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INTRODUCTION

Definition of Inventory:

The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense, inventory can bedefined as an idle resource which has an economic value. It is however, commonly used to

indicate various items of stores kept in stock in order to meet future demands.

Introduction to the study:

In any organization, there may be following four types of inventory:

(a) Raw materials & arts! these may include all raw materials, components and

assemblies used in the manufacture of a product

(") Consuma"les & # ares $$ These may include materials re!uired for maintenance

and day"to"day operation

(c) %or in ro'ress $$ These are items under various stages of production not yet

converted as finished goods

(d) inished roducts $$ #inished goods not yet sold or put into use.

Inventory control is the activity, which organizes the availability of items to

the customers. It co"ordinates the purchasing manufacturing and distribution

functions to meet the marketing needs. This role includes the supply of current

sales items, new products, consumables, spare parts, obsolescent items and all

other supplies.

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N**D +ND #CO * O T,* #TUD-

The need of the study is identify that inventory management process and maintenance

of inventories at %%&

The study is done on inventories held by %&& . To identity whether ade!uate

inventories of raw material is maintain or not

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O./*CTI0*#:

$. To e)amine the organization structure of inventory management in the stores ofthe %&& .

(. To discuss pattern, levels and trends of inventories in %&& .

*. To understand the various inventory control techni!ues followed bystores in %&& .

+. To know the performance of inventory management of the %&& byselected accounting ratios.

. To minimize investment in inventories keeping In view operating re!uirements.-. To provide for efficient store of materials so that inventories are protected from

loss by fire and theft and handling time and cost are kept at a minimum.

R*#*+RC, 1*T,ODO2O3-

RI1+R- D+T+:

rimary data has been collected from the financial employees through oral and discussionwith the supervisors has been used to collect the data from them.

#*COND+R- D+T+:

%econdary data is collected from the various te)t books, annual reports, stores and ledgersand website of the comapnay..

2I1IT+TION# O T,* #TUD-:

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The study has the following limitations:

$. The study is limited only for a period of years i.e. from (//("$$.(. The limitations of ratio analysis can be applicable to the study.

*. There may be appro)imations in calculating ratios and taking thefigures from the annual reports,

+. The study is purely based on secondary data.

. The study is confined to + days

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OR3+NI4+TION RO I2*

The %ingareni collieries company limited is the oldest public sector company in India,

carrying the coal mining activities in the 0odavari valley of 1ndhra radesh and catering the

needs of the consumers in southern India.

The origin of %&& may be traced back to the year $23$, where the coal was first

discovered in 4izam state at 56ellandu7. In those days pilgrims going to 58hadrachalam7

used to travel by road. 1fter getting down at 56ellandu7 railway station, many of the

pilgrims used to cook their food with firewood in the vicinity of the railway station before

continuing their 9ourney.

ne such party arranged the fireplace for cooking by lighting the firewood between

them. They observed that the stones were also burning sending out heat even after the

firewood was consumed. 8ased on their report, the authorities concerned carried

investigation and found the e)istence of coal deposits around the village of 5%ingareni7.

1fter the discovery of coal in the year $23$, 5the ;yderabad Deccan &ompany7 was

incorporated in <ngland in the $22-. In $=($,the company was converted into a public

limited company and was named as 5the %ingareni collieries company limited7 after the

name of the village 5%ingareni7 near yellandu and was listed in the ondon stock e)change.

In $=+ , the 4izam of ;yderabad purchased the shares of the company at ondon

stock e)change and this action brought the company under the government control through a

Trust #und. Thus the %ingareni collieries company limited has the distinction of being the

first government owned &oal &ompany in India.

Today the e!uity capital is shared in the ratio of nearly $:+2 between government of

1ndhra radesh and government of India. The loan capital is entirely provided by

government of India. The assistance is by tripartite agreements between %&& and

government of India and government of 1ndhra radesh. The company has proven coal

reserves of 2/=$ million tones as on >arch *$, (//* spread over in the districts of

?hammam, 1dilabad, ?arimnagar and @arangal of 1ndhra radesh

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,I#TOR-

In the year $23$, Dr. ?ing of the 0eological %urvey of India discovered coal near the village

of 6ellandu in ?hammam district and one of the important coal seams bore his name. The;yderabad ADeccanB &ompany imited incorporated in <ngland ac!uired mining rights in

$22- to e)ploit coal found in 6ellandu area. The present &ompany was incorporated on (*rd

December $=(/ under the ;yderabad &ompanies 1ct as a public limited company with the

name 'The %ingareni &ollieries &ompany imited' A%&& B. It ac!uired all the assets and

liabilities of the ;yderabad ADeccanB &o. td. 8est C &o., acted as %ecretaries and %elling

1gents. The %tate of ;yderabad purchased ma9ority shares of the &ompany in $=+ . #rom

$=+ to $=+=, the ;yderabad &onstruction &o., td., was acting as >anaging 1gent. In $=+=this function was entrusted to Industrial Trust #und by the then 0overnment of ;yderabad.

The controlling interest of the &ompany devolved on the 0overnment of 1ndhra radesh in

$= - pursuant to the reorganization of %tates. Thus, the %&& became a 0overnment

&ompany under the &ompanies 1ct in $= -.

arge"scale e)pansion of %&& was undertaken during the initial #ive"year plans. In $=-/

the 0ovt. of India started its participation in the e!uity of the &ompany and also started

e)tending loan assistance. Thus since >arch $=-/ it has been 9ointly owned by the0overnment of 1ndhra radesh and the 0ovt. of India. In $=3+ the 0overnment of India

transferred its share capital to the &oal >ines 1uthority imited. The manner of e)tending

financial assistance for e)pansion of %&& by the 0ovt. of 1. ., and the 0ovt. of India during

plan period was agreed upon in the #our parties 1greement e)ecuted on $/th Eune $=3+.

%ubse!uently, the 0ovt. of India decided to control its e!uity directly in %&& . 1ccordingly,

agreement was concluded on $*th December $=33. The %&& , the 0overnment of 1. ., the

0overnment of India and &oal India imited were parties to the agreement. These twoagreements are popularly called !uadripartite agreements.

#or financial and other assistance during I, II, III, IF C F lan periods, separate

agreements were e)ecuted on *$st >arch, $=2 , $/th #ebruary $=2=, (+th %eptember $==+,

$$th Eanuary (//( and $=th ctober (//+ between the 0overnment of India, the 0overnment

of 1ndhra radesh and %&& . These agreements are called tripartite agreements.

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The &ompany's accredited function is to e)plore and e)ploit the coal deposits in the 0odavari

valley coalfield, which is the only repository of coal in %outh India. >ining activities of

%&& are presently spread over four districts of 1ndhra radesh iz. 1dilabad, ?arimnagar,

?hammam and @arangal.

The studies of 0eological %urvey of India attribute as much as $-==3 million tones of coal

reserves in the 0odavari valley coalfield. The reserve covers up to a depth of $(// meters and

it includes reserves confirmed, indicated as well as inferred.

The coal e)tracted by %&& in the 0odavari valley coalfield up to the year (//+"/ was

about 3($ million tones.

2+%# # *CI IC TO T,* CO+2 #*CTOR

The &oal >ines 1ct, $= (, along with the &oal >ine Gegulation, $= 3 and &oal >ines

Gules, $= , govern coal mining in India. The onus of administering the >ines 1ct,

Gegulation and Gules lies with the Director 0eneral of >ines %afety. The >>D 1ct"$= 3

lies down procedures for the grant of mining leases and preparing of mining plants.

1c!uisition of land for mining is to follow the and 1c!uisition 1ct and #orest &onservation1ct. f course various abour 1cts such as ayment of wages 1ct, ayment of 0ratuity 1ct,

ayment of 8onus 1ct, &oal >ines provident fund and >isc. provision 1ct are following

9udiciously for maintaining harmonious labour relations. It is also observed that benefits are

e)tended in some cases more than that statutory obligation.

RO2* O #CC2 IN N+TION+2 #C*N+RIO

&oal mining in India commenced in $33+ and the production level Increased from-.$= million tones on $=// to around *+/ million tones in (// "(//-. 1lmost the entire

sector is under state control. &oal India ltd., A&I B a 0ovt. of India undertaking, has seven

coal producing subsidiaries and produce 23H of the total coal production. %ingareni

collieries company td A%&& B 9oint venture of the state 0overnment of 1ndhra radesh

and 0ovt. of India, contribute about $/Hof the coal production with only 3H of national coal

reserves catering south IndiaJs coal re!uirements.

