INTRODUCTION

Inventory is all the goods such as raw material, material in process, finished products, general supplies and equipments etc. Inventory control may defined as the systematic location storage and recording of goods in such a way the desired degree of service can be made to the operating shops at minimum ultimate cost. The necessity of inventory control is to maintain stock of goods that will ensure manufacturing according to the production plan based on sales requirement and the lowest possible ultimate cost. To promote smooth factory operations and to prevent piling up or idle machine time proper quantity of material must be on hand when it is wanted. Every enterprise needs inventory for smooth running of activities it services, as link between production and distribution process. There is generally time lag between the reorganization of a need and its full filled. The greater time lag the higher requirement for inventory unforeseen fluctuation in demand and supply of goods also neccestable. The need for inventory it provides caution for future price fluctuation. In this context it is proposed to take project study in a reputed public sector under taking covering inventory management aspects and giving suggestions for implementing any. ECIL is chosen, as it is central public sector unit of long standing having diversified product portfolio with variety of material inventory having control complications. The project study aims to analyze, discuss, conclude and suggest measures for further controls.

NEED FOR STUDY The investment in Inventory is very high in most of the undertaking engaged in
manufacturing wholesale and retail trade. The amount of Investment is sometimes more Inventory than in other assets. In India a study of 29 major industries has revealed that the average cost of materials is 64 paisa of a rupee. About 90 percent of working capital is invested in Inventories. The main reason attributed for loss making in financial indiscipline in managing the resources particularly. In inventory management for an organization, the product profitability considering standards and budgets is of permanent importance needless to say that in this context Inventory management assumes lost of significances. Hence, the Inventory management determines and portrays the following factors like what to purchase, how to purchase, from where to purchase, where to store etc., will be critical factors. Hence further it becomes a crucial factor to undergo a detained analysis to find an efficient system of the Inventory. As an attempt has been made to study Inventory Management with reference to ECIL.

OBJECTIVE OF THE STUDY:1. To analyze inventory levels of raw material, work in progress and finished goods at ECIL.

2. To ascertain the inventory cost component of total cost of production. 3. To analyze whether inventory management is effective in ECIL.
4. To analyze and evaluate the various techniques of inventory management for better control

and for minimizing the carrying cost of ECIL.

SCOPE:
1. The study is confined only to analyze Inventory levels in ECIL with the

help of some ratios.

2. For the project, data/Information for the financial years 2006-2010 is

considered. 3. Inventory statements are prepared on the basis of the financial statements of ECIL. 4. The project report on Inventory management covers collection of data, analysis data, Interpretations and suggestions.
5. The proposed

project study will cover financial year 2006-2010 depending on the data availability.

LIMITATIONS:
1. ECIL is under a strategic ministry of government of India dealing with nuclear power, defense etc. 2. The very nature of the organization places limitations on the collection at the data and analysis thereof.
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3. It was not possible to collect total information.

METHODOLOGY:
The purpose of study the following methodology is adopted. Annual accounts of the year 2001-02 to 2006-07 are taken to do ratios to judge if Inventory management system is effective in ECIL and percentage of Inventory component in the total costs of production.

SOURCES OF DATA: 1. So, in this study the information furnished has been collected in two ways one is primary source and another one is secondary source. Primary Source:1. Direct personal and oral Investigation. Secondary Source:1. Annual report of the unit. 2. Other reports of the Unit. 3. Broachers. 4. House magazines of the Units. 5. Internet.

About ECIL ECIL was created under the department of Atomic Energy primarily to production the R & D efforts at the Bhabha Atomic Research Centre (BARC) and there by support the countrys Nuclear Power Programmes Concurrently it was expected o achieve self-reliance in electronics and enlarge the base of the base of the countrys electronics industry to convincingly demonstrate the techno-commercial viability of indigenous technology. Over the years the company blossomed into a multi-disciplinary organization mainly catering to the requirements of the strategic sectors of India in the chosen areas of Control and Instrumentation, Information Technology and Communications, Electronic Werfare and Security. The company has a decentralized structure organized as Strategic Business Units (SBU) addressing the product and service requirements of a wide variety of customers in the area of Strategic Electronics. As a premier public enterprise, the company devolves on itself the responsibility to forge seamless relationships with all the stake holders and specifically the customers, with a view to build mutual trust, respect and a win-win environment. GENESIS & EVOLUTION
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ECIL was setup under department of Atomic Energy in the year 1967 with a view to generating a strong indigenous capability in the field of professional grade electronics. The initial accent was on total self-reliance and ECIL was engaged in the Design Development, Manufacture & Marketing of several products emphasis on three technology lines viz. Computers, Control, System & Communications. Over the years, ECIL pioneered the development of various complex electronic products without any external technological help & scored several first in these fields prominent among them being countries. First Digital Computer First Solid State T.V First Control & Instrumentation for Nuclear Power Plants First Earth Station Antenna The company played a very significant role in the training & growth of high caliber technical & managerial manpower especially in the fields of computers & information technology. Through the initial thrust was on meeting the control & instrumental requirement of the Nuclear Power Program, the expanded scope of self-reliance pursed by ECIL enabled the company to develop various products to cater to the needs of Defense, Civil Aviation, Information & Broadcasting, Telecommunication, Insurance, Banking, Police & Paramilitary Forces, Oil & Gas, Power, Space Education, Health, Agriculture, Steel & Coal sectors & various user departments in the Government domain. ECIL thus evolved as a multi-product company serving multiple sectors of India economy with emphasis on import of the country substitution & development of products & services that are of economic & strategic significance to the country.

ECIL was setup under the Department of Atomic Energy in the year 1967 with a view to generating a strong indigenous capability in the field of professional grade electronics. The present employee strength of the company is about 5100 (3000 officers and 2100 workmen). The company, which started as a manufacturing company wedded to indigenization and self-reliance had a majority of human resources deployed in manufacturing operations. The post-liberalization era posed a number of challenges to the company especially in the area of HR, Due to the right sizing and restructuring compelled by the market forces. With the help of Government of India, the company offered attractive Voluntary Retirement schemes to the employees which invited reasonable response. The company has also initiated a number of programmers to retrain and redeploy the existing manpower so as to ensure gainful employment and achievement of targets

The

COMPANY

is

organized

into

DIVISIONS

serving

various

SECTORS, National and Commercial Importance.

Divisions Nuclear sector

serving

a.

Control & Automation Division (CAD) Instruments & Systems Division (ISD) Components Division (CD) Communications Division (CND) Antenna Products Division (APD) Servo Systems Division (SSD) Strategic Electronics Division (SED) Special Products Division (SPD)

Divisions Defence sector

serving

b. c. d. e.

Supervisory Control & Data Acquisition Division (SCADA) Business Systems Division (BSD) Telecom Division (TCD) Customer Support Division (CSD) Computer Education Division (CED)

Divisions

handling

Commercial Products

Vision: To help the country achieve self-reliance in strategic electronics. Mission: ECILs mission is to consolidate its status as a valued national asset in the area of strategic electronics with specific focus on Atomic Energy, Defense, Security & Such Critical sectors of strategic national importance.

In line with the corporate mission and objectives, the company chose a product range suiting the strategic requirements of our country. The current product range of ECIL may be categorized broadly under three sectors; Nuclear sector: Control & Instrumentation products for Nuclear Power Plants Integrated Security Systems to Nuclear installations Radiation Monitoring instruments to support the radiation safety program of the DAE Secured Networking of all DAE units via satellite. Defence Sector: Various types of fuses V/UHF Radio Communication Equipment Electronics Warfare Systems and derivatives Thermal Batteries and Special components for missile projects Precision Servo components like gyros Missile Support control & Command Systems Training Simulators, Stabilized Antenna & Tracking for Light Combat Aircraft Detection and Pre-detonation of
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Explosive devices Jammers with Direction Finding abilities Projects connected with Defense Intelligence. Commercial Sector: Electronics Voting Machines to Election Commission Wireless in Local Loop (WLL) for Telecom sectors Antenna products for I & B and Telecom sectors Integrates Security Systems and Security equipment including X-Ray Baggage inspection system for airports, Customs and VVIP Installations Computer Hardware, Software and Services to various agencies in the Government domain Computer Education Services.

