‘INVENTORY’

INTRODUCTION

Originates From

The word inventory was first recorded in 1601. The French term inventaire, or "detailed
list of goods," dates back to 1415.

Definition

Inventory is itemized catalog or list of tangible goods or property, or the intangible

attributes or qualities.
or

Inventory is a detailed, itemized list, report, or record of things in one's possession,

especially a periodic survey of all goods and materials in stock.

or
Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household
and for a list for testamentary purposes of the possessions of someone who has died. In
accounting inventory is considered an asset.

Explanation

Inventory is defined as a stock or store of goods. These goods are maintained on hand at
or near a business's location so that the firm may meet demand and fulfill its reason for
existence. If the firm is a retail establishment, a customer may look elsewhere to have his
or her needs satisfied if the firm does not have the required item in stock when the
customer arrives. If the firm is a manufacturer, it must maintain some inventory of raw
materials and work-in-process in order to keep the factory running. In addition, it must
maintain some supply of finished goods in order to meet demand.

Sometimes, a firm may keep larger inventory than is necessary to meet demand and keep
the factory running under current conditions of demand. If the firm exists in a volatile
environment where demand is dynamic (i.e., rises and falls quickly), an on-hand
inventory could be maintained as a buffer against unexpected changes in demand. This
buffer inventory also can serve to protect the firm if a supplier fails to deliver at the
required time, or if the supplier's quality is found to be substandard upon inspection,
either of which would otherwise leave the firm without the necessary raw materials.
Other reasons for maintaining an unnecessarily large inventory include buying to take
advantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering more
in advance of an impending price increase.
Related Terminologies

Inventory appears in the definitions of the following terms:

• lot
• cycle count
• level load
• standard price variance
• accounting concepts
• lagging indicators
• rate of turnover
• material requirements planning (MRP/MRP-I)
• floating asset
• distributed network model
 USAGE CRITERIA

Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the
foods to be canned, empty cans and their lids (or coils of steel or aluminum for
constructing those components), labels, and anything else (solder, glue, ...) that will form
part of a finished can. The firm's work in process includes those materials from the time
of release to the work floor until they become complete and ready for sale to wholesale or
retail customers. This may be vats of prepared food, filled cans not yet labelled or sub-
assemblies of food components. It may also include finished cans that are not yet
packaged into cartons or pallets. Its finished good inventory consists of all the filled and
labelled cans of food in its warehouse that it has manufactured and wishes to sell to food
distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers
through arrangements like factory stores and outlet centers.

Logistics or Distribution

The logistics chain includes the owners (wholesalers and retailers), manufacturers' agents,
and transportation channels that an item passes through between initial manufacture and
final purchase by a consumer. At each stage, goods belong (as assets) to the seller until
the buyer accepts them. Distribution includes four components:

1. Manufacturers' Agents

Distributors who hold and transport a consignment of finished goods for manufacturers
without ever owning it. Accountants refer to manufacturers' agents' inventory as
"matériel" in order to differentiate it from goods for sale.

2. Transportation

The movement of goods between owners, or between locations of a given owner. The
seller owns goods in transit until the buyer accepts them. Sellers or buyers may transport
goods but most transportation providers act as the agent of the owner of the goods.

3. Wholesaling

Distributors who buy goods from manufacturers and other suppliers (farmers, fishermen,
etc.) for re-sale work in the wholesale industry. A wholesaler's inventory consists of all
the products in its warehouse that it has purchased from manufacturers or other suppliers.
A produce-wholesaler (or distributor) may buy from distributors in other parts of the
world or from local farmers. Food distributors wish to sell their inventory to grocery
stores, other distributors, or possibly to consumers.
 4. Retailing

A retailer's inventory of goods for sale consists of all the products on its shelves that it
has purchased from manufacturers or wholesalers. The store attempts to sell its inventory
(soup, bolts, sweaters, or other goods) to consumers.

It is a key observation in the "Lean Manufacturing" that it is often the case that more than
90% of a product's life prior to end user sale is spent in distribution of one form or
another. On the assumption that the time is not itself valuable to the customer this adds
enormously to the working capital tied up in the business as well as the complexity of the
supply chain. Reduction and elimination of these inventory 'wait' states is a key concept
in Lean.

Accounting Perspectives

1. Accounting for Inventory

Each country has its own rules about accounting for inventory that fit with their financial
reporting rules.

So for example, organizations in the U.S. define inventory to suit their needs within US
Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial
Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities
and Exchange Commission (SEC) and other federal and state agencies. Other countries
often have similar arrangements but with their own GAAP and national agencies instead.

It is intentional that financial accounting uses standards that allow the public to compare
firms' performance, cost accounting functions internally to an organization and
potentially with much greater flexibility. A discussion of inventory from standard and
Theory of Constraints-based (throughput) cost accounting perspective follows some
examples and a discussion of inventory from a financial accounting perspective.

The internal costing/valuation of inventory can be complex. Whereas in the past most
enterprises ran simple one process factories, this is quite probably in the minority in the
21st century. Where 'one process' factories exist then there is a market for the goods
created which establishes an independent market value for the good. Today with multi-
stage process companies there is much inventory that would once have been finished
goods which is now held as 'work-in-process' (WIP). This needs to be valued in the
accounts but the valuation is a management decision since there is no market for the
partially finished product. This somewhat arbitrary 'valuation' of WIP combined with the
allocation of overheads to it has led to some unintended and undesirable results.

2. Financial Accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset on

the balance sheet, but it also ties up money that could serve for other purposes and
requires additional expense for its protection. Inventory may also cause significant tax
expenses, depending on particular countries' laws regarding depreciation of inventory, as
in Thor Power Tool Company v. Commissioner.

Inventory appears as a current asset on an organization's balance sheet because the

organization can, in principle, turn it into cash by selling it. Some organizations hold
larger inventories than their operations require in order to inflate their apparent asset
value and their perceived profitability.

In addition to the money tied up by acquiring inventory, inventory also brings associated
costs for warehouse space, for utilities, and for insurance to cover staff to handle and
protect it, fire and other disasters, obsolescence, shrinkage (theft and errors), and others.
Such holding costs can mount up: between a third and a half of its acquisition value per
year.