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RODUCTION RO I2*:

%&& occupies a vital position in the coal production program of the country with 3H

of India reserves and is producing around $/ H of country annual coal mining.

pencast mining, launched in %&& in $=3 now it contributes to more than

-/H of the total coal output from $( opencast mines 5

1+R6*T RO I2*:

%&& has been endeavoring to meet the coal demand of entire south. 1ll the

powerhouses located within the state of 1ndhra radesh get their coal supplies from

%ingareni collieries. In addition, the re!uirement of coal of some of the powerhouses located

in >aharastra and ?arnataka is also met from %ingareni &olliery &ompany limited.

In the small"scale sector, about (3// industrial units situated over the southern states

get their re!uirements of coal from %&& .

CU#TO1*R #+TI# +CTION :

To improve the customer satisfaction the company adopted selective mining in

under ground and open cast mines to improve the !uality of coal dispatches. 4on K

carbonaceous brands like clay were blasted separately and e)cluded from coal brought to

surface. In some mines, picking arrangements for removing shale, stone etc were intensified

at all dispatch points. arious steps are being taken by the company to improve the !uality

and availability of coal. 1part from the above, steps like installation of electronic

weighbridges in the place of mechanical weighbridges 9oint sampling methods etc

were also taken.

0I##ION O #CC2

To train up young men C women able and eager to create and put into action such ideas,

methods, techni!ues and information.

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1I##ION O #CC2

$. To retain our strategic role of a premier coal producing company in the country and

e)cel in a competitive business environment.

(. To strive for self"returns by optimum utilization of e)isting resources and earn

ade!uate returns on capital employed.

#TR*N3T, O #CC2

%trong will power and determination, teamwork and commitment to the Defined goals yield

positive results and pay good Dividends. This has been proved in %ingareni &ollieries

&ompany td., %&& has made a dramatic turn around by recording Gs.*-$ crore profits

during (//+"(// and Gs.$+ crore profits during (//*"(//+. %&& 's strength is within its

people. In $==2 the &ompany was able to successfully counter the strike culture and

promoted harmonious industrial relations. The company introduced several welfare schemes

for its workers and their families The company, which had a low customer"focus in the past,

laid emphasis on market dynamics by scripting fuel supply The company is now looking to

reinvent itself, backed by the visionary political leadership of the state, smart management,

>otivated workforce and responsible leadership of workers.

+%+RD#

The &ompany bagged $ st prize for Design and concept in the >ineral %ector at the + th

International Trade #air on >ineral and >etallurgy conducted at ragati >aidan, 4ew Delhifrom $( th %eptember (//(. %&& has established an Integrated <nvironment and #orestry

Department and is a pioneer in 8ioengineering works taken up at the pencast"mines for

stabilizing 8 dumps and their reclamation. ver the years, more than $.(/ crore saplings

have been planted over an area of -/3/ hectares. %&& Js ;erculean efforts in this sphere that

have been recognized by it being awarded the prestigious 0olden eacock <nvironment

>anagement 1ward by the world <nvironment #oundation in Eune (// .

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The %&& has bagged the %tate 0overnmentJs abor >inistry 5>anagement 1ward7 for the

year (//( on >ay Day from &hief >inister of 1ndhra radesh. The &C4D has said this

award was possible was because of cohesive work by all employees including officers and

supervisors. Their integrity, honesty, hard working nature, Trade Lnions wholehearted

support helped the %&& to bag this prestigious award.

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R*0I*% O 2IT*R+TUR*

D* INITION:

5Inventory is an idle stock of physical goods that contain economic value, and are held in

various forms by an organization in its custody awaiting packing, processing transformation,

use or sale in a future point of time7.

Inventory management is primarily about specifying the size and placement of

stocked goods. Inventory management is re!uired at different locations within a facility or

within multiple locations of a supply network to protect the regular and planned course of

production against the random disturbance of running out of materials or goods.

<very enterprise needs inventory for smooth running of its activities. It serves as a

link between production and distribution process. There is, generally, a time lag between the

recognition of a need and its fulfillment the greater the time lag, the higher the re!uirements

for inventory. It also provides a cushion for future price fluctuations.

The investment in inventories constitutes the most significant part of current

assetsOworking capital in most of the undertakings. Thus, it is very essential to have proper

control and management of inventories.

The purpose of inventory management is to ensure availability of materials in

sufficient !uantity as and when re!uired and also to minimize investment in inventories.

1eanin' and nature of inventory:

In accounting language, inventory may mean the stock of finished goods only. In a

manufacturing concern, it may include raw materials, work"in"process and stores etc.

Inventory includes followin' thin's:

aB. Raw 1aterial: Gaw material form a ma9or input into the organization.

They are re!uired to carry out production activities uninterruptedly.

The !uantity of raw materials re!uired will be determined by the rate

f consumption and the time re!uired for replenishing the supplies.

The factors like the availability of raw materials and government

regulations etc. too affect the stock of raw materials.

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")5 %or in ro'ress: The work in progress is that stage of stocks which are in between

raw materials and finished goods.

The !uantum of work in progress depends upon the time taken in the manufacturing

process.

The greater the time taken in manufacturing, the more will be the amount of work in

progress.

c)5 Consuma"les: These are the materials, which are needed to smoother the process of

production. These materials do not directly enter production but they act as catalysts.

&onsumables may be classified according to their consumption and criticality.

0enerally, consumable stores do not create any supply problem and form a small part

of production cost. There can be instances where these materials may account for

much value than the raw materials. The fuel oil may form a substantial part of cost.

d) inished 'oods: These are the goods which are ready for the consumers. The stock of

finished goods provides a buffer between production and market.

The purpose of maintaining inventory is to ensure proper supply of goods to

customers,

e) # ares: The stocking policies of spares differ from industry to Industry. %ome

industries like transport will re!uire more spares than other concerns. The costly spare

parts like engines, maintenance spares etc are not discarded after use, rather they are

kept in ready position for further use.

1ll decisions about spares are based on the financial cost of inventory on such spares

and the costs that may arise due to their non"availability.

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.*N* IT# O ,O2DIN3 IN0*NTORI*#

1lthough holding inventories involves blocking of a firm's funds and the costs of storage

and handling, every business enterprise has to maintain certain l evel of inventories tofacilitate un"interrupted production and smooth running of business.

In the absence of inventories a firm will have to make purchases as soon as it receives

orders. It will mean loss of time and delays in e)ecution of orders which sometimes may

cause loss of customers and business.

1 firm also needs to maintain inventories to reduce ordering cost and avail !uantity

discounts etc.There are three main purposes of holding inventories,

iB The transaction motive: which facilitates continuous production and timely

<)ecution of sales orders.

iiB The precautionary motive: which necessitates the holding of inventories for meeting

the unpredictable changes in demand and supplies of materials,

iiiB The speculative motive: which induces to keep inventories for taking advantage of

price fluctuations, saving in re"ordering costs and !uantity discounts.

RI#6 +ND CO#T# O ,O2DIN3 IN0*NTORI*#

The holding of inventories involves blocking of a firm's funds and incurrence of capital and

other costs.

The various costs and risks involved in holding inventories are:

iB &apital costs: >aintaining of inventories results in blocking of the firms financial

resources. The firm has therefore to arrange for additional funds to meet the cost of

inventories. The funds may be arranged from own resources or from outsiders. 8ut in both

the cases, the firm incurs a cost. In the former case, there is an pportunity cost of

investment while in the later case the firm has to pay Interest to the outsiders.

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iiB %torage and handling costs: ;olding of inventories also involves costs on storage as

well as handling of materials. The storage of costs include the rental of the godown,

insurance charges etc.

iiiB Gisk of price decline: There is always a risk of reduction in the prices of inventories

by the suppliers in holding inventories. This may be due to increased market

supplies, competition or general depression in the market,

ivB Gisk of obsolescence: The inventories may become obsolete due to improved

technology, changes in re!uirements, change in customer tastes etc.

ivB Gisk determination in !uality: The !uality of materials may also deteriorate while the

inventories are kept.

O"8ects of Inventory 1ana'ement

Definition of Inventory >anagement: Inventory management is concerned with the

determination of optimum level of investment for each components of inventory and the

efficient use of components and the operation of components and the operation of an

effective control and review of mechanism.

