A PROJECT REPORT ON

INVENTORY AND STORE MANAGEMENT

OF
HMT TOOLS LIMITED INDUSTRIES LIMITED
HYDERABAD
Project Report Submitted in
Partial fulfillment for the award of
MASTER OF BUSINESS ADMINISTRATION
SUBMITTED BY
B.BABU
Bearing Roll No.07E41E0011

Sree Datha Institute of Engineering & Science

(Affiliated to JNTU)
Hyderabad
(2007 09)

ACKNOWLEDGEMENT
Behind every successful achievement lies great
contribution by those without whom that could have
been achieved to them, although more words of
gratitude

is

insufficient

for

their

unlimited

contribution, I take this opportunity to revel my

heart felt gratitude imprinted deep within me. I am
very much thankful to the finance manager Mr.
MURALI KRISHNA GARU and the staff of HMT
TOOLS

LIMITED

Industries

for

giving

encouragement and their kind cooperation. I am

extremely grateful to Mr. SOMASUNDARAM
assistant general manager (IR & HRD) of HMT
TOOLS LIMITED; kindly guiding me without
whose kind help it would not have been possible for
me to complete this project work. I wish to express
my sincere thanks to (H.O.D) & Guide and also the
management and staff of my college for providing
the guidance and support.
B.BABU

DECLARATIONS
I here by declare that the enclosed project entitled
INVENTORY AND STORE MANAGEMENT
done at HYDERABAD in HMT TOOLS LIMITED
is submitted to JNTU, HYDERABAD in partial
fulfillment

of

MASTER

OF

BUSINESS

ADMINISTRATION, the project is an original

work done by me and to the best of my knowledge
this work is not submitted to any other university or
college for award of any other degree, diploma or
fellowship.

B.BABU

ABSTRACT
To build and sustain learning organization of competent world calls
professionals to institutionalize core values and create as culture of team
building, empowerment, equity, innovation and openness which world
motivate. To ensure continuous supply of materials, spares and finished goods
so that production should not suffer at any time and the customers demand
should also be met.
Absolvent inventories cannot be used or disposed off at values carried
on the books. Frequent reviews should be made of all inventories, and when
obsolescence is indicated a request for revaluation should be prepared for
approval by management.
The under stocking and over stocking costs are viewed as the demand
side costs and help in the determination of the amount of variations in demand
and the delay in supplies which the inventory should withstand.
Inventories are maintained basically for the operational smoothness
which key can be affected by uncoupling successive stages of production,
whereas the monetary value of the inventory serves as a guide to indicate the
size of the investment made to achieve this operational convenience.
The materials management departments primary function is to provide
this operational convenience with a minimum possible investment in
inventories. Materials department is accused of both stock outs a well as a
large investments in inventories. The solution lies in exercise a selective
inventory control and application of inventory control techniques. Inventories
build to act as a cushion between supply and demand.
.

. CONTENTS

TOPICS

PAGE NO.

CHAPTER- I

1-4

INTRODUCTION
NEED OF THE STUDY
OBJECTIVE OF THE STUDY
METHODOLOGY OF THE STUDY
LIMITATION OF THE STUDY
CHAPTER- 2

5-17

ORGANISATIONAL PROFILE
CHAPTER- 3

18-58

CONCEPTUAL BACKGROUND
CHAPTER- 4

59-77

ANALYSIS AND ITERPRETATION

CHAPTER- 5
CONCULSIONS & SUGGESTIONS
BIBLIOGRAPHY

78-81

CHAPTER I

INVENTORY MANAGEMENT
INTRODUCTION:
The materials means and includes the goods an services being sold by
the firm and the raw materials are other components being used in the
manufacturing of such goods and services. A retail shop keeper keeps an
inventory of finished goods to be offered to customers when ever demanded
by them. On the other hand, a manufacturing concern has to keep a stock pile
of not only the finished goods it is producing, but also of all physical
ingredients being used in the production process.
inventories are assets of the firm, and as such they represent an investment.
Because such investment requires a commitment of funds, mangers must
ensure that the firm maintains inventories at the correct level. If they become
too large, the firm loses the opportunity to employee those funds more
effectively. Similarly, if they are too small, the firm may lose sales. Thus, there
is an optimal level of inventories and there is an economic order quantity
model for determining the correct level of inventory.
In a complex industry like HMT TOOLS Limited it studied clearly of
how the thing are being performed and what is the real impact of these on
industry and how effectively the inventory is utilized is interested to be known
by researcher because of its great significance in the research.

NEED OF THE STUDY:

Every industry on average spends 70% - 80% on raw materials
(inventory). Therefore there is a need to know the raw material cost and also
there is great importance to understand the inventory management system of
this industry.
The study helps a log to various departments to take steps to control
the inventory process.