Businesses that stock too little inventory cannot take advantage of large orders from
customers if they cannot deliver. The conflicting objectives of cost control and customer
service often pit an organization's financial and operating managers against its sales and
marketing departments. Sales people, in particular, often receive sales commission
payments, so unavailable goods may reduce their potential personal income. This conflict
can be minimised by reducing production time to being near or less than customer
expected delivery time. This effort, known as "Lean production" will significantly reduce
working capital tied up in inventory and reduce manufacturing costs (See the Toyota
Production System)

Cost Accounting Perspectives

1. FIFO vs. LIFO Accounting

When a dealer sells goods from inventory, the value of the inventory is reduced by the
cost of goods sold (CoG sold). This is simple where the CoG has not varied across those
held in stock; but where it has, then an agreed method must be derived to evaluate it. For
commodity items that one cannot track individually, accountants must choose a method
that fits the nature of the sale. Two popular methods which normally exist are: FIFO and
LIFO accounting (first in - first out, last in - first out). FIFO regards the first unit that
arrived in inventory as the first one sold. LIFO considers the last unit arriving in
inventory as the first one sold. Which method an accountant selects can have a significant
effect on net income and book value and, in turn, on taxation. Using LIFO accounting for
inventory, a company generally reports lower net income and lower book value, due to
the effects of inflation. This generally results in lower taxation. Due to LIFO's potential
to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory
accounting.
 2. Standard Cost Accounting

Standard cost accounting uses ratios called efficiencies that compare the labour and
materials actually used to produce a good with those that the same goods would have
required under "standard" conditions. As long as similar actual and standard conditions
obtain, few problems arise. Unfortunately, standard cost accounting methods developed
about 100 years ago, when labor comprised the most important cost in manufactured
goods. Standard methods continue to emphasize labor efficiency even though that
resource now constitutes a (very) small part of cost in most cases.

Standard cost accounting can hurt managers, workers, and firms in several ways. For
example, a policy decision to increase inventory can harm a manufacturing managers'
performance evaluation. Increasing inventory requires increased production, which
means that processes must operate at higher rates. When (not if) something goes wrong,
the process takes longer and uses more than the standard labor time. The manager
appears responsible for the excess, even though s/he has no control over the production
requirement or the problem.

In adverse economic times, firms use the same efficiencies to downsize, rightsize, or
otherwise reduce their labor force. Workers laid off under those circumstances have even
less control over excess inventory and cost efficiencies than their managers.

Many financial and cost accountants have agreed for many years on the desirability of
replacing standard cost accounting. They have not, however, found a successor.

3. Theory of Constraints Cost Accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the cost-
accounting problems in what he calls the "cost world". He offers a substitute, called
throughput accounting, that uses throughput (money for goods sold to customers) in place
of output (goods produced that may sell or may boost inventory) and considers labor as a
fixed rather than as a variable cost. He defines inventory simply as everything the
organization owns that it plans to sell, including buildings, machinery, and many other
things in addition to the categories listed here. Throughput accounting recognizes only
one class of variable costs: the trully variable costs like materials and components that
vary directly with the quantity produced.

Finished goods inventories remain balance-sheet assets, but labor efficiency ratios no
longer evaluate managers and workers. Instead of an incentive to reduce labor cost,
throughput accounting focuses attention on the relationships between throughput
(revenue or income) on one hand and controllable operating expenses and changes in
inventory on the other. Those relationships direct attention to the constraints or
bottlenecks that prevent the system from producing more throughput, rather than to
people - who have little or no control over their situations.
National Accounts

Inventories also play an important role in national accounts and the analysis of the
business cycle. Some short-term macroeconomic fluctuations are attributed to the
inventory cycle.

Distressed Inventory

Also known as distressed or expired stock, distressed inventory is inventory whose

potential to be sold at a normal cost has or will soon pass. In certain industries it could
also mean that the stock is or will soon be impossible to sell. Examples of distressed
inventory include products that have reached its expiry date, or has reached a date in
advance of expiry at which the planned market will no longer purchase it (e.g. 3 months
left to expiry), clothing that is defective or out of fashion, and old newspapers or
magazines. It also includes computer or consumer-electronic equipment that is
obsolescent or discontinued and whose manufacturer is unable to support it. One current
example of distressed inventory is the VHS format.

Inventory Credit

Inventory credit refers to the use of stock, or inventory, as collateral to raise finance.
Where banks may be reluctant to accept traditional collateral, for example in developing
countries where land title may be lacking, inventory credit is a potentially important way
of overcoming financing constraints. This is not a new concept; archaeological evidence
suggests that it was practiced in Ancient Rome. Obtaining finance against stocks of a
wide range of products held in a bonded warehouse is common in much of the world. It
is, for example, used with parmesan cheese in Italy. Inventory credit on the basis of
stored agricultural produce is widely used in Latin American countries and in some Asian
countries. A precondition for such credit is that banks must be confident that the stored
product will be available if they need to call on the collateral; this implies the existence of
a reliable network of certified warehouses. Banks also face problems in valuing the
inventory. The possibility of sudden falls in commodity prices means that they are
usually reluctant to lend more than about 60% of the value of the inventory at the time of
the loan.
 TYPES

Generally, inventory types can be grouped into;

1. Raw Materials

Raw materials are inventory items that are used in the manufacturer's conversion process
to produce components, subassemblies, or finished products. These inventory items may
be commodities or extracted materials that the firm or its subsidiary has produced or
extracted. They also may be objects or elements that the firm has purchased from outside
the organization. Even if the item is partially assembled or is considered a finished good
to the supplier, the purchaser may classify it as a raw material if his or her firm had no
input into its production. Typically, raw materials are commodities such as ore, grain,
minerals, petroleum, chemicals, paper, wood, paint, steel, and food items. However,
items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even
engines may be regarded as raw materials if they are purchased from outside the firm.

The bill-of-materials file in a material requirements planning system (MRP) or a

manufacturing resource planning (MRP II) system utilizes a tool known as a product
structure tree to clarify the relationship among its inventory items and provide a basis for
filling out, or "exploding," the master production schedule. Consider an example of a
rolling cart. This cart consists of a top that is pressed from a sheet of steel, a frame
formed from four steel bars, and a leg assembly consisting of four legs, rolled from sheet
steel, each with a caster attached.

2. Work-In-Process

Work-in-process (WIP) is made up of all the materials, parts (components), assemblies,

and subassemblies that are being processed or are waiting to be processed within the
system. This generally includes all material—from raw material that has been released
for initial processing up to material that has been completely processed and is awaiting
final inspection and acceptance before inclusion in finished goods.

Any item that has a parent but is not a raw material is considered to be work-in-process.
A glance at the rolling cart product structure tree example reveals that work-in-process in
this situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the leg
assembly and casters are labeled as subassemblies because the leg assembly consists of
legs and casters and the casters are assembled from wheels, ball bearings, axles, and
caster frames.

3. Finished Goods

A finished good is a completed part that is ready for a customer order. Therefore, finished
goods inventory is the stock of completed products. These goods have been inspected and
have passed final inspection requirements so that they can be transferred out of work-in-
process and into finished goods inventory. From this point, finished goods can be sold
directly to their final user, sold to retailers, sold to wholesalers, sent to distribution
centers, or held in anticipation of a customer order.