The main ob9ectives of inventory management are operational and financial. The

operational ob9ective mean that the materials and spares should be available in sufficient

!uantity so that work is not disrupted for want of inventory The financial ob9ective means

that investments in inventory should not remain idle and minimum working capital should be

locked in it.


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The followin' are the o"8ectives of inventory mana'ement9

To ensure continuous supply of materials, spares and finished goods so that production

should not suffer at any time and the customers demand should also be met. To avoid both

over"stocking and under"stocking of inventory.

To maintain investment in inventories at the optimum level as re!uired by the operational and

sales activities.

To keep material cost under control so that they contribute in reducing the cost of production

and overall costs

To eliminate duplication in ordering or replenishing stocks. This is possible with the help of

centralizing purchases.

To minimize loses through deterioration, pilferages, wastages and damages.

To ensure perpetual inventory control so that materials shown in stock ledgers should be

actually lying in the stores.

To ensure right !uality goods at reasonable prices. %uitable !uality standards will ensure

proper !uality of stocks. The price"analysis, the cost"analysis and value"analysis will ensure

payment of proper prices.

To facilitate furnishing of data for short"term and long"term planning and control of

inventory.

TOO2# +ND T*C,NI U*# O IN0*NTOR- 1+N+3*1*NT

1 proper inventory control not only helps in solving the acute problem of li!uidity but

also increases profits and causes substantial reduction in the working capital of the concern.

The following are the important tools and techni!ues of inventory management and

control: Determination of stock levels:

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&arrying of too much and too little of inventory is detrimental to the firm. If the

inventory level is too little, the firm will face fre!uent stock

1a;imum 2evel:

It is the !uantity of materials beyond which a firm should not e)ceed its stocks. If the

!uantity e)ceeds ma)imum level limit then it will be overstocking. verstocking will mean

blocking of more working capital, more space for storing the materials, more wastage of

materials and more chances of losses from obsolescence.

1a;imum stoc level < Reorderin' level =Reorder >uantity$(1inimum Consum tion ?

minimum reorder eriod)5

Dan'er stoc level:

It is fi)ed below minimum stock level.

The danger stock level indicates emergency of stock position and urgency of obtaining

fresh supply at any cost.

Dan'er stoc level < +vera'e rate of$consum tion ? emer'ency delivery time5

+vera'e stoc level:

This stock level indicates the average stock held by the concern,

+vera'e stoc level < 1inimum stoc level = @ ; reorder >uantity5

Determination of safety stoc s

%afety stock is a buffer to meet some unanticipated increase in usage. The demand for

materials may fluctuate and delivery of inventory may also be delayed and in such a situation

the firm can face a problem of stock out.

In order to protect against the stock out arising out of usage fluctuations, firms usually

maintain some margin of safety stocks.Two costs are involved in the determination of this

stock that is opportunity cost of stock outs and the carrying costs.If a firm maintains low

level of safety fre!uent stock outs will occur resulting into the larger opportunity costs. n

the other hand, the larger !uantity of safety stocks involves carrying costs.

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outs involving heavy ordering cost and if the inventory level is too high it will be

unnecessary tie up of capital.

1n efficient inventory management re!uires that a firm should maintain an optimum level of

inventory where inventory costs are the minimum and at the same time there is no stock out

which may result in loss or sale or shortage of production.

1inimum stoc 2evel: It represents the !uantity below its stock of any item should

not be allowed to fall.

2ead time: 1 purchasing firm re!uires sometime to process the order and time is also

re!uired by the supplying firm to e)ecute the order. The time taken in processing the order

and then e)ecuting it is known as lead time.

Rate of consum tion: It is the average consumption of materials in the factory. The rate of

consumption will be decided on the basis of past e)perience and production plans.

Nature of material: The nature of material also affects the minimum level. If a material is

re!uired only against the special orders of the customer then minimum stock will not be

re!uired for such material. >inimum stock level can be calculated with the help of following

formula.

1inimum stoc level < Reorderin' level $ (normal consum tion ?

Normal re$orders eriod)5

") Re$orderin' level:

@hen the !uantity of materials reaches at a certain figure then fresh order is sent to get

materials again. The order is sent before the materials reach minimum stock level. Ge"

ordering level is fi)ed between minimum level and ma)imum level.

Re$orderin' level < 1a;imum consum tion ; ma;imum re$order eriod5

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uts involving heavy ordering cost and if the inventory level is too high it will be

unnecessary tie up of capital.

1n efficient inventory management re!uires that a firm should maintain an optimum level of

inventory where inventory costs are the minimum and at the same time there is no stock out

which may result in loss or sale or shortage of production.

1inimum stoc 2evel : It represents the !uantity below its stock of any item should

not be allowed to fall.

2ead time : 1 purchasing firm re!uires sometime to process the order and time is also

re!uired by the supplying firm to e)ecute the order. The time taken in processing the order

and then e)ecuting it is known as lead time.

Rate of consum tion: It is the average consumption of materials in the factory. The rate of

consumption will be decided on the basis of past e)perience and production plans.

Nature of material: The nature of material also affects the minimum level. If a material is

re!uired only against the special orders of the customer then minimum stock will not be

re!uired for such material. >inimum stock level can be calculated with the help of following

formula,

1inimum stoc level < Reorderin' level $ (normal consum tion ?

Normal re$orders eriod)5

*conomic Order uantity (*O )9

The !uantity of material to be ordered at one time is known as economic ordering

!uantity.

This !uantity is fi)ed in such a manner as to minimize the cost of ordering and

carrying costs,

Total cost of material < +c>uisition cost= carryin' costs =orderin' cost

Carryin' cost: It is the cost of holding the materials in the store.

Orderin' cost: It is the cost of placing orders for the purchase of materials.

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These

>ust be stored ade!uately.

The R<' type of spares are also necessary but their stocks may be kept at low figures.

The stocking of 5D7 type spares may be avoided at times. If the lead time of these spares is

less, then stocking of these spares can be avoided.

IN0*NTOR- TURNO0*R R+TIO

Classification and Codification of Inventories:

The inventories should first be classified and then code numbers should be assigned

for their identification. The identification of short names are useful for inventory management

not only for large concerns but also for small concerns. ack of proper classification may also

lead to reduction in production.

0enerally, materials are classified" accordingly to their nature such as construction

materials, consumable stocks, spares, lubricants etc. 1fter classification the materials are

given code numbers. The coding may be done alphabetically or numerically. The later

method is generally used for coding.

In %&& the item codification is done on a ten digit code wherein the class of materials is assigned two digits, sub class is assigned two digits, assembly is assigned two

digits, sub"assembly is assigned three digits and check number is one digit.

aluation of inventories">ethod of valuation:

#I# method

I# method

8ase %tock method@eighted average price method.

CRIT*RI+ OR /UD3IN3 T,* IN0*NTOR- #-#T*1

@hile the overall ob9ective of the inventory system is to minimize the cost to the firm

at the risk level acceptable to management, the more pro)imate criteria for 9udging the

inventory system are:

S &omprehensibility

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S 1daptability

S Timeliness

+reas of im rovement: Inventory management in India can be improved in various ways.

Improvements could be affected through:

*ffective com uteriAation: &omputers should not be used merely for accounting purposes

but also for improving decision"making.

Review of classifications: 18& and #%4 classifications must be periodically reviewed.

Im roved Co$ordination: 8etter co"ordination among purchase, production, marketing, and

finance departments will help in achieving greater efficiency in inventory management.

Develo ment of lon' term relationshi s:

&ompanies should develop long term relationships with vendors. This would help in

improving !uality and delivery.

Dis osal of o"soleteBsur lus inventories:

rocedures for disposing obsoleteOsurplus inventories must be simplified. 1doption of

challenging norms:

&ompanies should set benchmarks with global competitors and use ideals like ETT to

improve inventory management.

Inventory cost $ an overall view

In financial parlance, inventory is defined as the sum of the value of the raw materials, fuels,

and lubricants spares parts maintenance consumable, semi"processed materials and finished

goods stock at any giving point of time. The operational definition of inventory would be :

amount of raw materials, fuel and lubricants, spare parts and semi"processed materials to be

stocked for the smooth running of the plantOindustry.

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IN0*NTOR- 1+N+3*1NT IN #CC2

1bout $/H of the total cost of production in %&& imited represents inventory cost.