Standards And Quality Assurance Group (SQAG) at ECIL is a Corporate Quality Assurance Service Facility. While the individual business groups have their own Quality Control / Quality Assurance sections, this corporate facility caters to the common requirements.
1.

Faculty for training personnel in Product divisions on ISO awareness and on Internal Quality Audits, Helping in developing their quality system documentation, planning, conducting and managing internal quality audits and reporting of audit results.

2.

A well equipped and NABL accredited Calibration and Measurements Laboratory equipped with standards traceable to National Standards and catering to the calibration requirements of the Product divisions in the field of electro-technical measurements.

3.

An Environmental Test laboratory meant for both component / unit / system evaluation. It has Dry / Damp heat chambers, Walk in chambers, Dust / Rain chambers, Vibration and bump test facilities.

4.

A Technical information Centre. Equipped with such facilities with service as its motto SQAG has adapted and declared its

quality policy as "To render reliable and professional services in the fields of Quality Assurance, Testing and Calibration to the satisfaction of its CUSTOMERS." Standards and Quality Assurance Group (SQAG) is a Corporate Services Group catering to the needs of all Production divisions in the following areas.
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1. 2. 3. 4.

Standards Quality Assurance Environmental and Calibration Services Industrial Engineering

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11

WHAT IS INVENTORY?
There are different meanings of inventory in different languages in according language it May means stocks of finished goods only. In a manufacturing concern, it may include raw materials work in progress and stores, etc .to understand the exact meaning of the word inventory. Inventory constitutes the most significant part of the current assets financial statement. Because of the large size of inventories mainlined by the firm a considerable amount of funds is required to be committed to them. Inventory valuation affects both the results of operation of enterprise as well as balance sheet which presents the financial position of enterprise. The reduction in excessive inventories carries a favorable impact on the profitability of the companies. Inventory may include the following things. RAW MATERIAL:

Raw materials form a major input into the organization. They are required to carry out production activities uninterruptedly. The quality of raw materials required will be determined by the rate of raw material and government regulations, etc. too affect the stock of raw materials.

WORK IN PROGRESS: In progress is that stage of stocks, which are in between raw materials and finished goods. The material enters the process of manufacturing but they are yet to attain a final shape of finished goods. The quantum of work in progress depends up on manufacturing process. The greater the time in manufacturing the more will be time amount of work in progress. CONSUMABLES:

These are the materials, which are needed to smoothen the process of production. These materials do not enter directly into the production but they act as catalysts. Consumables may be
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classified according to their consumption and critically. Generally, consumables 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 then the raw materials. The fuel oil may from a substantial part of the cost.

FINISHING GOODS: There are goods, which are ready for the consumers. The stock of finished goods privies a buffer between production and market. The purpose of maintaining inventory is to ensure proper supply of goods to the customers in some concerns is under taken on order basis, In these concerns there will not be a need for finished goods inventory will be more when production is undertaken in general with out waiting for specific orders. SPARES:

Spares also form a part of inventory. The consumption pattern raw materials, consumption pattern raw materials, consumables finished goods are different from industry that of spares. The stocking policies of spares are different from industry to industry.

SAFTY STOCK INVENTORY:

To avoid customer service problems and the hidden costs unavailable

components

companies hold safety stock .Safety stock inventory protects against uncertainties in demand, lead time, and supply. Safety stocks desirable when suppliers fail to deliver and desired quantity on the specified date with acceptable quality or when manufactured items have significant amount of scrap or rework. Safety stock inventory ensures that operations are not disrupted problems occur, allowing subsequent operations to continue. when such

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To create safety stock, a firm places an order for delivery earlier then when the item is typically needed. The replenishment order therefore arrives ahead of time, giving a cushion against uncertainty.

PIPELINE INVENTORY: Inventory moving from point to point in the material flows system are called pipeline inventory. Materials move from suppliers to a plant, from one operation to the next in the plant to a distribution center to a retailer, pipeline inventory consists of orders that have been placed but not received. ANTICIPTION INVENTORY: Inventory used to absorb uneven rates of demand or supply which business often face, is referred to a anticipation inventory. Predictable area of personal demand patterns lend themselves to the use of anticipation inventory manufactures of air conditioners for examples, can experience 90% of their annual demand during just 3 months of a year. Such uneven demand may lead a manufacture to stockpile anticipation inventory during periods of low demand so that output level do not have to be increase much when demand peaks. Smoothing output rates with inventory can increase productivity because varying output rates and work force size can be costly. Anticipation inventory also can help when supply, rather than demand, is uneven. A company may stock up on a certain purchased item if its suppliers are. Threatened with a strike or have servers capacity limitation. Inventory is working is capital and therefore the control inventories is an important aspect of operation managements. The question is the management of inventory 1. How much of an item should be ordered when the inventory is replenished? 2. When should the inventory be replenished?

FUNCTIONS OF INVENTORY

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1.

There are inventories for normal consumption requirements. There fore, depending upon the average consumption rates and average lead times for procurement/manufacture of the material inventories are kept at the appropriate times.

2.

A product process, however continuous it may be, is found to have same interruptions, it may also have imbalance in the consumption and production rates of the materials at different stages these interruptions and imbalances make it necessary to keep stocks of inventory between the different stages of the operations. There is conflicting interest of different departmental heads over the issue of inventory.

The finance manager will try to invest less in inventory because to him it is an idle investment, where as production manager will emphasis to acquire more inventory as he dose not want any interruption in production due to shortage of inventory. The purpose of inventory management is to keep the stocks in such a neither way that is over stocking nor under stoking. The over stocking will mean a reduction of liquidity and starving of other production processes where as understocking, on other hand, will result in stoppage of work. The investment in inventory should be kept in reasonable limits. PURPOSE OF HOLDING INVENTORY

Although holding inventories blocking firms funds and cost of storage and handling, every business enterprises has to maintain a level of inventories facilitate uninterrupted production and smooth running of business. In the absence of inventories a firm will have to make purchase as soon as it receives order it will mean loss of time and delay in execution of orders, which sometimes may cause loss of customers and business. A firm also needs to maintain inventories to reduce ordering cost and avail quality discounted etc. generally there 3 main purpose of holding inventories. THE TRANSACTION MOTIVE: Which necessities continuous production and timely execution of sales order? THE PRECAUTIONARY MOTIVE:

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Which necessities the holding of inventories for meeting the unpredictable changes in demand and supplies of material. THE SPECULATIVE MOTIVE: This induces keep inventories for taking advantage of price fluctuation, saving in reordering costs and quality discounted, etc.

ESTEMATING INVENTORY RELATED COSTS AND THEIR EFFECTS: Implementing the EOQ decision model requires accurate estimates of the annual relevant carrying costs of inventory. Relevant inventory carrying costs consists of the relevant incremental costs plus the relevant opportunity cost of capital. CONSIDERATION IN OBTAINING ESTIMATES OF RELEVANT COSTS: Implementing the EOQ decision model requires accurate estimates of the annual relevant carrying costs of inventory. Reagent inventory carrying costs consist of the relevant increment cost plus the relevant opportunity cost of capital. 1. What are the relevant incremental costs of carrying inventory?