OBJECTIVES OF THE STUDY:

1.

To examine the organization structure of inventory management in

the stores of HMT TOOLS LIMITEDs.

2.

To discuss pattern, levels and trends of inventories in HMT

TOOLS LIMITEDs.

3.

To understand the various inventory control techniques followed by

studies in HMT TOOLS LIMITEDs.

4.

To access the performance of inventory management of the HMT

TOOLS LIMITEDs by selected accounting ratios.

5.

To know the inventory control techniques of HMT TOOLS

LIMITEDs.

METHODOLOGY OF THE STUDY:

The study is based on both primary and secondary data.
Primary Data: Consists of information gathered for some specific
purposes and primary data is also that u collects through researches, surveys
and experiments.
The collected data is tabulated and suitable interpretation had been
made by considering the data collection through secondary data like annual
reports purchase registers, storage records of the organization.
LIMITATIONS OF THE STUDY:
The study has the following limitations:
1.

The study is limited only for a period of 5 years i.e., from 2003
04 to 2007 08.

2.

The limitations of ratio analysis can be applicable of the study.

3.

There may be approximation in calculating ratios and taking the

figures from the annual reports.

CHAPTER II

COMPANY PROFILE
HMT is one of the major public sector undertakings in India for
over 50 years. The government of the India establish HMT in 1953-54 at
Bangalore in collaboration with m/s Oerlikons. Switzerland to manufacture
machine tools with a service motive the second machine tools unit was also
set up in Bangalore in 1961 and the third unit at pinjore (Haryana) in 1963.
HMT diversified into new production line.
Gradually HMT established its name in the international market today
HMT is a multi-unit, multi-product central government undertaking with, 18
manufacturing units and 35 product divisions these divisions are spread over
10 different states in the country known for its quality products all over the
world.
HMT manufacturing Hi-tech product is employing 21850 wellqualified and motivated employee.

HMT Product Range:

HMT is one of the worlds 10 largest machine tools house it
manufacturing the worlds widest range of machine tools and several
engineering product.
The total output of five factories in full production is estimated at
Rs.25crores per annum.
Machine tools find implementation in all manufacturing activities not
in engineering industries but also in four sectors like transportation coal
generation and defiance.
Hindustan tools one of the India machine tools manufacturing is a
multi product company with 18 production units and 22 product divisions.

PROFILE OF HMT LTD

Name of the company

HMT MACHINE TOOLS LIMITED

Established in

1953 PUBLIC SECTOR ENTERPRISE

Turnover of the company

: 50 CRORES AS ON 31-3-2008

Multi Product Company

: BROADLY CLASSIFIED INTO 5 HEADS

They are:1.

Machine tools

2.

Tractors

3.

Industrial Machinery

4.

Consumer Components

5.

Engineering components
Work force in HMT machine tools division, Hyderabad
Total work force

: 778

Work men

: 568

Direct work men

: 210

Indirect work men

: 320

Supervisory & Executive staff

G.M

: 1

J.G.M

: 8

D.G.M

: 31

A.G.M

: 41

Managers

: 60

Deputy Managers

: 42

Officers

: 78

Supervisors

: 20

Total

: 281

SHIFTS IN HMT, HYDERABAD

There are 3 shifts in HMT:
A from 6.00 AM to 2.00 PM
B from 2.00 PM to 10.00 PM
General from 8.00 AM to 4.00 PM
The administrative department work in general shift.

BRIEF HISTORY
The first industry police resolution was issued by the government of
India on 1st April 1948 which divided the industrial sector in to three
categories they were:
1. Industrial where state is having monopoly
2. Mixed of government control
3. The field private Enterprise

So in the third category which is fielding government control the

industries of national importance were included. Hence the government
considered them of such importance that their regulation and direction was
necessary.
The machine tools heavy machinery, tractors belonged to this category.
In 1948 industrial policy resolution remained in effect for 8 years this
period was marked by some significance changes in the economy like the
country had completed 1st five year planning during the period of 1951-56 and
also the industrial development act was passed in 1951 so the promoted
deceleration on new industrial policy resolution 1956 in this deceleration the
machine tools and heavy machine were subjected to the monopoly of state.
Some machine tools industries exists few places like Mumbai, Punjab
since 1890. But they were not able to fulfill the demands for machine tools in
domestic market and also during world war-11.