Inventories are maintained basically for the operational smoothness which they can be

affected by uncoupling successive stages of production, whereas the monetary value of the

inventory serves as a guide to indicate the size of the investment made to achieve this

operational convenience. The materials management departments' primary function is to

provide this operational convenience with a minimum possible investment in inventories.

>aterials department is accused of both stock outs as well as large investments in inventories.

The solution lies in e)ercising a selective inventory control and application of inventorycontrol techni!ues. Inventories built to act as a cushion between supply and demand. It is

sufficient to take care of the re!uirements of demand till the ne)t supply arrives. It is

sufficient to take care of probable delays in supply as well as probable variations in demand.

The size of the inventory depends upon the factors such as size of industry internal

lead time for purchase, supplier's lead time, vendor relations, availability of the materials,

annual consumption of the materials. Inventory cost can be controlled by applying >odern

Techni!ues viz, 18& analysis, %D<, #%4, ;>&, <D etc, these techni!ues can be usedeffectively with the help of computerization. @ho determines inventory :

4orm per inventory could be set by the area top management. In the %&& corporate

planning department will allocate this investment with the v arious items taking into

consideration the re!uisitions given by the areas and re!uisitions approved by the corporate

planning department for smooth operation of the company. urchase department will process

the procurement action.

Inventory cost re resents:

1. The total value of stores and spares and capital spares,

8. %tores in transit and under inspection and

&. %tock of finished products.

4ormally, there are certain problems in maintaining optimum level of inventory.

roblems of inventory can be resolved by the cost implications. &osts which are

relevant for consideration are discussed in the following lines

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8asically there are four costs for consideration in developing an inventory model.

$. The cost of placing a replenishment order.

(. The cost of carrying inventory.

*. The cost of under stocking and

+. The cost of overstocking.

The cost of ordering and inventory carrying cost are viewed as ;ie supply side

costs and help in the determination of the !uantity to be ordered for each

replenishment.

The under stocking and over stocking costs are viewed as the demand side

costs and help in the determination of the amount of variations in demand and the

delay in supplies which the inventory should withstand.

@henever an order placed for stock replenishment, certain costs are involved,

and, for most practical purposes it can be assumed that the cost per order is constant.

The ordering cost may vary depending upon the type f items, for e)ample raw

material like steel against production component like castings in steel plants, support

materials in the case of coal industry.

Orderin' cost

$. aper work costs, typing and dispatching an order.

(. #ollow up costs" the follow up re!uired to ensure timely supplies includes

the travel cost for purchase follow up, the telephones, and

postal bills etc.

*. &osts involved in receiving of the order, inspection, checking and

handling in the stores.

+. 1ny set up cost of machines charged by the supplier, either indicated in

!uotations or assessed through !uotations for various !uantities.

. The salaries and wages of the purchase department.

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Inventory carryin' Cost:

This cost is measured as H of the unit cost of the item. This measure gives basis for

estimating what are actually costs a company to carry stock. This cost includes:Interest on capital

Insurance and ta) charges

%torage costs " labour costs, provision of storage area and facilities like

8ins, racks etc.

Transport bills and hamali charges.

1llowance for deterioration or spoilages.

%alaries of stores staff

bsolescence.

The inventory carrying cost varies and a ma9or portion of this is accounted for by the

interest on capital. %&& is paying (/H interest on bank loans.

Under stoc in' cost:

This cost is the cost incurred when an item is out of stock. It includes cost of lost production during the period of stock out and the e)tra cost per unit which might have to be

paid for an emergency purchase.

Overstoc in' cost:

This cost is the inventory carrying cost Awhich is calculated per yearB for a specific

period of time. The time varies in different conte)ts" it could be the lead time of procurement

of entire life time of machine. In the case of one time purchases, over stocking cost would be

P : urchase rice$ scra rice5


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IN0*NTOR- IN #CC2 DURIN3 E$FF I# +# O22O%#:

Gs.in lakhs (//-"/3 (//3"/2 (//2"/= (//="$/ (/$/"$$$ .stores and sparescapital items (*3*2.3/ ($= +.23 ((=2/.(= (+32-.- ( 3( .-*

(. stores in transit andunder inspection ( 33.$$ *( (.+3 +$--.++ (*==.=2 *3 -. *

*. %tock of coal, coke coaltar fuel +$2$.22 $*$$./- $+( .+3 =--2.23 $=33+. $

alue of stores and spares representing 3.*-, 2.+-, 3.3$, 2./( month consumption during the

years (//- "/3, (//3"/2, (//2"/=, (//="$/,(/$/"$$ respectively.

%tock of coal, coke and coal tar fuel representing /. -, $.$$, /.2=, /. $ monthly sales

during the years (//- "/3, (//3"/2, (//2"/=, (//="$/,(/$/"$$ respectively.

In order to reduce the inventory cost the following steps may be considered accurate

assessment of materials re!uirement from area level to corporate office. &ommunicating

proper delivery schedule to suppliers based on our re!uirement s. 8etter planning at mine

level before installation of e!uipment viz. ventilation and haulage and pumping etc. 1fter

careful study the norms should be fi)ed regarding consumption of various areasOitems.

%tandardization of e!uipment will facilitate inter changeability in the event of

8reakdowns and also reduce the downtime of machinesOe!uipment. reventive

maintenance of e!uipments as per the schedules eriodical spot"checks at work spots for

tracing the availability of spares and the consumables.

1ccountability and responsibilities are to be fi)ed. Introduction of technical audit cells and

Lpdating of technology from time to time. Ge"utilization of materials.

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+ccountin' for materials:

The accounting for direct material begins with the issuance of the purchase re!uisition

and ends only when the finished product has been shipped to the customer.In the course of this cycle the other two elements of cost, direct labour and factory

over heads become part of material cost to the e)tent that they are applied to production and

included in inventory values.

+c>uirin' raw materials from vendors:

#our basic documents are involved in ac!uiring materials from vendors.

They are purchase re!uisition. the purchase order, the receiving report and the vendorsinvoice. 1fter due consideration of purchase re!uisition, a vendor is selected and a purchase

order is sent to the vendor by the purchasing agent. Lltimately the merchandise and the

vendors invoice are received and the receipt of merchandise is recorded on a receiving report.

If the vendors invoice, the purchase order, and the receiving report are found to be in

agreement, a voucher for payment is approved. 1t this time the receipt of the merchandise is

recorded in the 0eneral ledger as follows".

Dr. Gaw materials inventory

&r. 1ccounts payable.

@hen payment is made, the following general ledger entry is made:

Dr. 1ccounts payable

&r. &ash.

urchase Re>uisitions:

This is used to re!uest the purchasing agent to order materials. Timing of the

re!uisition and the amount to be re!uisitioned depend on the kind of material and the

circumstances.

#or control purposes it is important that the individuals authorized to issue purchase

re!uisitions be limited to such personnel as foremen, storekeepers and departmental heads.

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The purchase re!uisition originates a substantial percentage of the total costs of a

company, and one of the surest ways to control costs is to control them before they are

incurred.

urchase re!uisitions may be dispensed with in those instances where agreements are

made with a supplier to meet specific re!uirements over a period of time. %uch agreements

are blanket purchase re!uisitions.

In many companies, a copy of the re!uisition is sent to the accounting department for

checking of the propriety of the code. The origination also inserts the !uantity to be ordered

the description of the material, the amount on hand, the monthly consumption and any special

rotation as to the purpose for which the material is ordered.

endor selection depends upon such things as !uality and availability of desired

!uantities when needed as well as price.

urchase Orders:

1 purchase order is prepared from the purchase re!uisition, with sufficient copies to meet the

re!uirements of the company organization structure. Lsually at least four are prepared, the

original for the vendor and copies for the purchasing department files, the accounts payable

department and the receiving department. The copy for the latter department may have the

!uantity ordered blocked out so that the count of material at receiving will not be influenced

by the !uantities shown on the purchase order.

The purchase order is a vital document in the materials accounting process, for when it is

accepted by the vendor, it becomes a contract. 1s a contract it must be complete and specific.

Therefore, along with the list of items which are ordered, the purchase order should also

contain the terms and conditions like the re!uired delivery date, packing and shipping

instruction, insurance instruction, billing instruction, and terms of payment. It is customary to

include clauses and conditions as to warranty, patent infringement, contractors liability when

services are to be performed etc. %uch clauses may be inserted as re!uired or be printed on

the face or back of the order with a definite and well marked statement that they are a part of

the contract. These clauses are very useful controlled devices from the point of view of

preventing costly legal entanglements.