Only those costs of purchasing company for example, warehouse salaries and rent, costs of obsolescence, and costs of breakage that change with quality of inventory held. Consider the salaries paid to clerks, store keepers, and materials handlers. These costs are irrelevant if they are unaffected by change in inventory levels, suppose, however that as inventories decrease, total salary costs decrease as laid off. In this case, the salaries paid are relevant costs of carrying inventory.
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2. What is relevant opportunity cost of capital?

It is return to forgone by investing capital in inventory rather than elsewhere. It is calculated as the required rate of return multiplied by those per unit costs that (a) Vary with the number of units purchased. (b) Are incurred at the time the units are received in the case of stock outs, calculating the relevant opportunity cost requires an estimate of the lost contribution margin on the sales 10%due to a stock out as well as the lost contribution margin on the future sales lost because of customer ill will resulting from the stock out. RELEVANT COSTS: As the inventory corresponds too the normal consumption rates of the material, we should procure the inventory as and when it is required for production. Let us examine whether procuring a material as and when it is required the incorporation of other economies. We shill consider the relevant costs associated with the normal inventory keeping the relevant costs for the how much and when decision of normal inventory keeping are. COST OF CAPITAL: Since inventory is equivalent to locked up working capital, the cost of capital important relevant cost. This is the opportunity cost of inventory in inventory of course as mentioned in chapter 3, a firm cannot take the interest paid on the borrowed capital as the cost of capital. The cost of capital has to be arrived at by giving suitable weight ages to the different considerations about the use and procurement of the fund. SPACE COST; Inventory keeping needs space and therefore, the how much and when questions of inventory keeping are related to the space requirement. This cost may be the rent paid for the space. OBSOLESCENCE SPOILING OR DETERIORATION COSTS:
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If inventory is procured in a large quantity there is always a rescue of the item becoming obsolete due to change in product design, or the item getting spoilt because of the natural ageing process. The latter is particularly true of many sensitive chemicals and drugs which have limited shelf life. Such costs have, definitely, a relation to basic questions of how much and when. MATERIAL HANDLING COSTS: The inventory needs to be moved within the warehouse and the factory and costs associated with the internal movement of the inventory are included in this category. INSURANCE COSTS: There is always a risk of, theft or pilferage. These costs should therefore, be estimated. Or a firm might have taken insurance against such mishaps and the insurance premiums paid are relevant costs for our decision.

COST OF GENERAL ADMINSTRATION: Inventory keeping will involve the use of various staff, with large inventories; the costs of general administration might go up. INVENTORY PROCUREMENT COSTS: In addition to the general administration, whenever an there for procurement is to be placed to an external agency supplying the materials there is a cost associate activities such as tendering ,evaluating of bids ,ordering. Follow-up of the purchase order, receipt and inspection of materials, etc. every time a purchase order is placed; there costs are incurred as against general administration costs which are incurred for the materials procurement activity. BEHAVIOUR OF COSTING IN RELATION TO LEVEL OF INVENTORY: In regard to relevant costs the when question is automatically answered if the former question of how much is answered: this is so, particularly for normal inventories. The cost of
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space may be higher for higher levels of inventory provided there is no idle space already existing. It may be noted here that we are considering only the out of pocket or situational relevant cost. Therefore, in some cases we may have the cost of space, and in some cases it may not exist. The material handling may increase with increased volume on inventory, though out necessarily be proportional. If the material has limited shelf life or it is kind that might become absolute over time, then with larger inventories there are greater risks and larger costs of spoilage/obsolescence. This cost also needs not vary proportionately to the amount of inventory, because what may not be spoilt over four months may be spoilt in the fifth month. The risk of spoilage might increase nonlinearly with age of the material and consequently with volume of inventory. The cost of insurance is also being higher levels of inventory, but this may also not be a continuous function but a step function. One thing is common to all the above categories of cost that is, all these cost components increase with the increase in level of inventory; the increment may not be a continuous linear function of the level of inventory, but all the same cost do increase. Where as the procurement of the inventory decrease with the increase in level of inventory.

OBJECTIVES OF INVENTORY MANAGEMENT The main objectives are operational and financial. The operational objectives means that the materials and spares should be available in sufficient quantity so that the work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain idle and minimum capital should be locked in it. The following are the objectives of inventory management:
1. To ensure continuous supply of material, spares and finished goods so that production

should not suffer at any time and the customers demand should also be met. 2. To maintain investments in inventories at the optimum level as required by the operational and sales activities. 3. To keep material cost under control so that they contribute in reducing cost of production and overall costs.
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4. To minimize losses through deterioration, pilferage, wastage and damage. 5. To ensure perpetual inventory control so that material shown in stock ledgers should be actually lying in the stores. 6. To facilitate furnishing of data for short term and long term planning and control.

MATERIAL CONTROL: In most of the manufacturing concerns. The cost of raw materials represents a major part of the total cost of production. Hence proper control over material is necessary from the time the order is placed with the supplier till they are actually consumed. An efficient system of material control will lead to a significant reduction is production cost. Material control may be defined as the systematic control over the procurement, storage and usage of materials so as to maintain an even flow of materials and avoiding at the same time excessive investment in inventories material control covers three stages namely 1. Purchase of material
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2. Storing of material 3. Issue of material OBJECTIVE: The objective of material controls as follow
1. To ensure regular and uninterrupted supply of material I.e.. To make materials available as

and when they are needed.

2. Keep investment in stock at a reasonable level, so that there is no loss of interest on capital. 3. To a purchase the materials at reasonable price with out sacrificing the quantity of such

materials.
4. To avoid abnormal wastage by exercising direct control.

5. To avoid the risk of spoilage and obsolescence of the materials by fixing the maximum stock level. IMPORTANCE OF MATERIAL MANAGEMENT: For any manufacturing organization materials equipments are of primary importance. The reasons are
1. Nothing can be produced with out materials supplies, or equipment. 2. Materials constitute major part of total cost product. This varies depending up on typing of

product. 3. Because materials form major part of total cost these offer a very good scope for reduction of total cost. A small percent material cost can result in large percent increase in profitability. 4. End product quality a part from other factors largely depends on quality of input material.

5. Any interruption or shortage in supply of materials when needed by the production

department in many situations can result in complete stoppage of production.

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6. Because of the growing concern for pollution same contribution had to be materials management by finding substitutes which are less polluting or less damaging. 7. In the long term welfare and interest of the mankind the natural resources need to be conserved and regenerated along with planned usage. ISSUE OF MATERIAL MANAGEMENT: As per major groups involved in material management in any manufacturing organization. 1. Issue related to material planning
2. Issue related to purchase

3. Issue related to stores or inventory

4. Issue related to material handling and display.

1) ISSUE RELATED TO MATERIALS PLANNIN:

Material identification 1) Standardization 2) Make of buy 3) Coding and classification 4) Quality specification a. By providing sample or proto type b. By providing manufacturing operation specification c. By brand or trade name d. By specifying well accepted market grades
e. By specifying/providing engineering drawing/blue print.

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ISSUE RELATNIG TO PURCHASING: A. CENTRALISED VS DECENTRALISED PURCHASINGS: The issue is the comparatively more important and relevant to large corporations operating multiples plants may or may not be located at different places. For a single place organizations decentralization might be feasible on a very limited scale. I.
II.

Favorable price and item can be negotiated because of large volume purchase. Specialized venders/ancillaries can be encouraged to take up manufacturing and

supply of item/components of required & required quantities. III. IV. Admiration and control is comparatively more easy and efficient. Number of personal required is comparatively less resulting in to reduced overhead cost of purchasing. V. Paper work record keeping is consolidated possible to developing uniform procedures and policies. VI. Easier to maintain the quality of purchased parts/items through centralized testing and inspection. It is also possible to conduct testing and inspection facilities. VII. It is beneficial to the vendor also incase the size of order constitutes major proportion of his total production capacity.