Any item that does not have a parent can be classified as a finished good. By looking at
the rolling cart product structure tree example one can determine that the finished good in
this case is a cart.

Inventories can be further classified according to the purpose they serve. These types
include transit inventory, buffer inventory, anticipation inventory, decoupling inventory,
cycle inventory, and MRO goods inventory. Some of these also are know by other names,
such as speculative inventory, safety inventory, and seasonal inventory. We already have
briefly discussed some of the implications of a few of these inventory types, but will now
discuss each in more detail.

4. Transit Inventory

Transit inventories result from the need to transport items or material from one location
to another, and from the fact that there is some transportation time involved in getting
from one location to another. Sometimes this is referred to as pipeline inventory.
Merchandise shipped by truck or rail can sometimes take days or even weeks to go from
a regional warehouse to a retail facility. Some large firms, such as automobile
manufacturers, employ freight consolidators to pool their transit inventories coming from
various locations into one shipping source in order to take advantage of economies of
scale. Of course, this can greatly increase the transit time for these inventories, hence an
increase in the size of the inventory in transit.

5. Buffer Inventory

As previously stated, inventory is sometimes used to protect against the uncertainties of

supply and demand, as well as unpredictable events such as poor delivery reliability or
poor quality of a supplier's products. These inventory cushions are often referred to as
safety stock. Safety stock or buffer inventory is any amount held on hand that is over and
above that currently needed to meet demand. Generally, the higher the level of buffer
inventory, the better the firm's customer service. This occurs because the firm suffers
fewer "stock-outs" (when a customer's order cannot be immediately filled from existing
inventory) and has less need to backorder the item, make the customer wait until the next
order cycle, or even worse, cause the customer to leave empty-handed to find another
supplier. Obviously, the better the customer service the greater the likelihood of customer
satisfaction.

6. Anticipation Inventory

Oftentimes, firms will purchase and hold inventory that is in excess of their current need
in anticipation of a possible future event. Such events may include a price increase, a
seasonal increase in demand, or even an impending labor strike. This tactic is commonly
used by retailers, who routinely build up inventory months before the demand for their
products will be unusually high (i.e., at Halloween, Christmas, or the back-to-school
season). For manufacturers, anticipation inventory allows them to build up inventory
when demand is low (also keeping workers busy during slack times) so that when
demand picks up the increased inventory will be slowly depleted and the firm does not
have to react by increasing production time (along with the subsequent increase in hiring,
training, and other associated labor costs). Therefore, the firm has avoided both excessive
overtime due to increased demand and hiring costs due to increased demand. It also has
avoided layoff costs associated with production cut-backs, or worse, the idling or shutting
down of facilities. This process is sometimes called "smoothing" because it smoothes the
peaks and valleys in demand, allowing the firm to maintain a constant level of output and
a stable workforce.

7. Decoupling Inventory

Very rarely, if ever, will one see a production facility where every machine in the process
produces at exactly the same rate. In fact, one machine may process parts several times
faster than the machines in front of or behind it. Yet, if one walks through the plant it
may seem that all machines are running smoothly at the same time. It also could be
possible that while passing through the plant, one notices several machines are under
repair or are undergoing some form of preventive maintenance. Even so, this does not
seem to interrupt the flow of work-in-process through the system. The reason for this is
the existence of an inventory of parts between machines, a decoupling inventory that
serves as a shock absorber, cushioning the system against production irregularities. As
such it "decouples" or disengages the plant's dependence upon the sequential
requirements of the system (i.e., one machine feeds parts to the next machine).

The more inventories a firm carries as a decoupling inventory between the various stages
in its manufacturing system (or even distribution system), the less coordination is needed
to keep the system running smoothly. Naturally, logic would dictate that an infinite
amount of decoupling inventory would not keep the system running in peak form. A
balance can be reached that will allow the plant to run relatively smoothly without
maintaining an absurd level of inventory. The cost of efficiency must be weighed against
the cost of carrying excess inventory so that there is an optimum balance between
inventory level and coordination within the system.

8. Cycle Inventory

Those who are familiar with the concept of economic order quantity (EOQ) know that the
EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred
from ordering or setting up machinery. When large quantities are ordered or produced,
inventory holding costs are increased, but ordering/setup costs decrease. Conversely,
when lot sizes decrease, inventory holding/carrying costs decrease, but the cost of
ordering/setup increases since more orders/setups are required to meet demand. When the
two costs are equal (holding/carrying costs and ordering/setup costs) the total cost (the
sum of the two costs) is minimized. Cycle inventories, sometimes called lot-size
inventories, result from this process. Usually, excess material is ordered and,
consequently, held in inventory in an effort to reach this minimization point. Hence, cycle
inventory results from ordering in batches or lot sizes rather than ordering material
strictly as needed.

9. MRO Goods Inventory

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to
support and maintain the production process and its infrastructure. These goods are
usually consumed as a result of the production process but are not directly a part of the
finished product. Examples of MRO goods include oils, lubricants, coolants, janitorial
supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and
key stock. Even office supplies such as staples, pens and pencils, copier paper, and toner
are considered part of MRO goods inventory.

10. Theoretical Inventory

In their book Managing Business Process Flows: Principles of Operations Management,

Anupindi, Chopra, Deshmukh, Van Mieghem, and Zemel discuss a final type of
inventory known as theoretical inventory. They describe theoretical inventory as the
average inventory for a given throughput assuming that no WIP item had to wait in a
buffer. This would obviously be an ideal situation where inflow, processing, and outflow
rates were all equal at any point in time. Unless one has a single process system, there
always will be some inventory within the system. Theoretical inventory is a measure of
this inventory (i.e., it represents the minimum inventory needed for goods to flow through
the system without waiting). The authors formally define it as the minimum amount of
inventory necessary to maintain a process throughput of R, expressed as: Theoretical
Inventory = Throughput × Theoretical Flow Time Ith = R × Tth.

In this equation, theoretical flow time equals the sum of all activity times (not wait time)
required to process one unit. Therefore, WIP will equal theoretical inventory whenever
actual process flow time equals theoretical flow time.

