes production of goods and sale of
goods. Transaction motive facilitates uninterrupted production and delivery of order
at a given time (right time).
2. The Precautionary Motive: This motive necessitates the holding of inventories for
unexpected changes in demand and supply factors.
3. The Speculative Motive: This compels to hold some inventories to take the advantage
of changes in prices and getting quantity discounts.

10.2 Costs of Holding Inventories

Minimizing cost is one of the operating objectives of inventory management. The costs (excluding
merchandise cost), there are three costs involved in the management of inventories.
1. Ordering Costs: Ordering costs are those costs that are associated with the acquisition
of raw materials. In other words, the costs that are spend from placing an order to raw
materials to the receipt of raw materials. They include the following:
(a) Cost of requisitioning the items (raw materials)
(b) Cost of preparation of purchase order (i.e., drafting typing, dispatch, postage etc.).

(c) Cost of sending reminders to get the dispatch of the items expedited.
(d) Cost of transportation of goods (items).
(e) Cost of receiving and verifying the goods.
(f) Cost of in unloading of the (items) of goods.

(g) Storage and stocking charges.

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