COMPANY PROFILE
HMT LTD HYDERABAD
(THE FIFTH UNIT OF HMT LTD)
HMT Hyderabad, 5th in the chain of machine
tools factories built by the HMT Ltd. Is a multi division and multi products
organization started in the year 1963 in a 50 acres plot on the out skirts of
Hyderabad HMT has two divisions at present namely
1. The machine tools division
2. Press division

The machine tools division:

In this division special purpose machine are custom built in various sizes.
A notable feature of these SPMS is that each has to be designed for
a specific component based on requirement of the customer since each
machine has to be designed individually there is a large designed office with
more than 200 designers work on the board bulk of the requirements of these
types machine in India is met by HMT ltd. Hyderabad veering in cost form a
low value of rs. 5 lacs to has high 25 crores these machine laying a vital role in
producing engineering products in large quantities.
A concert effort also being made to increase the export of there high
technology machines and to gain good base in the world, machine tools mark.
HMT, Hyderabad has entered into a technical collaboration with m/s cross
company us. A who is one of the world lenders in building SPMS.
It has already exported SPM and horizontal boring machines to Iran,
Taiwan, Algeria, Sweden and Srilanka.

The press division:

Here Hyderabad press and press breakers of tonnage up to 200 are
designed and manufactured meeting the bulk of requirement of the defense
sector and automobile industry these high precision presses made originally
built in collaboration coming to an end.
HMT is now its own it helps country to space substantial mount of
importing a complete press. Since the business for the major products of the
about two diversion highly to have a strong engineering base enable it
diversify into products other than machine tools and press. It has successfully
executed orders for coil winding machine. Hailers for coal instruments,
equipment for rather etc.

HMT FAST FORWARD

It was in the early post independents are that HMT began a small way
to meet a big commitment.
To manufacture mother machine to built modern industrial India
HMT was convinced by the government of India in 1949, and was
incorporated in 1953, with the objective of producing a limited range of
machine tools required for building and industrial edifice for the country.

THE 1960S
In 1967 recession struck the Indian engineering industry and the
consumption of machine tolls dipped drastically. The traumatic years of
recession did indeed serve to bring to the fore two latent strengths of HMT
namely the urge to survive and the confidence to innovate with these strengths
a full play the company

emerged from the recession. With the world widest range of machine tools and
associated services under a single corporate entity.

1.

With action plan firmly launched for diversification into tractors presses
and press brakes printing machine, die casting and plastic. Injection
moulding machines, homological machinery etc., which were considered to
have economic cycles that are different from those of machine tools.

2.

With a watch factory already established in 1961 to 1962, additional

capacities

from for watch production a greater cushion against cyclical

fluctuation in capital goods market and also to meet the burgeoning demand
for watches.

THE 1970S
The 70s witnessed the fructification of all the diversification of plans as
envisaged.

HMT SETUPS
1. HMT International limited as a subsidiary company to channel HMTS
Products and technical service aboard.
2. Two more units for manufacture of watches one at Srinagar and one at
Tumkar.
HMT took over machine tool Corporation at
Ajmer as its sixth machine tool unit.

THE 1980S
In the 80s HMT as a part of vertical integration efforts, launched units to
manufacture
1.

Watches cases at Bangalore.

2.

Watches at ranibagh.

3.

Stepper motors at tumkur.

4.

CNC systems at Bangalore.

5.

Ball scrums for use on CNC machines at Bangalore etc., Also

1.

HMT took over indo-Nippon precision bearing ltd, a state owned

unit as a subsidiary, which was renamed HMT- bearing ltd.

2.

HMT took over praga tools ltd as another subsidiary.

THE 1990S
The company restructured itself into four business groups machine
tools, watches tractors, industrial machinery and engineering components as
part of business re-organization.

THE NEW MILLIENNIUM

HMT is now restructured with addition of there more subsidiaries to
those already existing HMT now comprises of six subsidiaries under the ambit
of the holding company which also manages the tractors business directly.
1.

HMT machine tools limited Bangalore.

2.

HMT watches limited Bangalore

3.

HMT chinar watches limited Jammu.

4.

HMT bearing limited Hyderabad

5.

Praga tools limited Hyderabad.

6.

HMT (international) limited Bangalore.

The Strategic plan of the HMT group is coordinated by the holding
company at Bangalore.

Anticipating that basic requisition for rapid industrial was selfefficiency in machine tools segment. Government entered in to technical
collaboration with M/s oerlikons machine tools factory at Bangalore. But
how the government till 1953 when HMT was established as a registered
company in Bangalore.

It was 1961 the HMT had show a profit setting of crores and riding the
high up the success HMT decides that the amount generated as profit would
be utilized for up of another unit Bangalore i.e. unit-1 1.
The HMT- 11 was inaugurated by the late. Prime Minister Jawaharlal
Nehru on 21st July, 1961 the second factory described as Gift of Nation.