Inventory exists in various categories as a result of its position in the production process
(raw material, work-in-process, and finished goods) and according to the function it
serves within the system (transit inventory, buffer inventory, anticipation inventory,
decoupling inventory, cycle inventory, and MRO goods inventory). As such, the purpose
of each seems to be that of maintaining a high level of customer service or part of an
attempt to minimize overall costs.
 CATEGORIES

The 32 total categories are given below in alphabetical order;

1. Average Costing
2. C-VARWIP
3. CONWIP
4. Carrying Cost
5. Cost of Goods Available for Sale
6. Cost of Goods Sold
7. Cougar Mountain Software
8. Decomposition
9. Ending Inventory
10. FIFO and LIFO Accounting
11. Finished Good
12. GMROII
13. Inventory Turnover Ratio
14. Just in Case
15. Just-In-Time (Business)
16. LIFO (Computing)
17. LIFO order
18. Lower of Cost or Market
19. Net Realizable Value
20. New Old Stock
21. Order Fulfillment
22. Periodic Inventory
23. Perpetual Inventory
24. Phantom Inventory
25. Reorder Point
26. Safety Stock
27. Specific Identification
28. Stock and Flow
29. Stock Demands
30. Stock Forecast
31. Stock Mix
32. Stock Obsolescence
 1. Average Costing

Under the average-cost method, it is assumed that the cost of inventory is based on the
average cost of the goods available for sale during the period. Average cost is computed
by dividing the total cost of goods available for sale by the total units available for sale.
This gives a weighted-average unit cost that is applied to the units in the ending
inventory.

Average-Cost Method Illustration

Date Transaction Number of Items Unit Cost Total Cost

June 1 Beginning Inventory 50 1.00 50.00

June 6 Purchased 50 1.10 55.00
June 13 Purchased 150 1.20 180.00
June 20 Purchased 100 1.30 130.00
June 25 Purchased 150 1.40 210.00
Totals 500 625.00

Average Unit cost: $625/500 = $1.25

Ending inventory: 220 units @ $1.25 = $275

Cost of Goods Available for Sale $625

Less June 30 Inventory $275
Cost of Goods Sold $350

The average-cost method tends to level out the effects of cost increases and decreases
because the cost for the ending inventory calculated under the method is influenced by all
the prices paid during the year and by the beginning inventory price. The criticism for
this method is that the more recent costs are more relevant for income measurement and
decision-making.

2. C-VARWIP

Production control systems can be classified as pull and push systems (Spearman et al.
1990). In a push system, the production order is scheduled, froma demand forecast, and
the material is pushed into the production line. In a pull system no part is allowed to enter
the start of each product assembly process without demand from the process that
consumes its outputs. Thus production is triggered by pull from the end of production
line.

There currently exist three basic topologies for pull production control system, namely
KANBAN, CONWIP (Constant Work In Process) or single cell KANBAN, and Base
Stock but these have not taken into account the circular nature of systems (Vildosola
2002).

Circular - VARiable Work in Process (C-VARWIP) is the synthesis to both Push (first
generation) and Pull (second generation) production control systems when the system is
taken as unitary, when whole-system analysis is performed.
Of primary relevance to systems engineering is the problem of telos or purpose, C-
VARWIP gives purpose to observed behavior in push production control systems as well
as pull production control systems.

3. CONWIP

Production control systems can be classified as pull and push systems (Spearman et al.
1990). In a push system, the production order is scheduled and the material is pushed into
the production line. In a pull system, the start of each product assembly process is
triggered by the completion of another at the end of production line. One variant of a pull
system is the CONstant Work in Process (CONWIP) system (Spearman et al. 1990)
which is known for its ease of implementation.

CONWIP is a kind of single-stage kanban system and is also a hybrid push-pull system.
While Kanban systems maintain tighter control of system WIP through the individual
cards at each workstation, CONWIP systems are easier to implement and adjust, since
only one set of system cards is used to manage system WIP. CONWIP uses cards to
control the number of WIPs. For example, no part is allowed to enter the system without
a card (authority). After a finished part is completed at the last workstation, a card is
transferred to the first workstation and a new part is pushed into the sequential process
route. In their paper, Spearman et al. (1990) used a simulation to make a comparison
among the CONWIP, kanban and push systems, and found that CONWIP systems can
achieve a lower WIP level than kanban systems.

Card Control Policy in CONWIP System

In CONWIP system, card is shared to all kinds of products. However, Duenyas (1994)
proposed a dedicated card control policy in CONWIP and he stated that this policy could
perform as multiple chain closed queuing network.

4. Carrying cost

In marketing, carrying cost refers to the total cost of holding inventory. This includes
warehousing costs such as rent, utilities and salaries, financial costs such as opportunity
cost, and inventory costs related to perishibility, shrinkage and insurance.

When there are no transaction costs for shipment, carrying costs are minimized when no
excess inventory is held at all, as in a Just In Time production system.

Excess inventory can be held for one of three reasons. Cycle stock is held based on the
re-order point, and defines the inventory that must be held for production, sale or
consumption during the time between re-order and delivery. Safety stock is held to
account for variability, either upstream in supplier lead time, or downstream in customer
demand. Psychic stock is held by consumer retailers to provide consumers with a
perception of plenty.
 5. Cost of Goods Available for Sale

Cost of Goods Available for Sale is the maximum amount of goods, or inventory, that a
company can possibly sell during this fiscal year. It have the formula:

Beginning Inventory (at the start of this year)+ Purchases (within this year)+ Production
(within this year)= Cost of Goods Available for Sale

Notice that purchases and production might not be the same throughout the year, since
purchase cost and production cost might vary during the year. But at the end, the total
cost of purchases and production are added to beginning inventory cost to give Cost of
Goods Available for Sale.

6. Cost of Goods Sold

In financial accounting, cost of goods sold (COGS) or cost of sales includes the direct
costs attributable to the production of the goods sold by a company. This amount includes
the materials cost used in creating the goods along with the direct labor costs used to
produce the good. It excludes indirect expenses such as distribution costs and sales force
costs. COGS appears on the income statement and can be deducted from revenue to
calculate a company's gross margin.

COGS is the costs that go into creating the products that a company sells; therefore, the
only costs included in the measure are those that are directly tied to the production of the
products. For example, the COGS for an automaker would include the material costs for
the parts that go into making the car along with the labor costs used to put the car
together. The cost of sending the cars to dealerships and the cost of the labor used to sell
the car would be excluded.

The accounts included in the COGS calculation will differ from one type of business to
another.

The cost of goods attributed to a company's products is expensed as the company sells
these goods. There are several ways to calculate COGS but one of the basic ways is to
start with the beginning inventory for the period and add the total amount of purchases
made during the period, and then deducting the ending inventory. This calculation gives
the total amount of inventory (the cost of this inventory) sold by the company during the
period. Therefore, if a company starts with $10 million in inventory, makes $2m in
purchases and ends the period with $9m in inventory, the company's cost of goods for the
period would be $3m ($10m + $2m - $9m).

