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Neha Tikoo, Lovely Professional University Unit 10: Inventory Management

Unit 10: Inventory Management Notes

CONTENTS

Objectives
Introduction

10.1 Meaning and Definition of Inventory
10.2 Costs of Holding Inventories
10.3 Tools and Techniques of Inventory Management

10.4 Summary
10.5 Keywords
10.6 Self Assessment
10.7 Review Questions

10.8 Further Readings
Objectives

After studying this unit, you will be able to:
Describe concept of inventory management
Explain costs of holding inventory and tools of inventory management

Introduction

Inventory management occupies the most significant position in the structure of working capital.

Management of inventory may be defined as the sum of total of those activities necessary for the

acquisition, storage, disposal or use of materials. It is one of the important component of current
assets. Inventory management is an important area of working capital management, which plays
a crucial role in economic operation of the firm. Maintenance of large size of inventories by a fi rm

required a considerable amount of funds to be invested on them. Efficient and effective inventory
management is necessary in order to avoid unnecessary investment and inadequate investment.
10.1 Meaning and Definition of Inventory

The term “Inventory” is originated from the French word “Inventaire” and the Latin
“Inventariom”, which implies a list of things found. The term inventory has been defined by the

American Institute of Accountants as the aggregate of those items of tangible personal property
which (a) are held for sale in the ordinary course of business, (b) are in the process of production
for such sales, or (c) are to be currently consumed in the production of goods or services to be
available for sale. The term inventory refers to the stockpile of the products a firm is offering for

sales and the components that make up the product. Inventories are the stocks of the product of
a company, manufacturing for sale and the components that make up the product.
The various components of inventory are as follows:
1. Raw Materials: Raw materials are those inputs that are converted into fi nished goods
through a manufacturing or conversion process. These form a major input for manufacturing
a product. In other words, they are very much needed for uninterrupted production.

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