HUMAN RESOURCE MANAGEMENT:

The company has continuously added to its installed capacity, yet the
Man-MW ration has been consistently improving. The total strength of
employees of the company including that on secondment to different
associated organization stands at 23080 as on March 31, 2004 as against
23427 as on March 31, 2003. All efforts were made to improve the work force
utilization. The overall man-MW ration for the year 2003-04 was 0.98 as
against 1.02 for year 2002-03.
In tune with companys HR initiatives, training & development given a
renewed thrust to build competence and commitment among the employees.
The target of seven days training per employees achieved by most of the
plants.
In order to bring more objectivity and transparency in performance
evaluation and building high performance culture, key performance area based
performance, monitoring system is being implemented from 2004-05.
Considering the importance of knowledge management, a detailed IT
enabled KM system has designed which provides for various domains of
knowledge to be comprehensively captured. The system under implementation
and would benefit a large number of users in the company.

Employee morale continued to remain high facilitating smooth

working of the company and contributing to higher generation of power. All
efforts to achieve employee development were made through measures like
job-rotation, re-deployment etc.
EMPLOYEE RELATIONS:
Employee relations In HMT, rooted in the philosophy of bipartisan,
continued to be cordial & harmonious during the year.
1. effectively leverage information technology to drive process
efficiencies.
2. aim for performance excellence in the diversification businesses.
HUMAN RESOURCE DEVELOPMENT:

To enhance organizational performance by institutionalizing

an objective and open performance management system.

To align individual and organizational needs and develop

business leaders by implementing a career development
system.

To enhance commitment of employees by recognizing and

rewarding high performance.

To build and sustain learning organization of competent

world- calls professionals.

To institutionalize core values and create a culture of team

building, empowerment, equity, innovation and openness
which would motivate employees and enable achievement of
strategic objectives.

FINANCIAL SOUNDNESS:
To maintain and improve the financial soundness of HMT by
prudent management of the financial resources.
To cautiously strive to reduce the cost of capital through
prudent management of deployed founds, leveraging opportunities in domestic
and international financial markets. To develop appropriate commercial
policies and processes which would ensure remunerative tariffs and minimize
receivables?
To continuously strive for reduction in cost of power generation
by improving operating practice.

CHAPTER III

CONCEPTUAL BACKGROUND
The investment in inventories constitutes the most significant part of
current assets / working capital in most of the undertakings. Thus, it is very
essential to have proper control and management of inventories.
The purpose of inventory management is to ensure availability of
materials in sufficient quantity as and when required and also to minimize
investment in inventories.

Meaning and Nature of Inventory:

In accounting language, inventory may mean the stock of finished
goods only. In a manufacturing concern, it may include raw materials, workin progress and stores etc.,

Inventory includes the following things:

a)

Raw Material: Raw material from a major input into the organization.
They are required to carry out production activities uninterruptedly.
The quantity of raw materials required will be determined by the
rate of consumption and the time required for replenishing the
supplies. The factors like the availability of raw materials and
Government regulations etc., too affect the stock of raw materials.

b)

Work in progress: The work in progress is that stage of stocks which

are in between raw materials and finished goods. The quantum of
work in progress depends upon the time taken in the manufacturing
process. The quantum of work in progress depends upon the time
taken in the manufacturing process. The greater the time taken in
manufacturing, the more will be the amount of work in progress.

c)

Consumables: These are the materials which are needed to smoother

the process of production but they act as catalysts. Consumables
may be classified according to their consumption add critically.

Generally, consumable stores doe not create any supply problem

and firm a small part of production cost. There can be instances
where these materials may account for much value than the raw
materials. The fuel oil may form a substantial part of cost.
d)

Finished goods: These are the goods, which are ready for the
consumers. The stock of finished goods provides a buffer between
production and market, the purpose of maintaining inventory is to
ensure proper supply of goods to customers.

e)

Spares: The stock policies of spares fifer from industry to industry.

Some industries like transport will require more spares than the
other concerns. The costly spare parts like engines, maintenance
spares etc., are not discarded after use, rather they are kept in ready
position for further use.
All decisions about spares are based on the financial cost of inventory

on such spares and the costs that may arise due to their non availability.
BENEFITS OF HOLDING INVENTORIES
Although holding inventories involves blocking of a firms and the
costs of storage and handling, every business enterprise has to be maintain
certain level of inventories of facilitate un interrupted production and
smooth running of business. In the absence of inventories a firm will have to
make purchases as soon as it receive orders. It will mean loss of time and
delays 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 quantity discounts etc.

There are three main purpose of holding inventories.

1.

The transaction motive: This facilitates continuous production and

timely execution of sales order

2.

The precautionary motive: This necessitates the holding of

inventories for meeting the unpredictable changes in demand and
supplies of materials.

3.

The speculative motive: This induces to keep inventories for taking

advantage of price fluctuations, saving in re ordering costs and
quantity discounts.
RISK AND COSTS OF HOLDING INVENTORIES
The holding of inventories involves blocking of firms funds and

incurrence of capital and other costs.