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Receivin' Re orts:

@hen material is received, the !uantity is determined by counting, weighing or other

measurement by the receiving department. This is done to ensure that payment is made only

for goods actually received.

The receiving department prepares receiving reports, either on a special form or on a

receiving copy or copies of the purchase order.

ayment of Invoices:

endor's invoices are sent to the accounts payable department. 1pproved vendor's

invoices are filed by vendor according to date of payment. n that date a voucher is prepared

on which listed invoices of the vendor covered by the voucher. The che!ue is drawn for the

net amount indicated by the voucher. 1 combination che!ue and voucher form is fre!uently

used. The recording in the Invoice register may be done when the invoices are received or

after they are attached to die voucher for payment.

Internal Control:

The purchasing, receiving and payment procedures for goods and services are a vital

part of a system of internal control.

The matching of purchase orders, receiving records, and vendor's invoices assures that

payments are not made for goods and services not received and that the items of the invoice

are in agreement with those specified in the purchase order. This entire process aids in the

control of costs, for any payment for goods and services must ultimately be reflected in the

accounts as a cost of the current period or of a future period.

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+C UIRIN3 R+% 1+T*RI+2# RO1 T,* #TOR* ROO1

Reco'niAeneed for

materials inroduction

#toresRe>uisition 1aterials are sent to wor lace

4otifies store&lerk of need

Ge!uisition is recorded in$. Ge!uisition summary used to record general

ledger entry transferring G.>Js to @I(. erpetual inventory records*. Departmental cost records used to accumulate

materials costs by responsibility centers and todetermine costs for individual production

process.

+. Eob cost sheets used when manufacture of a 9ob shop variety and costs must be byindividual 9obs

/ournal entry:

To record total of re!uisition summery

Dr. @ork in process

&r. Gaw materials inventory.

The first step is the recognition of the fact that materials are needed for production. @orkers,

foreman and production control personnel are usually the people that recognize the need for material.

The stores re!uisition is prepared in order to obtain materials from the storeroom.

The stores re!uisition is the basic document behind general and subsidiary ledger entries charging

materials to work in process. The 0eneral edger entry resulting from stores re!uisitions is simply a

transfer of materials from the raw materials inventory to the work in process inventory. %uch an entry is

as follows: Dr. @ork in process &r. Gaw materials inventory.

#tores Re>uisition:

The stores re!uisition is the document, which is used to notify the storerooms that

materials are to be released for production. #or control purposes it is better to have the foreman and

Oor specified production control personnel re!uisition the materials.

In some plants the production control department may issue stores re!uisitions at the

same time that production schedules are issued. The foreman in such cases might be restricted only

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to the issuance of the re!uisitions for materials re!uired in e)cess of estimated or standard

!uantities. This e)cess stores re!uisition is usually a distinct form, which might re!uire a

supervisor's signature as well as foreman's signature. @aste of material cannot be hidden for long when

e)cess stores re!uisitions are used.

Recordin' the stores re>uisition $ the 3eneral 2ed'er:

The stores re!uisition is recorded in the general ledger and in vari%ous subsidiary ledgers.

1mong the usual subsidiary ledgers are the perpetual inventory cards, departmental cost

records, and 9ob cost sheets.

#TOR*# R* UI#ITION #U11+R-

Date Re>5 NoDe t $I De t$Il Total

Direct Indirect Direct Indirect Direct Indirect

Total

In the genera ledger, stores re!uisitions are recorded by a transfer from raw materials

inventory Aa creditB to work: in process Aa debitB

<ach stores re!uisition is not the sub9ect of a general ledger entry. The stores

re!uisitions for a month are totaled, and this total is the sub9ect of the above general edger

entry. rdinarily each stores re!uisition is recorded in a re!uisition summary which is totaledeach month to determine the dollar amount of the general ledger entry.

1 re!uisition summary shown above provides departmental distinctions as well as

distinctions between direct and indirect materials.

@hen the general ledger contains only one work in process account and one factory

overhead account, the monthly entry from the re!uisition summary would be

Dr. Q@ork in process Afor direct materialsB

Dr. #actory overhead Afor indirect materials )&r. Gaw materials inventory

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@hen the general ledger contains departmental accounts the monthly entry from the

re!uisition summary would be:

Dr. @ork in process"I

Dr. #actory overhead"I

Dr. @ork m process"EI

Dr. #actory verhead"fl

&r. Gaw materials inventory.

Recordin' the stores re>uisition$ a su"sidiary led'er:

The three basic subsidiary ledgers in which stores re!uisitions might be recorded are

the perpetual inventory cards, departmental cost records, and 9ob card sheets. erpetual

inventory are very useful for inventory control purposes, whereas departmental cost records

are valuable aids in accounting for each Qarea of responsibilityQ. In addition, departmental

cost records are indispensable aids in calculating unit costs when production is of a

continuous process nature, for e)ample, a canning factory.

%tores re!uisitions can be recorded individually in subsidiary ledgers, or if

summarizations are possible, re!uisitions can be recorded in summary form. The perpetual

inventory cards are to be useful aids in controlling inventories, the stores re!uisitions must berecorded therein at least once each week or even daily for critical ma9or materials.

Departmental cost records can take many different forms. ;owever, if they are to be

complete, direct materials, direct labor, and factory overhead must be a part of such records.

The 9ob cost sheet contains complete information on the costs pertaining to a 9ob.

Direct labor, direct material, other direct charges, and factory overhead are all included on a 9ob cost sheet. ther direct charge includes such items as special tools and dies which can be

and are worthwhile tracing to individual 9obs. #actory overhead per 9ob is usually estimated

in terms of direct labor costs

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IN0*NTOR- 0+2U+TION +ND CO#T 2O%#

Inventory cost

ne can readily visualize the determination of inventory !uantities by physical count

or by use of perpetual inventory records. @hen this !uantity is determined, it must be

multiplied by C unit cost in order to determine the inventory value that is used on financial

statements.

Trade and !uantity discounts are to be e)cluded from unit cost since these discounts

e)ist for the purpose of defining the true invoice cost of merchandise. &ash discounts, on the

other hand, have been considered as a reward for early payment and as a penalty for late

payment. The QrewardQ has often been interpreted as a form of income, whereas the

QpenaltyQhas often been interpreted as a loss rather than as a part of unit cost. Thus it would

not be difficult to find difference of opinion as to whether invoice cost includes or e)cludes

cash discount.

@hen the Qcurrent replacement costQ of material on hand at the close of a year is less

than the actual cost, the inventory value is reduced to replacement cost Acurrent market

priceB. Thus the acceptable basis inventory valuation is the Qlower of cost or marketQ or

more properly the Qlower of actual cost or replacement costQ.

The determination of inventory values is very important from the point of view of the

balance sheet and the income statement since costs not included in the inventory Athe balance

sheetB are considered to be e)pensive and are thus included in the income statement.

0aluation of inventories $ methods of determination:

1lthough the prime consideration in the valuation of inventories is cost, there are a

number of generally accepted methods of determining die cast of inventories at the close of

an accounting period. The most commonly used methods ate first"in first"out A#I# B

average, and last"in first "out A I# B. The selection of the method for determining cost for

inventory valuation is important

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for it has a direct bearing on the cost of goods sold and conse!uently on profit. @hen a

method is selected, it must be used consistently and cannot be changed from year to year in

order to secure the most favorable profit for each year.

F5 T,* I O 1*T,OD ( IR#T$IN FR#T$OUT 1*T,OD)

Lnder this method it is assumed that the materials or goods first received are the first to be

issued or sold. Thus, according to this method, the inventory on a particular date is presumed

to be composed of the items which were ac!uired most recently.

The value of inventory would remain the same even if the Qperpetual inventory systemQ is

followed. 1dvantages"The #I# method has the following advantages.

$. alue of stock nearer to current market prices since stock is presumedto consisting of, the most recent purchases.

( It is based on cost and, therefore, no unrealized profit enters into the

financial accounts of the company.

*. The method is realistic since it takes into account the normal procedure of

utilizing or selling those materials or goods, which have been longest in

stock

+dvanta'es9

It takes into account the current market conditions while valuing materials issued to different

9obs or calculating the cost of goods sold. The method is based on cost and, therefore, no

unrealized profit or loss is made on account of use of this method. The method is most

suitable for materials, which are of a bulkyard non"perishable type.

Disadvanta'es: $ The method suffers from the following disadvantages. It involves

complicated calculations and hence increases the possibility of clerical errors.

