OS - INVENTORY MANEGEMENT Flashcards
WHAT IS INVENTORY?
o Inventory (or more commonly called ‘stock) refers to the amount of raw materials, work I progress (WIP) and finished goods the business has on hand. o Businesses hold inventory in order to minimise lead times and ensure a rapid responsne to customer orders
INVENTORY MANAGEMENT
o Inventory management involves decisions around the amount of stick that should be held, how stick is vauled/accounted for and decisions of when to restock/reorder
WHY IS THIS IMPORTANT
o The amount of inventory will impact speed, flexibility and costs of operations processes
o How inventory is valued will impact quality and costs of operations processes
o When to restock/reorder will impact dependability, speed and cost of operations porcesses
THE AMOUNT OF INVENTORY?
amount of inventory a business decides to hold will be dependent upon Three major factors:
The type of business
The nature of the products they produce
The level of service that they are trying to provide
WHAT ARE THE DISADVANTAGES OF HOLDING INVENTORY?
o It comes with associated storage, spoilage, insurance, theft and handling costs.
o It represents money that is tied up and cannot be allocated and invested elsewhere
o Over time, inventory can become obsolete.
WHAT ARE THE ADVANTAGES OF HOLDING INVENTORY?
o It will enable the business to meet consumer demands immediately, including variety and volume which can generate greater revenue
o It can reduce lead times in the production process
o It allows businesses to make bulk purchases and achieve economies of scale.
THE VALUING OF INVENTORY?
o One of the fundamental jobs of an accountant is to ‘account for’ the value in the business. This includes valuing the inventory held by the business
o this is where we get the term ‘stock take’ it is the physical counting of the inventory
o the financial outcomes of operations and how the business will signifigantl impact how inventory is valued.
THE PROBLEM WIITH INVENTORTY
o The difficulty arises that the price paid for inputs often changes over time due to improved production processes, supply shortages and market fluctuations
o The business needs a way to determine the inventory value that will be used in their financial calculations
THE VALUING OF INVENTORY – FIRST IN FIRST OUT (FIFO)
o FIFO assumes that the first or oldest stock bought by the business is sold first and therefore the cost of each unit sold is the first cost recorded. The remaining stock would then be valued at latest cost
THE VALUING OF INVENTORY – LAST IN FIRST OUT (LIFO0
o LIFO assumes that the last or newest stock bought by the business is sold first and therefore the cost of each unit sold is the last cost recorded.
o The remaining stock is then valued at the earliest cost.
THE VALUING OF INVENTORY – WEIGHTED AVERAGE COST
o Weighted average cost (WAC) determines the average cost of inventory purchased in the period and uses that in calculating the value.
THE IMPACGT OF THESE
o It is legal to choose between these three valuing options but there will be significant variations in the outcomes they provide.
o FIFO tends to undervalue inventory sold and therefore overstate profits
o LIFO tends to overvalue inventory sold.
JUST IN TIME
o A method that can be used to reduce the problems associated with valuing inventory is to adopt a just in time (JIT) inventory management system
o This type of system ensures that the exact level of inputs arrive in the business only as needed.
o The JIT approach offers cost savings, flexibility in customisation and reduces inventory losses.
o However it is dependent on reliable suppliers and on time deliveries otherwise customers will be left waiting
WHAT IS THE RESULT OF EFFECTIVE INVENTORY MANAGEMNT.
o the most effective inventory management balances the costs associated with holding stock with the need to be dependable and flexible will be a point of differentiation
