Page 179 - DMGT409Basic Financial Management

Basic Financial Management

Notes 10.4 Summary

Inventory management occupies the most significant position in the structure of working
capital.
Management of optimum level of inventory investment is the prime objective of inventory
management.
Inadequate or excess investment in inventories is not healthy by for any fi rm.
The optimum level if investment in inventories lies between excess investment and
inadequate investment.
Economic Order Quantity (EOQ) [Order Quantity Problem] refers to that level of inventory
at which the total cost of inventory is minimum.

10.5 Keywords

Economic Order Quantity (EOQ): It refers to that level of inventory at which the total cost of
inventory is minimum.

Inventory: The stockpile of the products a firm is offering for sales and the components that make
up the product.
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 & fi nished goods.

10.6 Self Assessment

Fill in the blanks:
1. Inventory is one of components of ..................... assets.
2. The term inventory is originated from the .....................”Inventoried”, and the Latin ............
................................

3. Raw materials, work-in-process, finished goods and stores and spares are the components
of ...................................................
4. ..................... motive necessitates the holiday of inventories for unexpected changes in
demand and supply factors.
5. ............................... are those costs that are associated with the acquisition of raw materials.
6. ............................ are those costs that arise due to stock out, either shortage of raw materials
or fi nished goods.
7. .............................. refers to that level of inventory at which the total cost of inventory is
minimum.

State whether the following statements are true or false:
8. Holding of inventories to take the advantages of changes in prices and getting quantity
discounts are known as speculative motive.

9. Inventory carrying costs are those costs that are associated with the carrying of goods from
supplies to the fi rm.

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