&omparison between different 9obs using the same type of material becomes sometimes

difficult. 1 9ob commenced a few minutes after another 9ob may have to bear an entirely

different charge when two different lots with different prices are to be charged for the same

material drawn.


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The #I# method of valuation of inventories is particularly suitable in the following

circumstances.

AiB The materials or goods are of perishable nature.

AiiB The fre!uency of purchases is not large

AiiiB There are only moderate fluctuations in the prices of materials or goods

purchased.

AivB >aterials are easily identifiable as belonging to a particular purchase

lot.

5 T,* 2I O 1*T,OD (2+#T$IN IR#T$OUT 1*T,OD)

This method is based on the assumption that last item of materials or goods purchased

are the first to be issued or sold. Thus, according to this method, inventory consists of items

purchased at the earliest cost. 1dvantages: " This method has the following

G5 .+#* #TOC6 1*T,OD:

This method is based on the contention that each enterprise maintains at all times a

minimum !uantity of materials or finished goods in its stock. This !uantity is termed as basestock. The base stock is deemed to have been created out of the first lost purchased therefore,

it is always valued at this price and is carried forward as a fi)ed asset. 1ny !uantity over and

above the base stock is valued in accordance with any other appropriate method. 1s this

method aims at matching current costs to current sales, the I# method will be most

suitable for valuing stock of materials or finished goods other than the base stock. The base

stock method has the advantage of charging out materials O goods at actual cost. Its other

merits or demerits will depend on the method, which is used for valuing materials other than

the base stock.

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H5 %*I3,T*D +0*R+3* RIC* 1*T,OD:

This method is based on the presumption that once the materials are put into a

common bin, they lose their identity. ;ence, the inventory consists of no specific batch of

goods. The inventory is thus priced on the basis of average prices paid for the goods,

weighted according to the !uantity purchased at each price.

@eighted average price method is very popular on account of its being based on the

total !uantity and value of materials purchased besides reducing number of calculations. 1s a

matter of fact the new average price is to be calculated only when a fresh purchase of

materials is made in place of calculating it every now and then as is the case with #I# ,

I# methods. ;owever, incase of this method different prices of materials are charged

from production particularly when the fre!uency of purchases and issuesOsales is !uite large

and the concern is following perpetual inventory system.

0aluation of inventories$im act on the flow of costs:

1s should be !uite evident, the different methods of calculating inventory values will

all have their impact on the flow of costs through the balance sheet into the income

statement. The dollars that are paid to ac!uire inventory are always divided between the

balance sheet AinventoriesB and the income statement Acost of goods soldB, there is no other

place to put them. Thus if the different methods of calculating inventory produce differing

inventory values, they will also produce differing cost of goods sold figures, and the

differing cost of goods sold figures will naturally produce differing profit figures.

In order to show the impact of inventory valuation on cost flows, the preceding

e)hibits are summoned. <ach method produces a different figure for the transfer of raw

materials to work in process. These differences appear to be small, but the only reason for

this is that the dollar amounts have been kept small to make the illustration workable.

@ith the transfer of materials to work in process, the cost flow or transfer will have its

impact on the work in process inventory and the transfer of completed merchandise to

finished goods. Lltimately when goods are sold, the varying methods of valuing inventories

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will have their impact on cost of goods sold and the profit. The effects of the cost flows on

cost of goods sold and profits can be accentuated further if the differing methods of valuing

inventories are applied to work in process and finished goods.

Different "etween evaluation methods

The differences in inventory values and cost flows for each of the method illustrated

result from only one factor that is, changing purchase prices or unit costs. If purchase prices

had remained stable or unchanged, each method would have produced the same inventory

value and cost flow.

&ost flows and inventory are e)actly the same under stable prices. @ith a rising pricelevel, the I# method produces the highest cost flow and the lowest inventory. @ith a

felling price level, the I# method produces the lowest cost flow and the highest inventory.

The cost flow under I# follows the price level, I# produces larger cost flows when

prices are rising and smaller cost flows when prices are falling. 1 final item to consider is that

the average method produces results, which fell between the e)tremes of I# and #I# .

*valuation of methods$can we 8ustify the differencesThe best method of inventory valuation might be Qspecific identificationQ, that is, the

units in inventory should be identified with the specific invoices and thus specific unit costs

to which they apply.

#ortunately, the #I# method constitutes a very useful appro)imation to the specific

identification method if one can reasonably assume that the actual flow of materials is first"

in first" out This assumption is not unreasonable and thus we have stated the main argument

for the #I# inventory scheme, that is, the hysical flow of materials would match the flow

of costs under the first"in first"out method.

@hen the units in inventory are identical, interchangeable and do not follow any

specific pattern of physical flow, the average cost system would seem to be appropriate.

The primary difference between the #I# and average methods is centered on the

physical flow since both methods could involve identical and interchangeable units. The

#I# method fits a first"in first"out physical flow. The average method fits a system, which

has no specific pattern of physical flow. #inding a situation where there is no specific pattern

of physical flow should be !uite difficult because of the fact that most inventory items are

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sub9ect to deterioration and any reasonable person would attempt to reduce such deterioration

by instituting a physical flow appro)imating first"in first"out. The ma9or reason for the use of

the average method is something other than the lack of specific physical flow.

rdinarily the I# method cannot be 9ustified on the basis of the physical flow of

materials. Lnder conditions of changing prices, the advocates of I# say that the only

method, which matches costs and revenues, is the I# method. The I# method assumes

that the latest item is the first item out, and thus the current costs of materials are matched

with the current selling prices or current revenues. The #I# method, on the other hand,

assumes that the first item in is the first item out, and thus the non"current costs of materials

are matched with current selling prices or current revenues. This matching current cost with

current revenues is the essence of the argument for the I# method.

1s can be seen by the above comments, there is no one best method of valuing

inventories. The method chosen should fit the situation. 1 physical flow pattern comparable

to #I# would force one to consider the #I# method. The lack of a discernible physical

flow pattern would force one to consider the average method. &oncentration on cost flows, as

distinct from physical flows, w ould force one to consider the I# method especially where

there appears to be a discernible trend towards rising prices Aor falling pricesB as has been the

case in our economy during recent years.

Inventories valued at standard cost:

1 very useful method of valuing inventories is at a standard cost. @ith a standard cost

system there is no need for spending a great deal of time and money tracing unit costs

through perpetual inventory records.

*R *TU+2 IN0*NTOR- C+RD UND*R + #T+ND+RD CO#T

#-#T*19

er etual Inventorylant : #tandard Costs:

Order uantity:2ocation: Order oint:

Date Descri tion On order Received Issued+vaila"le

On order On ,and

MBA Department, AIZZA College Of Engg & Tech *=

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1s shown above, there is need only for physical !uantities since the inventory value is

the physical !uantity multiplied by the standard cost. @ith the cost and value columns

disposed off, a perpetual inventory card can include additional data such as !uantities on

order. Muantities reserved, and !uantities available. These additional data are very useful for

inventory and production control purposes. n the basis of a few calculations concerning

actual units costs, inventories at a standard costs could easily be converted into inventories on

a #I# , a I# , or an average cost basis.

Inventory of O"solescence:

bsolete inventories cannot be used or disposed off at Qvalues carried on the books. #re!uent

reviews should be made of all inventories, and when obsolescence is indicated a re!uest for revaluation should be prepared for approval by management. The difference between original

and obsolete value should be recorded by a charge to an operating account. Inventory

obsolescence, and a credit to inventory. If the material is scrapped, this will be for the >l

inventory value of the material. If it is anticipated that the material can be sold at reduced

value or used in areas where it will be worth less than its original value, the entry would be

only for the amount of write down. %ome companies carry a salvage inventory and transfer to

it materials, which may be sold or used at reduced values. @here this is done, the entry would

be:

Dr. %alvage inventory

Dr. Inventory obsolescence

&r. Gaw material inventorO or %upplies inventory.

In order to know the inventory management system of %&& , a !uestionnaire analysis

has been served to the &ompany and got it filled up by stores >anager of the &ompany. The

!uestionnaire date has been presented below.

