INVENTORY CONTROL POLICIES Dokuz Eylül University Industrial Engineering Department Özge AVCI...
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INVENTORY CONTROL POLICIES
Dokuz Eylül University
Industrial Engineering Department
Özge AVCI 2010503008
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CONTENTS
What is the Inventory Control Policies?
Procurement
Valuing Inventory
Inventory Accounting System
Physical Controls
Methods
Main Functions
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Inventory control policies are decision rules
that focus on the trade-off between the costs
and benefits of alternative solutions to
questions of when and how much to order for
each different type of item.
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The process of managing the timing and the
quantities of goods to be ordered and stocked, so
that demands can be met satisfactorily and
economically.
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The possible reasons for carrying inventories are:
Uncertainty about the size of future demands.
Uncertainty about the duration of lead time for deliveries. Provision for greater assurance of continuing
production,using work-in-process inventories as a
hedge against the failure of some of the machines
feeding other machines. Speculation on future prices of commodities.
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Some of the other important benefits of carrying inventories are:
Reduction of ordering costs and production setup costs
Price discounts for ordering large quantities
Shipping economies Maintenance of stable production rates and work-
force levels which otherwise could fluctuate
excessively due to variations in seasonal demand.
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Uncertainties of future demand play a major role in the cost
of inventories. That is why the ability to better-forecast future
demand can substantially reduce the inventory expenditures of a
firm.
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Main Functions Inventory management is the process companies use
to order, receive, account for and manage the various
products sold to consumers. Business owners and
managers focus on this activity because inventory
typically represents the second largest expenditure in
a company behind payroll.
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While standard policies and procedures exist for inventory
management, owners and managers have some latitude to
develop standards for their own companies.
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Procurement Procurement is the purchasing process individuals must
use to order and receive inventory. Companies typically
require individuals to have a purchase order with a
manager's authorization prior to ordering inventory.
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A procurement manager is responsible for reviewing the
purchase order to ensure it includes authorization and other
information relating to the cost of items purchased. While
larger organizations can hire individuals to work in the
procurement department, smaller companies often have the
business owner perform this function.
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Valuing Inventory Methods include first-in, first-out (FIFO), last-in,
first-out (LIFO) and the weighted average method.
FIFO requires companies to sell older inventory first,
leaving more expensive inventory in the general ledger
and increasing the company's gross profit during an
accounting period.
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LIFO is the opposite of FIFO; therefore it has
the opposite effects in the accounting ledger.
The weighted average method does not require
older inventory to be sold first as inventory
costs are recalculated each time the company
purchases inventory.
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An inventory accounting system is the specific
procedures a company uses to update its accounting
ledger. The two types of systems are periodic and
perpetual. The perpetual system starts
with the opening inventory balance and updates
inventory after each purchase, sales or inventory
adjustment.
Inventory Accounting System
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Physical controls relate to how a company
stores and counts inventory items. Storage is
important because companies must safeguard
their inventory against loss, theft and employee
abuse. This can include limiting access,locking up
valuable products and using tracking devices on
products.
Physical Controls
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Cycle counts and counting a specific number of items
each day or week-and annual inventory counts are the
most common physical counting methods in the
business environment.The benefits of carrying
inventories have to be compared with the costs of
holding them.
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Inventory Control Policy Statement is as follows:
It is the responsibility of Inventory department
heads to assign a Barcode to all equipment and
material in their possession. Each inventory
department head is responsible for the equipment
and materials purchased and assigned to his or
her department.
Methods
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Inventory managers are also responsible for conducting quarterly inventory on the prescribed Inventory forms and will receive a quarterly inventory showing:
Assigned Inventory number
Description
Serial Number
Last known location
Value of asset
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In order to insure proper inventory control, all
inventory managers are to use the proper
forms.
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