B. SINGLE SOURCE VS MULTIPLE SOURCE: The purchase debt can decided to choose and depend on a single source for each of same selected items in the extreme case the department can decide to use single source for each of item. 1. For small total annual requirement of an item source tend increase clerical other expenses. 2. Due to bulk purchases form single source it becomes possible to avail of discounts of prices or frights or other services.
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3. A supplier tries to co-operation update and improves his service because of long term

relation. 4. No of personnel required is comparatively less, resulting in to reduced overhead cost of purchasing.
5. Paper work record keeping in consolidated possible to develop uniform procedures and

policies. 6. Easier to maintain the quality of purchased part/items through centralized testing and inspection. It is also possible to conduct testing and inspection at the vendors facilities.
7. It is beneficial to the vendor also in case the size of order constitutes major proportion of

his total production capacity.

C. VENDOR/ ANCILARY DEVELOPMENT This is same what similar to single / multiple supplier decision and also an out come of make/ buy decision. When total annual requirement is large and item is to be brought from the market, then it is worth it to encourage ancillaries to take up production and supply of the item to a percent company. Providing item design/drawings. Providing technology for production. Helping in arrangement of finance. Helping by loading of its technical persons. Extending credit facilities.

D. SIZE AND TIMING OF PURCHASING ORDERS:

This is an integrated issue. Stores and inventory, production schedule, suppliers capability time lag, reliability cost of holding inventory and cost of placing orders, etc. all have an important bearing an how much to order and when to order.
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Relative importances of material are an item to the organization is also an important issue all items need not be considered equally for inventory management and control. TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT: Effectively inventory management requires effective controls systems for inventories. A proper inventory control not only helps in solving acute problem of liquidity but also increase profits and causes substantial reduction in the working capital of the concern. The following are the tools and techniques of inventory management and control.
Determination of Stock Levels.

Determination of safety stocks levels. Selecting a proper system of ordering of inventory. Determination of economics order quality. A .B.C. analysis.

DETERMINATION OF STOCK LEVELS: Carrying of too much and too little of inventories in determinant to the firm. If the inventory level is too little, the firm will face frequent stock-outs inventory heavy ordering cost and if the inventory levels are too high it will be unnecessary tie up of capital .Therefore, optimum levels of inventory where costs are minimum and at the same time their id no stock out, which may result in loss or scale or stop page of production. Various stocked levels are discussed as such. 1. Minimum level 2. Re-order level 3. Maximum level 4. Danger level 5. Average talk level 1) Minimum level:
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This represents the quality, which must be maintained in hands at all times. Is less the minimum level then work will stop due to shortage of materials following factors are taken into consideration while fixing minimum stock level.

LEAD TIME: A purchase firm requires some time to process order and time also required by the supplying firm to execute the order. The time taken in processing the order then executing it is known as lead time. It is essential to maintain some inventory during this period.

RATES OF CONSUMPTION: It is average consumption of materials in the factory. The rate of consumption will be decided on the basis past experience and production plan.

NATURE OF MATERIALS: The nature materials also affect the minimum level. If materials required only against special order of the consumers and the minimum stock will not be required such materials minimum stock level can be calculated using the formula. Minimum stock level: Re-order level (normal consumption x normal re-order period. 2) RE-ORDER LEVEL: When the quality of materials reaches at a certain figures then the fresh order is sent to get materials again. The order is sent before the material reach minimum stock level. Re-ordering or ordering level is fixed between minimum, stock level. The rate of consumption, number of days required replenishing the stock, and maximum quantity of materials required on any day is taken into account while fixing recording level. Recording level is fixed with following formula. Re-order level = maximum consumption x maximum re-order period
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3) MAXIMUM LEVEL: It is the quality of material beyond which affirm should not exceed s maximum level limit then it will over-stock. A firm should avoid over-stocking because it will result in high material costs. Overstocking will more blocking of working capital, more space for storing the materials, more wastage of materials and more chances of loss from obsolescence. Maximum stock will depend upon following factors.
1. The maximum requirement of materials at any point of time.

2. The availability space for storing the material. 3. The rate of consumption of materials during lead time. 4. The cost of maintaining the stores. 5. The possibility of fluctuation in prices. 6. Availability of materials. If the materials are available only during seasons then they will have to be stored for the rest of the period. 7. The possibility of change in fashions and production process will also affect the maximum stock level. 8. The following formula may be used for calculating maximum stock level.

MAXIMUM STOCK LEVEL: Re-order quantity-(minimum consumption x minimum re-ordering period). 4)DANGER LEVEL: It is the level beyond which material should not fall incase. If level arises then immediately steps should be taken to replenish the stocks even if more costs is incurred in arranging the materials. If materials are not arranged immediately then there is a possibility stoppage of work .If danger level is determined with the formula. Danger level = consumption x maximum re-order period for emergency purchase. 5) AVERAGE STOCK LEVEL:
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The average stock level is calculated as such Average stock level: minimum stock level equal = of re-order quantity

DETERMINATION OF SAFETY STOCK: The safety is a buffer to meet unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted it fluctuate over a period of time. The demand for materials may fluctuates and delivery of inventory may also delayed and in such a situation the firm can face a problem of stock-out can prove costly by affecting the smooth working of concern. In order to protect against out of usage fluctuations, firm usually some margin of safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two costs are involved in determination of the stock. ORDERING SYSTEM OF INVENTORY: The basic problem of inventory is to decide the re-order point. This point indicates when an order should be placed. The re-order point is determined with the help of these things. 1. Average consumption rate 2. Duration of time Economic order quantity, when inventory is depicted to lead time consumption, the order should be placed. There are three prevalent systems of ordering and a concern may use any one of these: 1. Fixed order quantity system generally known as order economic quantity systems (EOQ). 2. Fixed period order system of periodic re-ordering system or review system. 3. Single order and schedule part delivery system. ECONOMIC ORDER QUANTITY (EOQ):

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The quantity of material to be ordered at one time is known as economic ordering quantity is fixed in such a number as to minimize the cost of ordering and carrying the stock. Carrying costs is the costs of holding the materials in stores and ordering cost is the cost of placing ordering for the purchase of materials. The quantity is ordered should be such which minimizes the carrying and ordering costs. The order for the materials of bulk transport, but at the same time it should not be too large to incur too heavy a payment on account of interest, storage and insurance costs. If the price to pay is stable, quantity to be ordered each time can be ascertained by following formula. EOQ=2.C.O/I E= economic C=carrying O= ordering Economic order quantity keeping in view the ordering costs and carrying costs . With interaction of these two costs. The economic ordering cost during a particular period are equal to carrying costs during that period and cost to order and carry is lower. VARIATIONS: There are variations on the basic EOQ model. I have listed ones below 1. Quantity discount logic can be programmed to work in conjunction with EOQ formula to determine optimum order quantities. Most systems will require this additional programming. 2. Additional logic can be programmed to determine max quantities for items subject to spoilage or to prevent obsolescence on the items reaching the end their product life cycle. 3. When used in manufacturing to determine lot size where production runs are very long and finished product is being released to stock and consumed/sold throughout the production run you may need to take into account the ratio of production consumption to more accurately represent inventory level.
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I=interest Q=quantity

ASSUMPTONS: 1. Only one product is involved. 2. Deterministic demand (demand is known as certainty). 3. Constant demand (demand is stable throughout the year). 4. No quantity discount. 5. Constant costs (no price increase or inflation) While this assumption would seem to make EOQ irrelevant for use in a realistic situation, it is relevant for items that have independent demand. This means that the demand for the item is not derived from the demand for something else. Example the demand for steering wheels would be derived from the demand for auto mobiles but the demand for purses is not derived from any thing else. Purses have independent demand.

