Page 278 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 12: Inventory Management

1. ‘A’ category of items consists of only a small percentage i.e., about 10% of the total items Notes
handled by the stores but require heavy investment (in rupee value) about 70% of the total
inventory value.
2. ‘B’ category of items (relatively less important) constitutes 20% of the total items handled
by stores, having an investment (in rupee value) of about 20% of the total inventory value.

3. ‘C’ category consists of large number of items handled by stores say 70%, having relatively
small investment say 10% of the total inventory value.
‘A’ category of items is controlled effectively by using a regular system, which ensures neither
overstocking nor shortage of materials for production. The stocks of materials are controlled by
fixing certain levels like maximum level, minimum level and reorder level. Reduction in
inventory management costs is achieved by determining economic order quantity. To avoid
shortage and to minimize heavy investment in inventories, the techniques of value analyses,
variety reduction, standardization etc., are used.
In case of ‘B’ category of items, less degree of control as applicable to ‘A’ category items are
warranted. The orders for the items, belonging to this category, may be placed after reviewing
the situation periodically.
For ‘C’ category of items, there is no need of exercising constant control. Orders for these items
are placed either at 6 months interval or yearly interval, depending on the consumption pattern.
In this case, the objective is to economize an ordering and handling costs.

Example:
Category Cost Range Total No. of Items Total Cost

C 1-500 12,000 10,00,000

B 501-2000 2,000 15,00,000
A 2001 – 100,000 1,000 100,00,000

15,000 125,00,000
______________ ______________
Percentage of total items and costs
Category % of total Cumulative % Percentage of Cumulative %
Items of Total Items Total Cost of the Total Cost
__________ __________ __________ __________ __________
A 7 7 80 80

B 13 20 12 92
C 80 100 8 100

12.3.3 Establishment of System of Budget

To control investment in inventories, it is necessary to know in advance about the inventories
requirements during a specific period, usually a year. The exact quantity of various types of
inventories and the time when they would be required can be known by studying carefully
production plans and production schedules. Based on this, inventories requirement budget can
be prepared. Such a budget will discourage the unnecessary investment in inventories.

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