The various costs and risks involved in holding inventories are:
Capital costs: Maintaining of inventories results in blocking of the
firms financial resources. The firm has therefore to arrange for additional
funds to meet the cost of inventories.
The funds may be arranged from own resources or from outsiders. But
in both the cased, the firm incurs a cost. In the former case, there is an
opportunity cost of investment while in the later case; the firm has to pay
interest to t he outsiders.
1.

Storage and Handling Costs: Holding of inventories also involves

costs on storage as well as handing of materials. The storage of costs
include the rental of the godown, insurance charges etc.

2.

Risk of Price decline: There is always a risk of reduction in the prices

of inventories by the supplies, competition or general depression in the
market.

3.

Risk of Obsolescence: The inventories may become absolute due to

improved technology, changes in requirements, change in customer
tastes etc.

4.

Risk Determination in quality: The quality of materials may also

deteriorate while the inventories are kept.

Objects of Inventory Management

Definition of Inventory Management: Inventory Management is
concerned with the determination of optimum level of investment for each
components of inventory and the operation of an effective control and review
of mechanism.
The main objectives of inventory management are operational and
financial.
The operational objective mean that the materials and spares should be
available in sufficient quantity so that work is not disrupted for want of
inventory.
The financial objective means that inventory should not remain idle
and minimum working capital should be locked in it.

The following are the objectives of inventory management:

1.

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

that production should not suffer at any time and the customers
demand should also be met.

2.

To avoid both over stocking and under stocking of inventory.

3.

To maintain investment in inventories at the optimum level as required

by the operational and sales activities.

4.

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

the cost of production and overall costs.

5.

To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralizing purchases.

6.

To minimize loses through deterioration, pilferages, wastages and

damages.

7.

To ensure perpetual inventory control so that materials shown in stock

ledgers should be actually lying in the stores.

8.

To ensure right quality goods at reasonable prices. Suitable quality

standards will ensure proper quality of stocks. The price analysis, the
cost analysis and value analysis will ensure payment of proper prices.

9.

To facilitate furnishing of data for short term and long term

planning and control of inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

A proper inventory control not only helps in solving the acute problem
of liquidity but also increases profit and causes substantial reduction in the
working capital of the concern.
The following are the important tools and techniques of inventory
management and control.
1.

Determination of stock levels:

Carrying of too much and too little of inventory is detrimental to the

firm. If the inventory level is too little, the firm will face frequent stock outs
involving heavy ordering cost and if the inventory level is too high it will be
unnecessary tie up of capital.
An efficient inventory management requires that a firm should
maintain an optimum level of inventory where inventory costs are the
minimum and at the same time there is no stock out which may result in loss
or sale or shortage of production.
a)

Minimum stock level:

It represents the quantity below its stock of any item should not be

allowed to fall.
Lead time: A purchasing firm requires sometime to process the order
and time is also required by the supplying firm to execute the order.
The time in processing the order and then executing it is know as lead
time.
Rate of Consumption: It is the average consumption of materials in
the factory. The rate of consumption will be decided on the basis of past
experience and production plans.
Nature of materials: The nature of material also affects the minimum
level. If a material is required only against the special orders of the customer
then minimum stock will not be required for such material.
Minimum stock level can be calculated with the help of following
formula.

Minimum stock level Re ordering level (Normal consumption x

Normal re order period)
b)

Re ordering Level:
When the quantity of materials reaches at a certain figure then fresh

order is sent to get materials again. The order is sent before the materials reach
minimum stock level.
Re ordering level is fixed between minimum level maximum level.
c)

Maximum Level:
It is the quantity of materials beyond which a firm should not exceeds

its stocks. If the quantity exceeds maximum level limit then it will be over
stocking.
Overstocking will mean blocking of more working capital, more space
for storing the materials, more wastage of materials and more chances of
losses from obsolescence.
Maximum stock level Reordering Level + Reorder Quantity
(Maximum Consumption x Minimum reorder period)
d)

Danger Stock Level:

It is fixed below minimum stock level. The danger stock level indicates

emergency of stock position and urgency of obtaining fresh supply at any cost.
Danger Stock level = Average rate of consumption x emergency delivery
time.
e)

Average Stock Level:

This stock level indicates the average stock held by the concern.
Average stock level = Minimum stock level + x reorder quantity.

2)

Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated increase in usage.

The demand for materials may fluctuate and delivery of inventory may also be
delayed in such a situation the firm can be face a problem of stock out.
In order to protect against the stock out arising out of usage
fluctuations, firms usually maintain some margin of safety stocks.
Two costs are involved in the determination of this stock that is
opportunity cost of stock outs and the carrying costs.
If a firm maintains low level of safety frequent stock outs will occur
resulting into the larger opportunity costs. On the other hand, the larger
quantity of safety stocks involves carrying costs.
3)

Economic Order Quantity (EOQ):

The quantity of material to be ordered at one time is known as

economic ordering quantity.