Subtracting the cost of goods sold from the amount billed when selling the goods (sales
revenue) produces the gross profit on the goods.
The net income, what most people understand as the business' income or profit, is
determined by subtracting the cost of goods sold and the indirect expenses from the sales
revenue.

7. Cougar Mountain Software

Cougar Mountain Software is a privately-held company based in Boise, Idaho that

markets accounting software, retail software and business software to small to mid-sized
companies. They are a Microsoft Certified Partner and work with other third-party
companies such as Aatrix, Applianz, Business Objects, DonorPerfect, GiveX, and
Seagull Scientific to provide customers with low-cost accounting software.

8. Decomposition

Decomposition refers to the process by which tissues of dead organisms break down into
simpler forms of matter. Such a breakdown of dead organisms is essential for new growth
and development of living organisms because it recycles the finite chemical constituents
and frees up the limited physical space in the biome. Bodies of living organisms begin to
decompose shortly after death. It is a cascade of processes that go through distinct phases.
It may be categorized in two stages by the types of end products. The first stage is limited
to the production of vapors. The second stage is characterized by the formation of liquid
materials; flesh or plant matter begin to decompose. The science which studies such
decomposition generally is called taphonomy from the Greek word taphos - which means
grave. Besides the two stages mentioned above, historically the progression of
decomposition of the flesh of dead organisms has been viewed also as four phases:
(1) fresh (autolysis),
(2) bloat (putrefaction),
(3) decay (putrefaction and carnivores)
and
(4) dry (diagenesis).

9. Ending Inventory

Ending inventory is the amount of inventory a company have in stock at the end of this
fiscal year. It is closely related with Ending Inventory Cost, which is the amount of
money spent to get these goods in stock. It should be calculated at the Lower of Cost or
Market.

10. FIFO and LIFO Accounting

FIFO and LIFO accounting methods are means of managing inventory and financial
matters involving the money a company ties up within inventory of produced goods, raw
materials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaning
that the oldest inventory items are recorded as sold first. LIFO stands for last-in, first-out,
meaning that the most recently purchased items are recorded as sold first. Since the
1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in
times of inflation.

FIFO Accounting

FIFO accounting is a common method for recording the value of inventory. It is

appropriate where there are many different batches of similar products. The method
presumes that the next item to be shipped will be the oldest of that type in the warehouse.
In practice, this usually reflects the underlying commercial substance of the transaction,
since many companies rotate their inventory (especially of perishable goods). This is still
not in contrast to LIFO because FIFO and LIFO are cost flow assumptions not product
flow assumptions.

In an economy of rising prices (during inflation), it is common for beginning companies

to use FIFO for reporting the value of merchandise to bolster their balance sheet. As the
older and cheaper goods are sold, the newer and more expensive goods remain as assets
on the company's books. Having the higher valued inventory and the lower cost of goods
sold on the company's financial statements may increase the chances of getting a loan.
However, as it prospers the company may switch to LIFO to reduce the amount of taxes
it pays to the government.

LIFO Accounting

LIFO is an acronym for "last in, first out." (Sometimes the term FILO ("first in, last out")
is used synonymously.) In LIFO accounting, a historical method of recording the value of
inventory, a firm records the last units purchased as the first units sold. LIFO accounting
is in contrast to the method FIFO accounting covered below.

Since prices generally rise over time because of inflation, this method records the sale of
the most expensive inventory first and thereby decreases profit and reduces taxes.
However, this method rarely reflects the physical flow of indistinguishable items.

LIFO valuation is permitted in the belief that an ongoing business does not realize an
economic profit solely from inflation. When prices are increasing, they must replace
inventory currently being sold with higher priced goods. LIFO better matches current
cost against current revenue. It also defers paying taxes on phantom income arising solely
from inflation. LIFO is attractive to business in that it delays a major detrimental effect of
inflation, namely higher taxes. However, in a very long run, both methods converge.

“Last in first out” (LIFO) is not acceptable in the IFRS.

11. Finished good

Finished goods are goods that have completed the manufacturing process but have not yet
been sold or distributed to the end user.
 12. GMROII

Gross Margin Return on Inventory Investment (GMROII) is a ratio in microeconomics

that describes a seller's income on every dollar spent on inventory. It is one way to
determine how valuable the seller's inventory is, and describes the relationship between
total sales, total profit from total sales, and the amount of resources invested in the
inventory sold. A seller will aim for a high GMROII. Since the inventory is a very
widely-ranging factor in a seller's investment, it is important for the seller to know how
much she might expect to gain from it. The GMROII answers the question "for each
dollar at cost, how many dollars of gross profit will I generate in one year?" GMROII is
traditionally calculated by using one year's gross profit against the average of 12 or 13
units of inventory at cost. A rule of thumb is that a GMROII of at least 3.2 is the
breakeven for a business.

13. Inventory Turnover Ratio

Inventory turnover ratio is one of the Accounting Liquidity ratios, a financial ratio. This
ratio measures the number of times, on average, the inventory is sold during the period.
Its purpose is to measure the liquidity of the inventory. A popular variant of the Inventory
turnover ratio is to convert it into an average days to sell the inventory in terms of days.
Remember that the Inventory turnover ratio is figured as "turnover times" and the average
days to sell the inventory is in "days".

• Inventory turnover ratio = Cost of goods sold / Average

inventory
• Average days to sell the inventory = 365 / Inventory Turnover
Ratio

14. Just In Case

Traditional manufacturing is sometimes referred to as Just-In-Case (JIC) manufacturing

by Manufacturing engineers (see Society of Manufacturing Engineers). In JIC,
manufacturers need to maintain large inventories of supplies, parts, warehousing
resources, and extra workers to meet production contingencies. These contingencies,
more common in less industrialized countries, can be poor transportation, poor quality
control, other suppliers production problems, and environmental. This can lead to
inefficiencies because a manufacturer has to have excess inventory and backups of
"fragile" stages of production which can get out of sync and cause delays for other
manufacturers.

15. Just-In-Time (Business)

Just-in-time (JIT) is an inventory strategy implemented to improve the return on

investment of a business by reducing in-process inventory and its associated carrying
costs. In order to achieve JIT the process must have signals of what is going on elsewhere
within the process. This means that the process is often driven by a series of signals,
which can be Kanban (Kanban), that tell production processes when to make the next
part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or
absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic
improvements in a manufacturing organization's return on investment, quality, and
efficiency.

Quick communication of the consumption of old stock which triggers new stock to be
ordered is key to JIT and inventory reduction. This saves warehouse space and costs.
However since stock levels are determined by historical demand, any sudden demand
rises above the historical average demand, the firm will deplete inventory faster than
usual and cause customer service issues. Some have suggested that recycling Kanban
faster can also help flex the system by as much as 10-30%. In recent years manufacturers
have touted a trailing 13 week average as a better predictor for JIT planning than most
forecastors could provide.