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The or'aniAation structure of inventory and stores de artment is asfollows5

Or'aniAation structure of #CC27 #tores

Director

C31 #tores

+ddl5 31 (#tores)

Dy5 31 (#tores)

#* (#TOR*#)

*;ecutive *n'ineer

+sst5 *n'ineer

Or'aniAation structure of +rea #tores

3eneral 1ana'er

Dy5 31 (#tores

*;ecutive *n'ineer

#tore 6ee er

#taff

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• The e)ecutive responsibilities to manage the inventory are to maintain inventorywithout stock"cuts or hampering of production.

• The company classifies inventory into #>'s, @I , %>'s, stores and spares Cconsumables.

• The company purchase inventory from local, non"local and sometimes imports.

• The ob9ective of inventory management of this company are :

iB >aintaining minimum inventoryiiB 4ot to hamper the productioninB avoid stock out situation

wB roper planning of materials

The &ompany plans for inventory re!uirements using 18& analysis techni!ue. Items costing

3/H are denoted as high level and grouped into '1.' type, medium level items value (/H will

be grouped into R8' type and the low level items valuing $/H will be taken into '&f type.

The &ompany plans for inventory consumption on monthly basis. The company values the

materials applying #I# and weighted average methods.

If there is any scrap materials, the company may sell to scrap dealers through >%T&

or it may re"utilize it. %ometimes some portion of scrap will be utilized for company's own

consumption and some other times some portion will be disposed and the same will be

accounted to rofit C oss account.

In order to control the inventory the company follows 18&, <D analysis and < M

techni!ues.

The purchasing procedure of this company is centralized.

The method of purchasing applied by the company is through tenders.

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The method adopted by the company for stock verification is done once in an year physically

with the help internal audit department. In general, this physical verification is done in the

month of Eanuary.

erified balance will be certified on the bin card by internal audit. The bin card and ledger

balance should be tallied with verified balance.

• The methods adopted for controlling the storage loss are checking with the storesledger, keeping detailed stock and stored ledger, periodic stock and comparing withstores ledger.

• The company is not maintaining any inventory norms, ratios.

• The present level of investment in inventory is e)cessive because of non"movingitems and obsolete items also in stock. In some sections like auto section, bearings Cmachine mining sections $/ to (/H of material can be counted as non"moving.

• 4ow the above system is being done through %1 modules. 1lso, %&& is planningfor perpetual auditing.

#tores 1ana'ementIn %ingareni, we have total $( stores:

+rea O encast #tores Central #tores +rea #tores Total

?0> 4il $ $ (6D 4il 4il $ $>40 $ 4il 4il $G0> * 4il $ +

8; 4il 4il $ $8 1 4il 4il $ $>> 4il 4il $ $%G 4il 4il $ $Total H F F

1 calendar programme for purchase of various items in different months is prepared

at &orporate evel.

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Calculation of net stoc to "e ordered (at area level)

ro9ected Ge!uirement A GB

1verage monthly consumption ) $

A$( months re!uirement U * months safety stockBP1

4et Ge!uirement A1ctualB

.G " stack"8. A8alance in orderB V8

<)ample: ast three years consumption

A/3"/2 U /2"/= U /="$/BO* for ascertaining yearly consumption 1fter processing purchase

order " when actually order is placed before selected supplier "1 reviewed re!uirement is sent

to purchase department by Oo. 0>A%toresB.

+D0+NT+3*# O CODI IC+TION:

$. <liminates stocking of same item under different items, nomenclatures or

by function or by use.

(. eliminates unnecessary varieties for e)ample " sizes.

*. <nables proper storage and prompt issue of materials.

+. #acilitates proper procurement and accounting.

. #acilitates introduction of modern inventory control.

-. #acilitates introduction of computerization for accounts and reporting.

&odification into class of material is done taking into consideration the characteristics

and use etc. 1ccounting is done on a weighted average basis opening balance !uantity

+N+2-#I#:

4on"moving item analysis

bsolete items

Insurance items

18& analysis based on consumer value

F6N analysis based on current value

urchase De artment $ ,ead office

O"8ective:

Gight !uantity, right !uality, right price, right supplier, right time at right destination.

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+ctivities:

• rocurement of various items according to calendar program C annual plans

• rocurement of imported items

• <stablishment of rate contracts, open orders, department agreements, annualmaintenance contracts.

• endor registration

• rocurement of medicines and medical e!uipment

• rocessing and awarding of 8 removal and drilling contract.

• &oal transport, sand transport contracts

• >aterial transport"rate contracts Athat is rate per kilometer is decidedB

• The re!uirement of various materials at area stores is placed before purchase

department in the form of want sheet by &entral %tores. 1fter receiving this

department initiates purchase procedures.

In case of revenue items, 3/H of previous year consumption can be processed by the

purchase department before receiving want sheet from stores. Thus, all processing can be

done beforehand.Then tender documents are prepared.

4otice inviting tender A4ITB., containing the general terms and conditions of the offer is given in following modes

l5 O en tender or 3lo"al tender: If item is to be imported, then global

Tender is given.

• If value of tenderW lakhs

• If reliable source of supplier not known

• 1dvertisement may bring better response.

• To avoid connivance of tenders.

5 2imited *n>uiry :$ 2imited en>uiry is floated in followin' cases9$

• alue of tender X akhs

• Geliable source of supply is known with previous record

• #or value of tender W lakhs" on emergencies.

• 1fter obtaining permission of finance and competent authority Ausually the 0eneral

>anager of the 1reaB limitedtender can be floated.


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• Information to at least firms. If less than firms, reasons for such action to be

e)plained and permission of chief of purchase is to be obtained.

4ow this limited tender process is differed and in 1reas also tenders are being

displayed in their website.

G5 #in'le tender:

If purchase is from original e!uipment manufacturer AorB sub"assembly

manufacturer, single tender is floated. If purchase is from authorized dealer list of

those persons to be obtained. If more than one authorized dealer in a particular area, discount

can be asked for.

H5 Rate Contract:

#or proprietary items and items procured regularly, long term contract Amay be one yearB is

entered to supply the material at a particular rate.

J5 Re eat Order:

4ormally this is undertaken to cut down lead time for procurement, but this is mostly

avoided.

• The original order is undertaken in normal course.

• 4ot more than ( years gap in original order and repeat order.

• There should not be declining price trend.

• Gepeat order could not e)ceed !uantity procured by original order Acumulative value

consideredB

• 4ot more than two repeat orders to be placed.

• %anction of competent authority to be taken.

Tender documents are purchased after paying re!uisite fees. Tenders are put in a

bo). 4ormally they are opened on @ednesdays in G0$ area and there are specific days for

each area. Three cover basis is adopted for all tenders.

art"1: Technical offer,

art"8: &ommercial terms C

art"&: rice bid

#irst technical evaluation is done and then price is considered. A $B

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E5 CI2 order "asis : #or e)plosives, cap lamps C their spares and other heavy e!uipment

like dumpers, dozers rate paid by &I is adopted.

D+T+ +N+2-#I#

The %&& inventory consists of stores and spares, stores in transit and under

inspection, stock of coal, stock of finished products. The various components of inventory

over a period of years from (// to (/$$ presented in the following table.

F5 CO1 ON*NT# O IN0*NTOR-

-ears #tores & # ares #tores in

Transit

#toc of Coal Total

Rs In 2ac sJ$ E FKFKH L GJGKEH FEJE GG LFJ

E$ FFJG EJL F HLLHH G FEJHK

$ K FK HHG GJFKH FF JE GEHJ K

K$ L LK L HFEEHH FH JH KJ

L$F H KEEF GLLLK LEELK GEKJEHE

F $FF J JEG G JEJG FL HJ GFHJLEF

INT*R R*T+TION:

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#rom the above table it can be understood that the inventory of %&& was recorded at Gs.

(**3=$ during the year (// "/- and it was showed upward trend up to (//3"/2.and

declined to Y. KJ 7 during the year (//2"/=.

5 CO1 ON*NTI+2 +N+2-#I#:

The &omponential analysis of inventory of %&& from the year (// "/- to (/$/"$$

is shown in the following table

CO1 ON*NTI+2 +N+2-#I#

AGupees in Z///B

-ears #tores &# ares

#tores inTransit

#toc of Coal

Total

J$ E FKFKH L(GK5KK@)

GJGKEH( 5JE@)

FEJE(G5JH@)

HE JKG

E$ FFJG(GE5KL@)

EJL F(H5HG@)

HLLHH(K5GG@)

JLLGHLE

$ KFLJH5K

(K 5FL)G J 5H(F 5 E)

FGFF5 E(H5LH)

EJFK5H

K$ LLK 5 L

(K 5H )

HFEE5HH(FH5J)

FH J5H(H5LK)

KJ 5

L$F H KE5EK(E 5 H) GLL5LK(E5J) LEEK5K( E5 G) GEKJJ5JG

F $FF J J5EG(J 5 )

G JE5JG( 5E)

FL H5JF(H 5FH)

HL JE5E

INT*R R*T+TION:

rom the a"ove ta"le it can "e inter reted that:The investment in stores and spares, stores in transit, stock of coal were registered at (.((H,

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3.-H, +/.$+H, respectively during the year (/$/"$$, During the year (// "/- the investment

in stores C spares, stores in transit, stock of coal, and stock of finished goods were registered

at *2.2=H, *-.2=H, 2(.$=H, and (.((H respectively.