This quantity is fixed in such a manner as to minimize the cost of
ordering and carrying costs.
Total cost material = Acquisition Cost + Cost + Carrying Costs +
Ordering Cost.
Carrying Cost:
It is the cost of holding the materials in the store.

Ordering Cost:
It is the cost of placing orders for the purchase of materials.
EOQ can be calculated with the help of the following formula
EOQ = 2CO / I
Where C = Consumption of the material in units during the year

O = Ordering Cost
I = Carrying Cost or Interest payment on the capital.
4)

A B C Analysis: (Always better control analysis):

Under A B C Analysis. The materials are divided into 3 categories

viz., A, B and C.
Almost 10% of the items contribute to 70% of value of consumption
and this category is called A category.
About 20% of the items contribute about 20% of value of category C
covers about 70% of items of materials which contribute only 10% of value of
consumption.
5)

VED Analysis : (Vitally Essential Desire)

The VED analysis is used generally for spare parts. Spare parts

classified as Vital(V), Essential (E) and Desirable (D).

The vital spares are a must for running the concern smoothly and these
must be stored adequately. The E type of spares are also necessary but their
stocks may be kept at low figures. The stocking of D type spares may be
avoided at times. If the lead time of these spares is less, then stocking of these
spares can be avoided.
6)

Inventory Turnover ratio:

Inventory turnover ratios are calculated to indicate whether inventories

have been used efficiently or not.

The inventory turnover ration also known as stock velocity is normally
calculated as sales / average inventory of cost of goods sold / average
inventory.
Inventory conversion period may also be calculated to find the average
time taken for clearing the stocks. Symbolically.
Inventory Turnover Ratio =

Cost of goods sold

__________________________
Average inventory at cost
Or
=

Net sales
_____________________
(Average) Inventory

And, Inventory conversion period =

Days in a year
______________________
Inventory Turnover ratio

7)

Classification and Codification of Inventories:

The inventories should first be classified can then code numbers should

be assigned for their identification. The identification of short names are

useful for inventory management not only for large concerns but also for small
concerns. Lack of proper classification may also lead to reduction in
production.
Generally, materials are classified accordingly to their nature such as
construction materials, consumable stocks, spares, lubricants etc. After
classification the materials are given code numbers. The coding may be done
alphabetically or numerically. The later method is generally used for coding.
The class of materials is assigned two digits and then two or three
digits are assigned to the categories of items divided into 15 groups. Two
numbers will be category of materials in that class.
The third distinction is needed for the quality of goods and decimals
are used to note this factor.

8)

Valuation of inventories Method of valuation:

FIFO method
LIFO method
Base Stock method
Weighted average price method

CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall objective of the inventory system is to minimize the
cost to the firm at the risk level acceptable to management, the more
proximate criteria for judging the inventory system are:
Comprehensibility
Adaptability
Timeliness
Area of improvement:
Inventory management in India can be improved in various ways.
Improvements could be affected through.
Effective Computerization: Computers should not be used merely for
accounting purpose but also for improving decision making.
Review of Classification: ABC and FSN classification must be periodically
reviewed.
Improved Coordination: Better coordination among purchase, production,
marketing and finance departments will be help in achieving greater efficiency
in inventory management.

Development of long term relationship:

Companies should develop long term relationship with vendors. This

would help in improving quality and delivery.
Disposal of obsolete / surplus inventories:
Procedures for disposing obsolete / surplus inventories must be
simplified.
Adoption of challenging norms:
Companies should set benchmarks with global competitors and use
ideals like JIT to improve inventory management.
Inventory cost an overall view
Introduction:
In financial parlance, inventory is defined as the sum of the value of
the raw materials, fuels and lubricants spare parts maintenance consumable
semi processed materials and finished goods stock at any giving point of
time. The operational definition of inventory would be amount of raw
materials, fuel and lubricants, spare parts and semi processed materials to be
stock for the smooth running of the plant / industry.

Need of Inventory:
Inventories are maintained basically for the operational smoothness
which they can be affected by uncoupling successive stages of production,
whereas the monetary value of the inventory serves as a guide to indicate the
size of the investment made to achieve this operational convenience. The
materials management departments primary function is to

provide this

operational convenience with a minimum possible investment in inventories.