A-B-C ANALYSIS (ALWAYS BETTER CONTROL): It is the one of the types of the inventory control in which materials are divided into number of categories for adopting a selective approach for material control. It is generally seen that in a manufacturing concern a small percentage of items contributed a large percentages of value of consumption and a large percentages of times of materials contribute a small percentage of value in between these two limits there are some items, which have almost equal percentage of value of material.

Under A-B-C analysis the materials are divided into three categories viz.A.B.C and X.Y.Z where A.B.C represents the value of material, where X.Y.Z represents the consumption of the materials.

30

Z items are those, which are consumed less. The consumption of these materials upon the customer order and these products are used at least i.e. can be every 3 months/6 months/1 year. Y items are those, which are repeatedly used in the manufacturing. X if there is a model, which is presently manufacturing, those items are called X item. A-B-C analysis helps to concentrate more efforts on a since greatest monitory advantages will come by controlling these items. An attention should be paid in estimation requirements, purchasing, maintaining safety stocks and property storing of A category materials. These items are kept under a constant review so that a substantial material cost may be controlled .the control of C items can be relaxed and these stocks may be purchased for the year. B category items and their purchase should be understood at quarterly of half intervals.

JUST INTIME PURCHASING: Just in time purchasing is the purchase of material so that they are delivered just as need for production (or sales) JIT purchasing and EOQ model parameters Companies moving towards JIT purchasing to reduce their costs of carrying inventories (parameters in EOQ model) say that, in the past, those costs have actually been much greater than estimated because the costs of warehousing, handling, shrinkage, and capital have been properly identified at the same time, the costs of placing a purchase order. Companies are establishing long term purchasing agreement defining price and quality items over an extended period. Individual purchase orders covered by those agreements require no additional negotiation regarding price or quality. Companies are using electronic links such as internet, to place purchase orders. The cost of placing orders on the internet is estimated to be a fraction of the cost of placing order telephone or by mail. RELEVANT BENEFITS AND JIT PURCHASING: The EOQ model does not JIT purchasing. The EOQ model designed only to emphasize the tradeoff between carrying and ordering costs. However, inventory management also
31

includes purchasing costs, stock out costs, and quality costs. Acquiring quality materials and good, receiving timely deliveries and avoiding stock out is important in JIT purchasing. FINANCIAL BENEFITS OF JIT AND RELEVANT COSTS: Early advocates saw the benefits of JIT production as lower carrying costs of invented. But there are other benefits of lower inventories greater transportation of the production process, heightened emphasis on eliminating the specific cause of rework, scrap, and waste, and lower manufacturing lead time. In computing the relevant benefit and cost of reducing inventory in JIT production system. The cost analyst should take into account all benefits. PERFORMANCE MEASURE AND CONTROL IN JIT PRODUCTION: In addition to personal observation, the following list describes measures manager use to than in traditional plants. Thats evaluated and control JIT production and how these measure are expected to be affected. 1. Financial performance measures, such inventory turn over ratio. Which is expected to decrease positioned to support JIT purchasing. 2. Non financial performance measures of time, inventory, and quality.

1. Manufacturing lead time, expected to decrease

2. Units produced per hour, expected to increase

3. Number of days of inventory on hand, expected to decrease 4. Total scrap time for machines expected to decrease total manufacturing time. 5. Total number of units requiring re work or scrap, total no if units started and completed. Personal observation and non financial performance measure provide the most timely, and easy to understand measure of plant performance. Rapid, meaningful feed back is critical because the lack of inventories in a demand pull system makes it urgent to direct and solve problem quickly. TURNOVER RATIO:

32

Funds of creditors and owners invested in various assets to generate sales profits activity ratios are concerned with measuring the efficiency in assets management. These ratios are also called as efficiency ratios or utilization ratios or turnover ratios. These are called turnover ratios because they include the speed with which asset are being turned over into sales. Turnover is primary made for measuring the extent of efficient employment of assets to sales. It is current assets convert into cash. INVENTORY TURNOVER RATIO: Ratios inventory turn over ratio is calculated to minimize the investments in inventories.
INVENTORY TURNOVER RATIO= COST OF GOODS SOLD/AVERAGE INVENTORY.

A high inventory turn over ratios indicates that the product is selling well the inventory ratio should be done by inventory categories or by individual products. Inventory turnover ratio regarding different items of inventory may be compared with the ratios of earlier as well as with each other. Such comparison may reveal the following type of inventories

1. SLOW MOVING INVENTORIES: These are inventories, which have low turnover ratio. An attempt should be made to keep these inventories at lowest level. 2. DORMANT INVENTORIES: Inventories, which at present no demand, are classified as dormant inventories. Decision should taken by the finance manager in consultation with the chief buyer, store keeper, production controller and the cost account whether to retain inventories because of good chance of future demand or to cut losses by scraping them while some market. 3. FAST MOVING INVENTORIES: These are inventories, which are very much in demand special care should be taken in respect of these items of inventories so that the production are the sales do not suffer on account of their storage.
33

4. ABSOLUTE INVENTORY:

Inventory that no sales or usage activity or a specific period of time the period of time by company and industry may even vary by product line with in a specific company and may range from weeks to years. 5. EXCESS INVENTORY: Inventory quantities above specific need. Some business designate excess inventory as inventory beyond certain of demand. 6. COMPOUND OF INVENTORY TURNOVER: The manufacturing firms inventory consists of two inventories. 1. Raw Materials: 2. Work in Progress RAW MATERIALS INVENTORY TURNOVER =

WORK IN PROGRESS INVENTORY TURNOVER = BENEFITS OF HOLDING INVENTORY: The second element in the optimum inventory decision deals with benefits associated with holding inventory. The major benefits of holding inventory are the basic function of inventory. In other words, inventories perform certain functions, which are of crucial importance of the firm production and marketing strategies. The basic function of inventory is to act as a buffer to decouple or uncouple the various activities of the firm so that all do not have to be purchased at exactly as same rate.

a) Purchasing b) Production
34

c) Selling The term uncoupling means that these interested activities of a firm can be carried independently completely controlled by the schedules. If the sales of a firm increase, the two would also increase and vice versa .In, other words, purchase and production function would dependent upon the level of sales it is of course, true that in the long run, the purchasing and production activities are and in fact, should be tied to the sales activity of a firm. Sine inventory enable uncoupling of the key activities of a firm, each of them can be depurated at the most efficient rate. This has several beneficial effects on the firms operation in other words ,three types of inventory ,raw materials ,work in progress and finished goods, performs certain useful functions .Alternatively ,rigid tying of purchaser and production to sales schedule is undesirable in the short run as it will deprive the firms of certain benefits of uncoupling is also follows.

BENEFITS OF PURCHASE: If the purchasing of raw materials and other goods is not tied to production/sales that is a firm can be purchase independently to ensure the most efficient purchase, several advantages would become available. In the first place, a firm can purchase larger quantities warranted by usage in production or sales level. This will enables it to avail of discounts that are available on bulk purchase; moreover, it will lower the ordering cost, as fewer acquisitions would be made. There will thus, be a significant saving in the cost. Second, firm can purchase goods before anticipated or announced price increase. This will lead to a decline in the cost of production. Inventory, thus serves as a hedge against price increase as well as shortage of raw materials, this is highly desirable inventory strategy.