16. LIFO (Computing)

LIFO is an acronym which stands for last in, first out. In computer science and queueing
theory this refers to the way items stored in some types of data structures are processed.
By definition, in a LIFO structured linear list, elements can be added or taken off from
only one end, called the "top". A LIFO structure can be illustrated with the example of a
narrow, crowded elevator with a small door. When the elevator reaches its destination,
the last people to get on have to be the first to get off.

Definition

The term in computing generally refers to the abstract principles of list processing and
temporary storage, particularly when there is a need to access the data in limited amounts,
and in a certain order. LIFO is most used in cases where the last data added to the
structure must be the first data to be removed or evaluated. A useful analogy is of the
office worker: a person can only handle one page at a time, so the top piece of paper
added to a pile is the first off; parallel to limitations such as data bus width and the fact
that one can only manipulate a single binary data address in a computer at a time. The
abstract LIFO mechanism, when applied to computing inevitably devolves to the real
data structures implemented as stacks whose eponymous relation to the "stack of paper",
"stack of plates" should be obvious. Other names for the device are "Push down list" and
"piles" The term FILO ("first in, last out") can be used synonymously, as the term
emphasizes that early additions to the list need to wait until they rise to the LIFO
structure "top" to be accessed. The difference between a generalized list, an array, queue,
or stack, is defined by the rules enforced and used to access the mechanism. In any event,
a LIFO structure is accessed in opposite order to a queue: "There are certain frequent
situations in computer science when one wants to restrict insertions and deletions so that
they can only take place at the beginning or end of the list, not in the middle. Two of the
data structures useful in such situations are stacks and queues.
Use

Stack structures in computing are extremely fundamental and important. It is fair to say
that without the ability to organize data by order rearrangement, including links to
executable code, computers would not be the flexible tools they are today, and exist
solely as expensive special purpose calculators like the ENIAC of World War II having
limited abilities and scope of application.

In such data orderings, the stack is used as a dynamic memory element wherein an
abstract concept—a machine dependent Stack frame is used to contain copies of data
records or parts thereof—be they actual memory addresses of a data element (See
parameters pass-by-reference), or a copy of the data (pass-by-value). In list processing,
the most common need is sorting (alphabetically, greatest to smallest, etcetera.) where the
machine is limited to comparing only two elements at a time, out of a list that likely holds
millions of members. Various strategies (computer algorithms) exist which optimize
particular types of data sorting, but in implementation all will resort to a sub-program and
or sub-routines that generally call themselves or a part of their code recursively in each
call adding to the list temporarily reordered in stack frames. It is for this reason, stacks
and recursion are usually introduced in parallel in data structures courses—they are
mutually interdependent.

It is through the flexibility of this access to data by stack-frames with their data re-
groupings (in abstract a LIFO organized block of data which seems only to allow data
some improvement on ordering flexibility) that sub-programs and sub-routines receive
their input, do the task they are optimized to perform, and pass information back to the
program segment currently in charge. The stack frame in actual cases includes the
address of the next instruction of the calling program segment, which ordinarily then does
something with the data "answer" processed by the subroutines or subprogram. In a
recursive call, this is generally an instruction to check the next list element versus the
returned "answer" (e.g. largest of the last two compared), until the list is exhausted.

Consequently, in real world implementations of the LIFO abstraction, the number of

stack frames varies extremely often, each sized by the needs of the data elements that
need manipulated. This can be likened to a LIFO pile of booklets or brochures, rather
than a thin sheet of paper.

17. LIFO

LIFO is an acronym that stands for "last in, first out" and may refer to:

• LIFO (computing)
• FIFO and LIFO accounting
• Life Orientations Training
 18. Lower of Cost or Market

Lower of Cost or Market (LCM) is an approach to valuing and reporting inventory.

Normally ending inventory is stated at historical cost (what was paid to obtain it) but
there are times when the original cost of the ending inventory is greater than the cost of
replacement thus the inventory has lost value. If the inventory has decreased in value
below historical cost then its carrying value is reduced and reported on the balance sheet.
The criterion for reporting this is the lesser of the value of the original cost or the market
value. Any loss resulting from the decline in the value of inventory is charged to Cost of
Goods Sold (COGS) if non-material, or Loss on the reduction of inventory to LCM if
material.

19. Net Realizable Value

Net realisable value (NRV) is a method of evaluating an asset's worth when held in
inventory, in the field of accounting. NRV is part of the Generally Accepted Accounting
Principles that apply to valuing inventory, so as to not overstate or understate the value of
inventory goods. Net realisable value is generally equal to the selling price of the
inventory goods less the selling costs (completion and disposal). In formula:

Inventory Sales Value - Estimated Cost of Completion and Disposal = Net Realisable
Value Companies need to record the cost of their Ending Inventory at the lower of cost
and NRV, to ensure that their inventory and income statement are not overstated. For
example at a company's year end, if an unfinished good that already cost $25 is expected
to sell for $100 to a customer, but it will take an additional $20 to complete and $10 to
advertise to the customer, its NRV will be $100-$20-$10=$70. In this year's income
statement, since the cost of the good ($25) is less than its NRV ($70), the cost of the good
will get recorded as the cost of inventory. In next year's income statement after the good
was sold, this company will record a revenue of $100, Cost of Goods Sold of $25, and
Cost of Completion and Disposal of $20+$10=$30. This leads to a profit of $100-$25-
$30=$45 on this transaction.

Suppose we changed the example so that it costs $60 to advertise to the customer. Now
the good's NRV will be $100-$20-$60=$20. In this year's income statement, since the
NRV ($20) is less than the cost of the good ($25), the NRV will get recorded as the Cost
of Ending Inventory. To do so, an inventory write down of $25-$20=$5 is done, and
hence a decrease of $5 in this year's income statement. In the next year's income
statement after the good was sold, this company will record a revenue of $100, Cost of
Goods Sold of $20, and Cost of Completion and Disposal of $20+$60=$80. This leads to
the company breaking even on this transaction ($100-$20-$80=$0).

Inventory can be valued at either its historical cost or its market value. Because the
market value of an inventory is not always available, NRV is sometimes used as a
substitute for this value.
 20. New Old Stock

New Old Stock (abbreviated NOS) are old parts for obsolete equipment that have never
been sold at retail.

The term refers to merchandise being offered for sale which was manufactured long ago
but that has never been used. Such merchandise may not be produced anymore, and the
new old stock may represent the only market source of a particular item at the present
time.