Materials department is accused of both stock outs as well a large investments
in inventories. The solution lies in exercise a selective inventory control and
application of inventory control techniques. Inventories build to act as a
cushion between supply and demand. It is sufficient to take care of the
requirements of demand till the next supply arrives. It is sufficient to take care
of probable delays in supply as well as probable variations in demand.
The size of the inventory depends upon the factors such as size of
industry internal lead time for purchase, suppliers lead time, vendor relations
availability of the materials, annual consumption of the materials. Inventory
coat can be controlled by applying Modern Techniques viz., ABC analysis,
SDE, ESN, HMC, VED etc. These techniques can be used effectively with the
help of computerization.

What is meant by inventory cost:

A.

The total value of stores and spares and capital spares.

B.

Stores in transit and under inspection and

C.

Stock of finished products.

Normally, there are certain problems in maintaining optimum level of

inventory. Problems of inventory can be resolved by the cost implications.

Costs which are relevant for consideration are discussed in the following lines;
Basically there are four costs for consideration in developing and
inventory model.
1.

The cost of placing a replenishment order.

2.

The cost of carrying inventory.

3.

The cost of under stocking and

4.

The cost of over stocking.

The cost of ordering and inventory carrying cost are viewed as the

supply side costs and help in the determination of the quantity to be ordered
for each replenishment.
The under stocking and over stocking costs are viewed as the demand
side costs and help in the determination of the amount of variations in demand
and the delay in supplies which the inventory should withstand.
Whenever an order placed for stock replenishment, certain costs are
involved, and, for most practical purpose it can be assumed that the cost per
order is constant. The ordering cost may vary depending upon the type of
items, for example raw material like steel against production component like
castings in steel plants, support materials in the case of coal industry.

The cost ordering includes:

1)

Paper work costs, typing and dispatching an order.

2)

Follow up costs the follow up, the telephones, telex and postal bills
etc.,

3)

Costs involved in receiving of the order, inspection, checking and

handling in the stores.

4)

Any set up cost of machines charged by the supplier, either directly

indicated in quotations or assessed through quotations of various
quantities.

5)

The salaries and wages of the purchase department.

Cost of Inventory carrying:

This cost in measured as of the unit cost of the item. This measure
gives basis for estimating what is actually costs a company to carry stock.
This cost includes:
1)

Interest on capital.

2)

Insurance and tax charges.

3)

Storage costs labour costs, provision of storage area and facilities

like bins, racks etc.,

4)

Transport bills and hamali charges.

5)

Allowance for deterioration or spoilages.

6)

Salaries of stores staff.

7)

Obsolescence.
The inventory carrying cost varies and a major portion of this is

accounted for by the interest on capital.

Under stocking cost:

This cost is the cost incurred when an item is out of stock. It includes
cost of lost production during the period of stock out and the extra cost per
unit which might have to be paid for an emergency purchase.
Over stocking cost:
This cost is the inventory carrying cost (which is calculated per year)
for a specific period of time. The time varies in different contexts it could be
the lead time of procurement of entire life time of machine. In the case of one
time purchases, over cost would be = Purchase Price Scrap Price.
INVENTORY VALUATION AND COST FLOWS:
What is the cost of inventory?
One can readily visualize the determination of inventory quantities by
physical count or by use of perpetual inventory records. When this quantity is
determined, it must be multiplied by a unity cost in order to determine the
inventory value that is used on financial statements.
Trade and quantity discount are to be excluded from unit cost since
these discount exist for the purpose of defining the true invoice cost of
merchandise. Cash discounts, on the other hand, have been considered as a
reward for early payment and as a penalty for late payment. The reward has
often been interpreted as a loss rather than as a part of unit cost. Thus it would
not be difficult to find difference of opinion as to whether invoice cost
includes or excludes cash discount.
When the current replaMACHINES cost of material on hand at the
close of a year is less than the actual cost, the inventory value is reduced to
replaMACHINES cost (current market price). Thus the acceptable basis
inventory valuation is the lower of cost or market or more properly the
lower of actual cost or replaMACHINES cost.

The determination of inventory values is very important from the point

of view of the balance sheet and the income statement since costs not included
in the inventory (the balance sheet) are considered to be expensive and are
thus included in the income statement.
Valuation of inventories methods of determination:
Although the prime consideration in the valuation of inventories is
cost, there are a number of generally accepted methods of determining the cost
of inventories at the close of an accounting period. The most commonly used
methods are first in first out (FIFO) average, and last in first out (LIFO).
The selection of the method for determining cost for inventory valuation is
important for it has a direct bearing on the cost of goods sold and consequently
on profit. When a method is selected, it must be used consequently and cannot
be changed for year to year in order to secure the most favorable profit for
each year.
THE FIFO METHOD (FIRST IN FIRST OUT METHOD)
Under this method it is assumed that the materials or goods first
received are the first to be issued or sold. Thus, according to this method, the
inventory on a particular date is presumed to be composed of the items which
were acquired most recently.
The value inventory would remain the same even if the perpetual
inventory system is followed.
Advantage:- The FIFO method has the following advantages.
1)

It values stock nearer to current market prices since stock is

presumed to be consisting of

2)

The most recent purchases.