35

BENEFITS IN PRODUCTION: Finished goods inventory saves to uncouple production and sales. This enables production at rate different from that of sales rate. That is production can be carried on at rate higher or lower than the sales rate. This would be of special advantage to firms with seasonal sales pattern. In other case, the sales rate will be higher than the production rate during a part of the peak seasonal and lower during the off season. The choice before the firm is either to produce at a level to meet the actual demand, that is higher production during off season, or produce continuously throughout the year and build up inventory, which will be sold during the period of seasonal demand. BENEFITS OF WORK IN PROGRESS: The inventory of work-in progress performs two functions. In first place, it is necessary because production process are not instantaneous the amount of such inventory depends upon technology and efficiently of the production. The larger steps involved in the production process, the larger the work in process inventory and vice- versa. By shortening the production time, efficiency of the production process can be improved and size of this type of inventory reduced. In a multistage production process, the work in progress inventory serves a second purpose also. It uncouples the various stages of production so that all of them do not have to be performed at the same rate. The stages involving higher setup costs may be most efficiently performed in batches with a work in progress inventory accumulated during production run.

BENEFITS IN SALES: The maintains of inventory also helps a firm to enhance its sales efforts.fo one thing, if there are no inventories of finished goods, the level of sales will be depend upon the level current production. A firm will not be able to meet demand instantaneously. There will be a lag depending upon the production process. Thus, inventory serves to bridge the gap between current production actual sales will not have to depend lengthy manufacturing process. Thus, inventory serves to bridge gap between current productions actual sales. A related aspect to inventory serves as a competitive marketing tool to meet customer demands.

METHODS OF VALUATION OF INVENTORY:

36

1. Cost price 2. Sales price 3. The lower of cost and sales price. METHOD BASED ON COST PRICE: a) HISTORICAL COST b) CURRENT REPLAACEMENT COSTS c) STANDERED COST

METHODS BASED ON THE ACTUAL COST:

1. First in First out(FIFO)

2. Last in first out(LIFO)

3. Highest in first out(HIFO)

4. Specific identification prices 5. Based stock method 6. Adjusted selling price 7. Least purchase price METHOD BASED ON AVERAGE COST:
1. Simple average

2. Weighed average price METHOD BASED ON THE ACTUAL COST: 1. FIRST IN FIRST OUT: First in first out method of pricing materials is based on the assumption that the material which are purchase the first are issued first issued of material are
37

priced in the order of their purchased the flow of cost of material should also be in the same order. Issues are priced on the basis until the first lost received is exhausted after which the price of the next lot received becomes the issue price. Advantages of FIFO: The value of closing stock tends to be nearer current marketing prices well as at cost since ending inventories, consists of most recently purchased goods.
1.

2.Being based on the cost, no realized profits enter into the financial results of the period. 3.If the prices of material do not fluctuate very frequently, the method is easy to operate. LAST IN FIRST OUT METHOD: This is just of the FIFO .It operate on the assumption that the latest received material are issued first for production and those received first are issued last. The price of the lot has been issued after the rice of previous lot received becomes the issue price. The main objectives of this method apply current costs to current sales. Advantages: 1. They keep the values of issue close to the current material prices.
2. No unrealized profits or loss is usually made by using this method.

Disadvantages:
1. The value of ending inventory may be quite different from the current market

value and hence may not be acceptable for taxation purpose.

2. This method does not confirm for the physical flow of material.

HIGHEST IN FIRST OUT METHOD: Under this method the highest priced material are treated as being issued first. The closing inventory is kept at the lowest possible price.
38

SPECIFIC IDENTIFICATION METHOD: This specific identification method is used for inventories of items that are not ordinarily interchangeable, or goods manufacturing and earmarked for a specific purpose this method is best suited for job order industries which carry out individual jobs or contracts against specific order.

BASE STOCK PRICE METHOD: The stock formula proceeds on the assumption that a minimum quality of inventory base stock must be held at all times in order to carry on the business. Inventories up to this quality is seated at the cost at which the base stock was acquired. The base stock formula requires a clear existence of the circumstances that a minimum level of inventory must be held at all times but that is not by itself a justification for use base.

ADJUSTED SELLING PRICE METHOD: Under this method this is adopted by retailers, inventory is estimated at selling price and to value it at cost, the estimated gross profit is deduced there from the alternative approach is to deduct current sales from total goods available for dale at retail price.

METHODS BASED ON THE AVERAGE COST: 1. Simple average price method:

39

Simple average price is the average of prices without any regard to quantities. Simple average price is calculated by adding up different prices, and then dividing by no. of different prices. This method operates under the principles that when items of materials are purchased in big lots and are put in stores there indent is lost and, therefore issued should be valued at the average price of all the lots in the store.

Simple average price =

Weighed average price method: Weighted average price method is calculated by dividing the total cost of material in stock by total quality of material in hand. Under this prices are averaged after weighting by their quantities. The average price at any time is simply the balance value figure divided by balance units figure.

DATA ANALYSIS

40

First-in, First-out Inventory Valuation Method (FIFO) As stated above, FIFO stands for first-in, first-out inventory tracking. This means as a business purchase its inventory, and finally sells the inventory the first group of purchase will be taken off the books first. This also implies that the remaining inventory at the last group or groups of purchase acquired. Assuming an inventory economy, this method of inventory tracking will provide the highest gross profit for the period. Last-in, First-out Inventory Valuation Method (LIFO) As stated above LIFO stands last-in, first-out inventory tracking. This means as a business purchase its inventory, holds the inventory, and finally sells the inventory the last group of purchases will be taken off the books first. This also implies that the remaining inventory at the end of the period will be the first group or groups of purchase acquired. Assuming an inflationary economy, this method of inventory tracking will provide the lowest gross profit for the period. Average cost method i. Simple Average Price:

A price which is calculated by dividing the total of the prices of the materials in the stock from which the material to be drawn b the number of the price used in that total. ii. Weighted Average Price:

A price which is calculated b in dividing the total costs of materials in the stock from which the materials to be priced could be drawn by the quantity of materials in that stock.

Methods of Valuation of Inventories: 1. First in first out method:

41

Under this method it is assuming that the 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 have been acquired most recently. Example: The following are the details regarding purchases of a certain item during the month of September Receipts (Quantity) 200 300 250 Rate Rs 2.00 2.40 .. 2.60 Issue(Quantity) 250 200

2-Oct 10-Oct 15-Oct 18-Oct 20-Oct

Record the above transactions in the ledger, pricing the issue at the FIFO method. Solution: Date 02.09.06 10.09.06 15.09.06 18.09.06 Qty. 200 300 250 Receipts P.U. 2.00 2.40 .. 2.60 Total Qty. 400 720 650 200 50 Issues P.U. .. .. 2.00 2.40 .. Total Qty. . 200 200 300 400 120 250 250 250 250 480 50 250 30 0 Balance P.U. 2.00 2.00 2.40 2.40 2.40 2.60 2.60 2.40 2.60 Total 400 400 720 600 600 650 650 120 650 770

20.09.06

..

200

2.40

Closing Stock .

Advantages of FIFO method: 1. The main advantage of FIFO method is that it is simple understand and easy to operate.

42

2. T is a logical method because it takes into consideration the normal; procedure of utilizing first those materials which are received first. Materials are issued in order of purchase, so materials received are utilized first. 3. This method is useful when prices are falling. Disadvantages of FIFO Method: 1. This method increases the possibility of clerical errors, if consignments are received frequently at fluctuating prices as every time an issue of materials is made, the store ledger clerk will have to record to ascertain the price to be charged. 2. For pricing one price has often to be taken. 2. Last in first out method: This method 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 earlier cost. Example: The following are the details regarding purchase of a certain item during the month of September.
R c ip ( u n ) e e ts Q a tity

R t (R .) Is u (Q a t ) ae s s e u n ity 2 2 .4 2 .6 .. 20 5 .. 20 0

2 .0 .9 6 1 .9 6 0 .0 1 .9 6 5 .0 1 .9 6 8 .0 2 .9 6 0 .0

20 0 30 0 20 5 ..