G5 TR*ND +N+2-#I#:

Trend analysis techni!ue is applied to know the growth rate in investment of

inventory of %&& over the review period which is shown in the following table.

TR*ND +N+2-#I#

-ear Inventory (+mount in Crores)

J$ E HEE J5G

E$ JLLGH5LE

$ K GL 5KH

K$ L EFGL5JJ

L$F GHKGF5HE

F $FF H GJH5E

INT*R R*T+TION:

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It is observed thee investment on inventory was the highest in (//-"/3. and swooning the

lowed in (//3"/2, It is also pertinent to say that the inventory levels are not even during the

study period. ;ence proper control is re!uired to maintain e!ual inventory with a margin of

UO" H.

H5 IN0*NTOR- TURN O0*R R+TIO:

This ratio indicates the number of items the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Thisratio is calculated by applying the following formula.

Inventory turn over ratio < Net sales Bavera'e inventory at cost

IN0*NTOR- TURNO0*R R+TION:

-ear Net sales (#ales of coal= co e = coaltar fuel)

+vera'e stoc (Closin' #toc )

Ratio

J$ E GE LF GHFJ 5EK F E 5H

E$ G L JJ G JFF5JE FFEJ5L

$ K HHLLEK H F5 L FK G5J

K$ L JJ H EFGL5GJ F H5 E

L$F EKJGKH GHKGF5HE FLE 5

F $FF KJKH H GJF5E FEJL5HL

INT*R R*T+TION:

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#rom the above table it can be observed that inventory turnover ratio $/-(.+/ during

the year (// "/- and it gradually increased to($/+.(- in the year (//2"/=. It

indicates that the stock has been turned into sales very !uickly.The inventory turnover

ratio was shown fluctuating trend.

J5 *RC*NT+3* O IN0*TOR- O0*R CURR*NT +##*T#:

In the order to know the percentage of inventory over current assets the ratio

f inventory to current assets is calculated and which is presented in the following tables:

Inventory over current ratio P AInventory O &urrent assetsB )$//

-ear Inventory Current assets Ratio (@)J$ E HEE J5G K K 5K 5 JGE$ JLLGH5LE F GHGE5 5J L

$ K GL 5KH FJ L 5 J 5FJFK$ L EFGL5GJ FEEHEE5L 5FJL$F GHKGF5HE FE FKE5 E 5 FH

F $FF H GJH5E KH HE5EL 5FEE

INT*R R*T+TION9

#rom the above table it can be understood that the H of inventory over current assets ratio

was showing a declining trend e)cept in the year (// " /-. During the year (// " /-the ratio

was /./ *H and it gradualO increased to /.$ $H .


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E5 *RC*NT+3* O IN0*NTOR- O0*R TOT+2 +##*T#(CURR*NT +##*T# = I?*D +##*T#):

-*+R IN0*NTOR- TOT+2 +##*T R+TIO (@)

J$ E HEE J5G EELGH5HK 5FK

E$ JLLGH5LE KJ E5L 5 F

$ K GL 5KH J FG5EK 5 L

K$ L EFGL5GJ LLE K5 G 5 K

L$F GHKGF5HE JFHFK5HF 5FGK

F $FF H GJH5E HEGG K5KK 5F

INT*R R*T+TION:

#rom the above table it can be understood that the percentage of inventory over total assets

ratio was showing declining trend. During the year (//3"/2 the ratio was /./=H and it was


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increased to /.$*2H in the year (//="$/ and the started declining up to /.$/ in the year (/$/"

$$.

5 UIC6 R+TIO9

The !uick ratio is the relationship between !uick assets to current liabilities. Muick

ratio is more rigorous test of liability position of a firm. It Es computed by applying

the following formula.

MLI&? G1TI P Muick 1ssetsO&urrent liabilities, where: Muick 1sset P &urrent assets K Inventory

-*+R uic +ssets Current lia"ilities uic Ratio

J$ E EH7H 7GEG J LE5E 5K H

E$ G7 E7 K J 5H 5L

$ K FJJ J5H F LJF5 F 5 FF

K$ L FE EJF5EE G HE F5LL 5J

L$F FJELL 5K KLLJF5FE F5 H

F $FF JKHE5F GFK LF5L 5 KEE

INT*R R*T+TION:


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#rom the above table it can be understood that the H of !uick assets to current liabilities i.e.,

the !uick ratio was showing an increasing trend till (//="$/ and then was declining till the

year (/$/"$$.During the year (// "/- the !uick ratio was /.2/+ and it gradually Increased to

/.=/3 till the year (//-"/3 and then started declining to /. (3 during the year (//2"/=.

INDIN3#

• The inventory of %&& was recorded at Gs. (**3=$ during the year (// "/- and it

was showed upward trend up to (//3"/2

• The investment in stores and spares, stores in transit, stock of coal were registered

at (.((H, 3.-H, +/.$+H, respectively during the year (/$/"$$, During the year

(// "/- the investment in stores C spares, stores in transit, stock of coal, and stock of

finished goods were registered at *2.2=H, *-.2=H, 2(.$=H, and (.((H respectively

• Inventory turnover ratio $/-(.+/ during the year (// "/- and it gradually increased to

($/+.(- in the year (//2"/=

• Inventory over current assets ratio was showing a declining trend e)cept in the year (// " /-. During the year (// " /-the ratio was /./ *H and it gradualO increased to

/.$ $H.

• The !uick ratio was showing an increasing trend till (//="$/ and then was declining

till the year (/$/"$$.During the year (// "/- the !uick ratio was /.2/+ and it

gradually increased to /.=/3 till the year (//-"/3 and then started declining to /. (3

during the year (//2"/=.


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#U33*#TION#

• rovision of internet facility to all the stores in %&& to have effective online communication.

• %tock transfers from one stores to others stores to be done effectively.

• Disposal action for obsolete and non"moving items to be takes up on priority. Indent.

The percentage of inventory over the current assets during the year (//2"/= is $ .3H

and has increased to $-.-3H during the year (/$/"$$.

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CONC2U#ION

n this chapter an attempt is made to give the conclusions at a glance on inventorymanagement of %ingareni &ollieries &ompany imited. The #ollowing conclusions

have been drawn:

• verall, the inventory management in %&& is up to the mark, whereby ade!uatesupplies of materials and stores, minimization of stock outs and avoided costlyinterruptions in operations.

• It has kept down by Investment in inventories, inventory carrying cost and

obsolescence losses to the minimum through purchasing economies by themeasurement of re!uirements on the basis of recorded e)perience.

• It also enables the management to make cost and consumption. &omparisons betweenoperations and periods

• The total of the components of inventory recorded in the year: (/$/"$$is *$,+ ,=-$,AGs in Z///B and has increased to *-,2 ,-+- AGs in Z///B by the year (//="$/

• The component analysis has shown a declined trend and its total is +=( -.-3 AGs. InZ///B during the year (/$/"$$

• Trend analysis of the inventory has increased at (/$/"$$ +3* +.-3 has declined to

*+2*$.+-during the year (//="$/.

• The inventory turnover ratio has shown a fluctuating trend and by the year (/2"/= itis ($/+.(-H,

• The inventory conversion period has been during the year (/$/"$$$- =.+=

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• The percentage of inventory over the current assets during the year (/$/"$$ is/.$--3H and has declined to /.$ 3H during the year (//2"/=.

• The percentage of inventory over the total assets is /.$/H during the year (/$/"$$,

which has increased to /.$*2H by the year (//="$/

.I.2IO3R+ ,-

.oo s:

>anagement 1ccounting G.?.%harma

rincipals C ractice %hashi ?. 0upta

Theory C ractice rasanna &handra

>anagement &ontrol %.4.>urthy

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