Page 59 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 3.4 Summary

Inventory control, therefore, aims at ensuring the availability of required quality material
in required quantity, at required time or period and place with minimum cost.
Inventory involves investment of money and locking up of precious space which has
alternate uses.
Inventory control is generally exercised over raw materials and work in progress.
The basic purpose of inventory control is to maintain optimum level of inventory.
The ordering of materials is usually tagged with three different components of costs viz:

Acquisition cost of materials
Ordering cost of materials and
Carrying cost of materials
A system of classifying materials and supplies according to value is known as A.B.C.
Analysis
The important operation of the inventory management is inventory valuation through
stores register. Inventory valuation under pricing is being executed through the following
various methodologies:
First in First out (FIFO)
Last in First out (LIFO)

Highest in First out (HIFO)
Simple Average Method (SAM)
Weighted Average Method (WAM)
Base Stock Method

3.5 Keywords

ABC Analysis: Analysis of exercising the control on the inventory on the basis of value. Always
Better Control Analysis; A- High control for high value goods; B- Moderate control for lesser
value goods and C- Little control on the least value goods.
Carrying Cost: Cost incurred for carrying the materials from the place of purchase to place of
production centre/profi t centre.
E.O.Q: Economic Order Quantity of materials to be ordered/procured.
Inventory: Stock of Raw materials, Stock of Work in Progress, Stock of Finished Goods and Stock
of Spares, but not Stock of Loose tools.
Ordering Cost: Cost incurred at the moment of placing the order of goods or materials,
administration costs, cost of communication and so on.

3.6 Review Questions

1. The basic purpose of material control is to maintain optimum level of inventory. Discuss.
2. Which method is most suitable for perishable commodities? Why? Reason out the suitability
of the model.

54 LOVELY PROFESSIONAL UNIVERSITY