Record the above transactions in the stores ledger, pricing the issues at LIFO method.

Solution: Date 02.09.06 Receipts Qty. P.U. 200 2.00 Issues Total Qty. P.U. 400 .. Balance Total Qty. P.U. . 200 2.00 Total 400
43

10.09.06 15.09.06 18.09.06

300

2.40

720 650

.. 250 2.40

600

.. 250 2.60

..

20.09.06

..

200

2.60

520

200 300 200 50 200 50 250 200 50 50 300

2.00 2.40 2.00 2.40 2.00 2.40 2.60 2.00 2.40 2.60

400 120 400 120 400 120 650 400 120 130 650

Closing Stock

Advantages of LIFO method: 1. Like FIFO method, this is simple to operate and is useful when transactions are not too many and the prices are fairly steady. 2. Like FIFO, this method recovers cost from production because actual cost of materials is charged to production. 3. Production is charged at the recent prices because materials are issued from the latest consignment. Thus, effect of current market prices of materials is reflected in the cost of sales provided the materials are recently purchased. Disadvantages of LIFO Method:

1. Like FIFO, this method may lead to clerical errors as every time an issue is made, the store ledger clerk will have to go through the record to ascertain the price to be charged.

2. For pricing a single requisition, more than one price has often to be adopted.

3. Simple average:
44

This method is based on the presumption that once the materials or goods are put into a common bin, they lose their separate identity. It does not take into account the quantities of materials in stock while calculating the average. Hence, the inventory consists of no specific batch of goods. The inventory in thus priced on the basis of average prices for the goods, weighted according to the quantity purchased at each price.

Example: The following are the details regarding purchase of a certain item during month of September:

2 9 6 .0 .0 1 .0 .0 0 9 6 1 .0 .0 5 9 6 1 .0 .0 8 9 6

R c ip e e ts 40 0 50 0 .. 60 0

R te a 4 0 .0 5 0 .0 .. 6 0 .0

Is u se 20 0

Record the above in the store ledger, pricing the issues at the Simple Average method. Solution:

Date

Receipts P.U Qty . 400 500 .. 600

Issues Tota Qt l y. P.U. .. 4.50

Total .. 900

Balance Qty . P.U. 400 900 700 130 0 4.00

Tota l 1600 4100 3200 6800

2.09.0 6 10.09. 06 15.09. 06 18.09. 06

4.00 1600 .. 5.00 2500 .. 20 .. . 0 6.00 3600

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4. Weighted average: It is superior to simple average because it covers the cost price of the materials from production. Under this method, issue is calculating on receipt of materials an not on issue of materials. Example: The following are the details regarding purchases of a certain item during the month of September. Date 2-Oct 10-Oct 15-Oct 18-Oct Receipts (Quantity) 300 200 . 400 Rate Rs 4.00 5.00 .. 6.00 Issue(Quantity) 300

Solution: Date Receipts Qty. P.U. 2-Oct 10-Oct 15-Oct 18-Oct 300 200 .. 400 4.00 5.00 .. 6.00 Issues Total Qty. 1200 1000 . 2400 .. . 300 .. P.U. .. .. 4.40 Balance Total Qty. P.U. . . 1320 .. 300 500 200 600 4.00 .. .. .. Total 1200 2200 880 3280

Advantages: 1. It is recovers the cost of materials from production. 2. It is suitable for manufacturing enterprises where several process are involved.

Stock Levels:
46

Example: Calculate the minimum stock level, maximum stock level and recording level from the following information. I. II. III. IV. V. VI. Minimum consumption Maximum consumption Normal consumption Re-order period Re-order quantity Normal re-order period =100 units per day =150 units per day =120 units per day =10-15 days =1500 units =12 days

Solution: Re-order = Maximum consumption *maximum re-order period. =150 units * 15 days = 2250 units Minimum stock level =re-order level (normal consumption * normal re-order period) =2250 (120 * 12) = 810 units Maximum stock level =ROL + ROQ (Min consumption * Min ROP) =2250 + 1500 (100 * 10) = 2270.

47

Turnover Ratios: Funds of creditors and owners are invested in various assets to generate sales & profits. The better the management of assets, the larger the amount of sales. Activity ratios are concerned with measuring the efficiency in asset utilization ratios or turnover ratios. These ratios are called turnover ratios because they indicate the speed with which assets are being converted or turned into sales. The four relevant turnover ratios are: i. Inventory turnover ratios are ii. Debtors turnover ratio iii. Creditors turnover ratio iv. Assets turnover ratio

Creditors Turnover ratios: The term creditors include creditors and bill payable. It is calculated as:

Creditors turnover ratio

Creditors payment period

Total assets turnover

Capital turnover

=
48

Working capital turnover

Inventory Turnover ratios:

TABLE: 1 Particulars Sales Gross Profit cost or goods sold(Sales, gross profit) Inventory: Closing stock Average inventory Inventory turnover ratio Opening Stock 12559.82 14531.93 13545.88 4.24 14531.93 10158.94 12345.44 6.7 10158.94 10710.86 10434.9 7.57 10710.86 6622.64 8666.75 8.09 6622.64 7681.96 7152.3 8.92 2005-06 67411.65 9937.65 57474.49 2006-07 100055.98 17372.76 82683.22 2007-08 93455.4 14489.74 78965.66 2008-09 77066.76 6927.01 70139.75 2009-10 70029.06 6222.8 63806.23

10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 VALUE

49

Interpretation:
The inventory turnover ratio has from 4.09 to 4.24 from the year 2001-02 to 2002-03 which shows the efficient management of inventory. The ITR has increased from 4.24 to 6.70 from the year 2002-03 to 2003-04 which shows the efficient management of inventory. The ITR has increased from 6.70 to 7.57 from the year 2003-04 to 2004-05 which shows the efficient management of inventory. The ITR has increased from 7.57 to 8.09 from the year 2004-05 to 2005-06 which shows the efficient management of inventory. The ITR has increased from 8.09 to 8.92 from the year 2005-06 to 2006-07 which shows the efficient management of inventory. As there is less inventory interest is less and the amount borrowed is less. The sales are on the higher side.

Components of Inventory: a. Raw Material b. Work in progress c. Finished goods Annual consumption of inventory:
a. Raw material inventory turnover =

50

Raw material Inventory turnover:

TABLE: 2 Particulars material consumed Raw Material Inventory Opening stock closing stock Average Raw Material Raw material inventory 11.48 12.69 10.71 14.17 23.84 2474.42 3224.95 2849.69 3224.95 4545.99 3885.47 4545.99 4277.66 4411.83 4277.66 1648.53 2963.1 1632.37 1648.53 2005-06 32701.28 2006-07 49307.2 2007-08 47426.65 2008-09 41979.11 2009-10 38916.93

turnover

R Material T aw urnoverR atio:

30 25 20 15 10 5 0 2005-06 2006-07 2007-08 2008-09 2009-10

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Interpretation:
The raw material inventory turnover ratio increased from 7.44 to 1.48 to 12.69 from the year 200102 to 2002-03 which shows the efficient management of raw material inventory. The raw material inventory turnover ratio increased from 11.48 to 12.46 to 12.69 from the year 2002-03 to 2003-04 which shows the efficient management of raw material inventory. The raw material inventory turnover ratio decreased from 12.69 in the year 203-04 to 10.71 in the year which 2004-05 which indicates the raw material inventory is managed properly. The raw material inventory turnover ratio has increased from 10.71 to 14.17 in the year 2005-06. The RMITR has high growth when compared 2006-07 with 2005-06.It has rise 10.17 to 23.84 which indicates that the raw material inventory has been managed very effectively.