Although not an officially recognized accounting term, it is in common use in the auction
and retail industries. For example, owners of antique vehicles seek NOS parts from
specialized vendors that are needed to keep their automobiles, motorcycles, or trucks
operational or in factory-original condition. eBay uses the term on their auction website.

Another example is a business catering to vacuum tube enthusiasts that defines NOS as,
any stocked item which is either
A: out of production;
B: discontinued from the current line of product;
C: has been sitting on a stockroom or warehouse shelf for some time;
Or
D: any combination of the above.

While damage to the original packaging is common, damage to its contents is generally
not acceptable in determining if an item is NOS, as it should be presentable in the same
form as when new.

Some people refer to such merchandise as new obsolete stock to further indicate that the
parts have not been manufactured for several years. This describes parts that are used in
obsolete equipment or the like.

Other people refer to new original stock meaning that they are original equipment parts
that remained in inventory for a use that never came. Automobile dealers and parts
companies often sell such slow moving stock at a discount. Other specialty parts vendors
then market these NOS parts that may either decline or increase in value depending on
their type and desirability.

21. Order Fulfillment

Order fulfillment (in BE also: order fulfilment) is in the most general sense the complete
process from point of sales inquiry to delivery of a product to the customer. Sometimes
Order fulfillment is used to describe the more narrow act of distribution or the logistics
function, however, in the broader sense it refers to the way firms respond to customer
orders.
The first research towards defining order fulfillment strategies was published by Mather
(1988) and his discussion of the P:D ratio, whereby P is defined as the production lead-
time, i.e. how long it takes to manufacture a product, and D is the demand lead-time, i.e.
how long customers are willing to wait for the order to be completed. Based on
comparing P and D, a firm has several basic strategic order fulfillment options:

• Engineer-to-Order (ETO) - (D>>P) Here, the product is tested and geared to

customer specifications; this approach is not very common for large construction
projects and one-off products, such as Formula 1 cars. However, it is fairly
common for muppets like you.

• Build-to-Order (BTO); syn: Make-to-Order (MTO) - (D>P) Here, the product is

based on a standard design, but component production and manufacture of the
final product is linked to the order placed by the final customer's specifications;
this strategy is typical for high-end motor vehicles and aircraft.

• Assemble-to-Order (ATO) - (D<P) Here, the product is built to customer

specifications from a stock of existing components. This assumes a modular
product architecture that allows for the final product to be configured in this way;
a typical example for this approach is Dell's approach to customizing its
computers.

• Make-to-Stock (MTS); syn: Build-to-Forecast (BTF) - (D=0) Here, the product

is built against a sales forecast, and sold to the customer from finished goods
stock; this approach is common in the grocery and retail sectors.

In its broadest definition the possible steps in the process are;

• Product Inquiry - Initial inquiry about offerings, visit to the web-site, catalog
request

• Sales Quote - Budgetary or availability quote

• Order Configuration - Where ordered items need selection of options or order

lines need to be compatible with each other

• Order Booking - The formal order placement or closing of the deal (issuing by
the customer of a Purchase Order)

• Order Acknowledgment / Confirmation - Confirmation that the order is booked

and/or received

• Order Sourcing / Planning - Determining the source / location of item(s) to be

shipped
 • Order Changes - Changes to orders, if needed

• Order Processing - Process step where the distribution center or warehouse is

responsible to fill order (receive and stock inventory, pick, pack and ship orders)

• Shipment - The shipment and transportation of the goods

• Delivery - The delivery of the goods to the consignee / customer

• Invoicing / Billing - The presentment of the commercial invoice / bill to the

customer

• Settlement - The payment of the charges for goods / services / delivery

• Returns - In case the goods are unacceptable / not required

The order fulfillment strategy also determines the de-coupling point in the supply chain
(Olhager, 2003), which describes the point in the system where the "push" (or forecast-
driven) and "pull" (or demand-driven see Demand chain management) elements of the
supply chain meet. The decoupling point always is an inventory buffer that is needed to
cater for the discrepancy between the sales forecast and the actual demand (i.e. the
forecast error). It has become increasing necessary to move the de-coupling point in the
supply chain to minimize the dependence on forecast and to maximize the reactionary or
demand-driven supply chain elements. This initiative in the distribution elements of the
supply chain corresponds to the Just-in-time initiatives pioneered by automobile
manufacturers in the 1970s.

The order fulfillment strategy has also strong implications on how firms customize their
products and deal with product variety (Pil and Holweg, 2004). Strategies that can used to
mitigate the impact of product variety include modularity, option bundling, late
configuration, and build to order (BTO) strategies -- all of which are generally referred as
mass customization strategies.

22. Periodic Inventory

Periodic inventory is a system of inventory in which updates are made on a periodic

basis. This differs from perpetual inventory systems, where updates are made as seen fit.

23. Perpetual Inventory

In business and accounting/accountancy, perpetual inventory or continuous inventory

describes systems of inventory where information on inventory quantity and availability
is updated on a continuous basis as a function of doing business. Generally this is
accomplished by connecting the inventory system with order entry and in retail the point
of sale system. In this case, book inventory would be exactly the same as, or almost the
same, as the real inventory.
In earlier periods, non-continuous, or periodic inventory systems were more prevalent.
Starting in the 1970's digital computers made possible the ability to implement a
perpetual inventory system. This has been facilitated by bar coding and lately radio
frequency identification (RFID) labeling which allows computer systems to quickly read
and process inventory information as part of transaction processing.

Perpetual inventory systems can still be vulnerable to errors due to overstatements

(phantom inventory) or understatements (missing inventory) that can occur as a result of
theft, breakage, scanning errors or untracked inventory movements, leading to systematic
errors in replenishment.

24. Phantom Inventory

Phantom inventory is a common expression for goods that an inventory accounting

system considers to be on-hand at a storage location, but are not actually available. This
could be due to the items being moved without recording the change in the inventory
accounting system, breakage, theft, data entry errors or deliberate fraud. The resulting
discrepancy between the online inventory balance and physical availability can delay
automated reordering and lead to out-of-stock incidents. If not addressed, phantom
inventory can also result in broader accounting issues and restatements.

A number of techniques have been used to correct phantom inventory problems,

including physical cycle counts, RFID tagging of items and statistical modeling of
phantom inventory conditions.

25. Reorder Point

The reorder point is the level of inventory when a fresh order should be made with
suppliers to bring the inventory up by the Economic order quantity (EOQ).

Continuous Review System

The reorder point for replenishment of stock occurs when the level of inventory drops
down to zero. In view of instantaneous replenishment of stock the level of inventory
jumps to the original level from zero level.