Work in progress inventory: Work in progress inventory turnover =

52

Work in progress inventory turnover:

TABLE: 3 Particulars cost production WIP a)Opening b)closing Average Inventory WIP Inventory 7.28 17.71 17.71 17.14 17.52 6192.52 8350.15 Wip 7271.34 6113.25 4068.11 3816.03 3585.7 8350.15 3876.35 3876.35 4259.86 4259.86 3372.2 3372.2 3799.2 2005-06 of 52957.36 67762.26 72054.56 65413.94 62841.96 2006-07 2007-08 2008-09 2009-10

turnover=COP/Avg Wip inventory

W ork-in-prog ressInventoryR atio

20 18 16 14 12 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10

53

Interpretation: The work in progress inventory turnover has been decreased from 8.04 to 7.28 from the year 200102 to 2002-03 which shows WIPIR is not managed efficiently. The WIPIR has increased from 7.28 to 11.05 from the year 2002-03 which shows the WIPIR is efficiently managed in order to compensate for the previous decline. The WIPIR has increased from 11.05 in the year 2003-03 to 17.71 in the year 2004-05 which shows the WIPIR is efficiently managed. The WIPIR has slightly decreased from 17.71 in 2005-06 to 17.52 in 2006-07 which indicates there is a rise in the work in progress inventory

54

Finished Goods:
TABLE: 4 Rs In lakhs 2007-08 2008-09 1183 84177 946 72231

Particulars Finished goods Net sales Finished goods turnover ratio

2005-06 1446 57115

2006-07 651 89218

2009-10 648.76 65187.91

39.49

137.04

71.15

76.35

100.48

F inishedGoodsT urnoverR atio

160 140 120 100 80 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretation: The finished goods inventory turnover in year 2001-02 was 44.38.
55

In the year 2002-03 it was 39.49 indicating a decrease. There was an increase to 137.04 in the year 2003-04. It was 71.15 in 2004-05. In 2005-06 it has risen to 76.35. There was an increase to 100.48 in 2006-07 which indicates the efficiency.

Monthly Consumption of inventory: Raw material Stock:

56

TABLE: 5 Rs In lakhs 2007-08 2008-09 5267 2304 47247/12 3937 1.34 41979/12 3498 0.66

Particulars 2005-06 Raw material 4735 Material Consumed (Per month) 32701/12

2006-07 5630 49307/12 4109 1.37

2009-10 1616.21 65187.91/12 3243.07 0.49

Monthly Consumption 2725 No. of months stock available=raw material/consumption 1.04

R Materialsstock aw

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretation: In the year 2001-02 the raw material sock was 2.43.
57

In had got decreased from 2.43 to 1.74 in the year 2002-03. In 2003-04 there was again a decrease in the stock levels. it was 1.37 when compared with 1.74 in 2002-03. In 2004-05 it was 1.34 which indicated a decrease. Even I 2005-06 there was a decreased of 0.66. In the year 2006-07 it is 0.49 indicating further decreased in the stock level.

Work in Progress:
TABLE: 6 Rs In lakhs
58

Particulars WIP COP (per month ) Monthly

2005-06 8350 3877/12

2006-07 3877 81160/12 6763

2007-08 4260 73880/12 6157

2008-09 33725 67710/12 5643

2009-10 379.2 62841.96/12 5266.83

Consumption 5198 No. of months WIP in inventory = WIP/monthly consumption 1.16

0.57

0.69

0.6

0.72

W ork-in-prog sheld inven . res tory

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretation: The no. of months work in progress held in inventory in the year 2001-02 was 1.33 and in 2001-03 it was 1016 this indicates a rise. It was 0.57 in the year 2003-04 which got decreased from 1.16. In 2004-05 it increases to 0.69 from 0.57.
59

In the year 2006-07 it is 0.72 which increases when compared to the year 2005-06.

Finished Goods:
TABLE: 7 Particulars 2005-06 Finished Goods 1,446 Net Sales (per month) 57115/12 2006-07 651 8921/12 2007-08 1183 84177/12 2008-09 946 601 11/12 2009-10 648.76 65187.91/12
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Monthly Consumption 4,760 No. of months finished = goods finished 0.30 0.09 0.17 0.16 0.12 held in inventory goods/monthly consumption 7435 7015 6019 5432.32

F inishedGoodsRa tio

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretation: The finished goods inventory ratio in 2001-02 was 0.27 has increased to 0.30 in the year 2002-03. The finished goods ratio had decreased from 0.30 in the year 2002-03 to 2003-04. The ratio in 2004-05 has increased again to 0.17 in 2004-05.
61

The ratio again has decreased to 0.16 in the year 2005-06 from 0.17 in 2004-05. The finished goods ratio has decreases to 0.12 in 2006-07 from 0.16 in the year 2005-0

CONCLUSIONS
1. As ECIL is a multi product organization catering to different based on divergent technology the inventory procurement of products high. 2. Inventory procurement it also based on and conforms to economic batch quantities leading to surplus inventories and non-moving. 3. It is also observed that there are frequent changes in specification by the customer, rendering the already procured inventory, either obsolete or non-moving.

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4. There is a regular physical verification for A and B class items by internal audit department to highlight on non-moving inventories. 5. As per the directive of the management non-moving inventory of a particular business group has to be listed and circulated to all other division for any possible usage before action is taken for disposal. 6. In spite of the constraint there is reasonably a good control noticed as reflected in the period of holding of inventories and inventory turnover ratio. FIFO method: 1. The main advantage of FIFO method is that it is simple understand and easy to operate. 2. T is a logical method because it takes into consideration the normal; procedure of utilizing first those materials which are received first. Materials are issued in order of purchase, so materials received are utilized first. 3. This method is useful when prices are falling. FIFO Method: 1. This method increases the possibility of clerical errors, if consignments are received frequently at fluctuating prices as every time an issue of materials is made, the store ledger clerk will have to record to ascertain the price to be charged. 2. For pricing one price has often to be taken.

LIFO method: Like FIFO method, this is simple to operate and is useful when transactions are not too many and the prices are fairly steady.
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Like FIFO, this method recovers cost from production because actual cost of materials is charged to production. Production is charged at the recent prices because materials are issued from the latest consignment. Thus, effect of current market prices of materials is reflected in the cost of sales provided the materials are recently purchased. LIFO Method: Like FIFO, this method may lead to clerical errors as every time an issue is made, the store ledger clerk will have to go through the record to ascertain the price to be charged.

For pricing a single requisition, more than one price has often to be adopted.

SUGGESTIONS
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1. A regular reporting system on inventory should be in place to highlight on carrying costs and liquid covering all the business groups and at the corporate level.
2. As a preventive measure there should be a regular monitoring mechanism at the stage of

procurement itself whether there is a control exercised in pursuing materials in line with estimate, standard bill of material. 3. Once non-moving inventory is observed and declared a quick disposal action has to be initiated. This exercised has to be carried on through the year.

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BIBLIOGRAPHY

1. Prasanna Chandra, 2002, Financial Management; .3rd edition, TATA-McGraw HILL,

New Delhi.
2. I M PANDEY, 2002, Financial Management, 8th

Edition

Vikas Publishing House

Private Limited, New Delhi. 3. S N CHARY Production & Operation Management.

4. R.K. Sharma, Shashi K. Gupta MANAGEMENT ACCOUNTING, 2nd Edition, Kalyani

Publishers, Ludhiana.

WEBSITES: www.ecil.co.in. www.inventorymanagement.com.

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