In real life situations one never encounters a zero lead time. There is always a time lag
from the date of placing an order for material and the date on which materials are
received. As a result the reorder point is always higher than zero, and if the firm places
the order when the inventory reaches the reorder point, the new goods will arrive before
the firm runs out of goods to sell. The decision on how much stock to hold is generally
referred to as the order point problem, that is, how low should the inventory be depleted
before it is reordered.
The two factors that determine the appropriate order point are the delivery time stock
which is the Inventory needed during the lead time (i.e., the difference between the order
date and the receipt of the inventory ordered) and the safety stock which is the minimum
level of inventory that is held as a protection against shortages due to fluctuations in
demand.

Therefore:

Reorder Point = Normal consumption during lead-time + Safety Stock

Several factors determine how much delivery time stock and safety stock should be held.
In summary, the efficiency of a replenishment system affects how much delivery time is
needed. Since the delivery time stock is the expected inventory usage between ordering
and receiving inventory, efficient replenishment of inventory would reduce the need for
delivery time stock. And the determination of level of safety stock involves a basic trade-
off between the risk of stock-out, resulting in possible customer dissatisfaction and lost
sales, and the increased costs associated with carrying additional inventory.

Another method of calculating reorder level involves the calculation of usage rate per
day, lead time which is the amount of time between placing an order and receiving the
goods and the safety stock level expressed in terms of several days' sales.

Reorder level = Average daily usage rate x lead-time in days.

From the above formula it can be easily deduced that an order for replenishment of
materials be made when the level of inventory is just adequate to meet the needs of
production during lead-time.

26. Safety Stock

Safety stock is a term used by inventory specialists to describe a level of stock that is
maintained below the cycle stock to buffer against stockouts. Safety Stock (also called
Buffer Stock) exists to counter uncertainties in supply and demand. Safety stock is
defined as extra units of inventory carried as protection against possible stockouts. By
having an adequate amount of safety stock on hand, a company can meet a sales demand
which exceeds their sales forecast without altering their production plan. It is held when
an organization cannot accurately predict demand and/or lead time for the product. It
serves as an insurance against stockouts.

With a new product, safety stock can be utilized as a strategic tool until the company can
judge how accurate their forecast is after the first few years, especially when used with a
material requirements planning worksheet. With a material requirements planning (MRP)
worksheet a company can judge how much they will need to produce to meet their
forecasted sales demand without relying on safety stock. However, a common strategy is
to try and reduce the level of safety stock to help keep inventory costs low once the
product demand becomes more predictable. This can be extremely important for
companies with a smaller financial cushion or those trying to run on lean manufacturing,
which is aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramatically
affect their business. Too much safety stock can result in high holding costs of inventory.
In addition, products which are stored for too long a time can spoil, expire, or break
during the warehousing process. Too little safety stock can result in lost sales and, thus, a
higher rate of customer turnover. As a result, finding the right balance between too much
and too little safety stock is essential.

Reasons for Safety Stock

Safety Stocks enable organizations to satisfy customer demand in the event of these
possibilities;

• Supplier may deliver their product late or not at all

• The warehouse may be on strike
• A number of items at the warehouse may be of poor quality and replacements are
still on order
• A competitor may be sold out on a product, which is increasing the demand for
your products
• Random demand (in reality, random events occur)
• Machinery Breakdown
• Unexpected increase in demand
• ...and more

27. Specific Identification

Specific Identification is a method of finding out ending inventory cost. It requires a very
detailed physical count, so that the company knows exactly how many of each goods
brought on specfic dates remained at year end inventory. When this information is found,
the amount of goods are multiplied by their purchase cost at their purchase date, to get a
number for the ending inventory cost.

On theory, this method is the best method, since it relates the ending inventory goods
directly to the specific price they were brought. However, this method allows
management to easily manipulate ending inventory cost, since they can choose to report
that the cheaper goods were sold first, hence increasing ending inventory cost and
lowering Cost of Goods Sold. This will increase the income. Alternatively, management
can choose to report lower income, to reduce the taxes they needed to pay.

This method is also very hard to use on interchangeable goods. For example, it is hard to
relate shipping and storage costs to a specific inventory item. These number will need to
be estimated, and hence reducing the specific identification 's benefit of being extremely
specific.
 28. Stock and Flow

Economics, business, accounting, and related fields often distinguish between quantities
which are stocks and those which are flows. A stock variable is measured at one specific
time, and represents a quantity existing at that point in time, which may have been
accumulated in the past. A flow variable is measured over an interval of time. Therefore a
flow would be measured per unit of time.

For example, U.S. nominal gross domestic product refers to a total number of dollars
spent during a specific time period, such as a year. Therefore it is a flow variable. In
contrast, the U.S. nominal capital stock is the total value, in dollars, of equipment,
buildings, inventories, and other real assets in the U.S. economy. The diagram illustrates
how the stock of capital currently available is increased by the flow of new investment
and depleted by the flow of depreciation.

29. Stock Demands

Stock demands - the demand a customer has for a certain product or products. The
demand is influenced by price, availability and position of the product in relation to the
consumer.

30. Stock Forecast

Stock Forecast - by evaluating current and past stock demands and stock levels accurate
stock forecasting can be made to customer needs. Stock forecasting is integral to
managing profitability in any organisation that deals with inventory.

31. Stock Mix

Stock mix - is the combination of products a company sells or manufactures. The stock
mix is determined by the demand for certain products and the profitability of those
products.
 32. Stock Obsolescence

Obsolete stock or stock obsolescence calculations are done by companies to determine

how much of their stock on hand is unlikely to be used in the future.

The financial value of stock obsolescence that is calculated can be entered into a general
ledger system to create a "stock obsolescence provision" which can reduce the tax
liability of a company. For this reason, a systematic and auditable approach to designing
a stock obsolescence report should be used. Estimation of stock obsolescence without any
traceable calculations will probably not be acceptable to an auditor.

Typically, a stock obsolescence report uses the value of "stock on hand" as a starting
point, and then reduces this value based on the potential that stock will be used up in the
future. The higher the probability that stock will be used in the future, the more the on-
hand stock value can be reduced. Sometimes a historical usage of the item can also
reduce the value, in this case, the more recently the item was used, the more the on-hand
value can be reduced.

The formulae that calculate how much the on-hand value can be reduced by may vary
from company to company and are normally described in a general way in the GAAP
(Generally Accepted Accounting Practices) for that company or country. For example
one formula may be: "If there is any future usage of the item in the next 3 months then
reduce the value by 100%, if there is usage in the next 6 months then reduce by 50%, and
if it is only going to be used in a year's time then reduce by 10%, if it has been used in the
past 6 months then reduce by 70%, if there has been usage in the past year then reduce by
30%".

Some formulae may also take into account the volume used e.g.: reduce the on-hand
value by the percentage of product used in the past 6 months.