3)

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

the financial accounts of the company.

4)

The method is realistic since it takes into account the normal

procedure of utilizing or selling those materials or goods which
have been longer longest in stock.

Disadvantages:- The method suffers from the following disadvantages.

1)

It involves complicated calculations and hence increases the

possibility of clerical errors.

2)

Comparison between different jobs using the same type of material

becomes sometimes difficult. A job commenced a few minutes
after another job may have to bear an entirely different charge for
materials because the first job completely exhausted the supply of
materials of the particular lot.
The FIFO method of valuation of inventories is particularly suitable in

the following circumstances.

I.

The materials or goods are of a perishable nature.

II.

The frequency of purchases is not large.

III.

There are only moderate fluctuations in the prices of materials or

goods purchased.

IV.

Materials are easily identifiable as belonging to a particular

purchase lot.

The LIFO method (Last in First Out method)

This method is based on the assumption that last item of materials or
goods purchased are the first to be issued or sold. Thus, according to this
method, inventory consists of items purchased at the earliest cost.
Advantages:- This method has the following advantages:
1)

It takes into account the current market conditions while valuing

materials issued to different jobs or calculating the cost of goods
sold.

2)

The method is base on cost and, therefore, no unrealized profit or

loss is made on account of use of this method.
The method is most suitable for materials which are of bulky and non

perishable type.
Base Stock Method:
This method is based on the contention that each enterprise maintains
at all times a minimum quantity of materials or finished goods in its stock.
This quantity is termed as base stock. The base stock is always valued at this
price and its carried forward as a fixed asset. Any quantity over and above the
base stock is valued in accordance with any other appropriate method. As this
method aims at matching current costs to current sales, the LIFO method will
be most suitable for valuing stock of materials or finished goods other than the
base stock. The base stock method has advantage of charging out material /
goods at actual cost. Its other merits or demerits will depend on the method
which is used for valuing materials other than the base stock.
Weighted average price method:
This method is based on the presumption that once the materials are
put into a common bin, they lose their identity. Hence, the inventory consists
of no specific batch of goods. The inventory is thus priced on the basis of
average priced on the quantity purchased at each price.

Weighted average price method is very popular on account of its being

based on the total quantity and value of materials purchased besides reducing
number of calculations. As a matter of fact the new average price is to be
calculated only when a fresh purchase of materials is made in place of
calculating it every now and then as is the case with FIFO, LIFO methods.
However, in case of this method different prices of materials are charged from
production particularly when the frequency of purchases and issues/sales in
quite large and the concern is following perpetual inventory system.
Valuation of inventories impact on the flow of costs:
As should be quite evident, the different methods of calculating
inventory values will all have their impact on the flow of costs through the
balance sheet into the income statement. The dollars that are paid to acquire
inventory are always divided between the balance sheet (inventories) and the
income statement (cost of goods sold), there is not other place to put them.
Thus if the different methods of calculating inventory produce differing
inventory values, they will also produce differing cost of goods sold figures,
and the differing cost of goods sold figures will naturally produce differing
profit figures.
In order show the impact of inventory valuation on cost flows, the
preceding exhibits are summarized. Each method produces a different figure
for the transfer of raw materials to work in process. These differences appear
small, but the only reason for this is that the dollar amounts have been kept
small to make the illustration workable.
With the transfer of materials to work in process, the cost flow or
transfer with have its impact on the work in process inventory and the transfer
of completed merchandise to finished gods. Ultimately when goods are sold;
the varying methods of valuing inventories will have their impact on cost of
goods sold and these profits. The effects of the cost flows on cost of gods sold
and profits can be accentuated further it the differing methods of valuing
inventories are applies to work in process and finished goods.

Evaluation of methods What causes the differences?

The differences in inventory values and flows for each of the method
illustrated result from only one factor, that it, changing purchases prices or
unit costs. If purchase prices had remained stable or unchanged, each method
would have produced the same inventory value and cost flow.

Cost flows and inventory are exactly the some under stable prices.
With a falling price level, the LIFO method produces the highest cost flow and
the lowest inventory. With a falling price level, the LIFO method produces the
lowest cost flow and highest inventory. The cost flow under LIFO follows the
price level, LIFO produces larger cost flows when prices are rising and
smaller cost flows when prices are falling. A final item to consider is that the
average method produces results which fall between the extremes of LIFO and
FIFO.
Evaluation of methods can we justify the differences?
The best method of inventory valuation might be specific
identification, that is, the units in inventory should be identified with the
specific invoices and thus specific unit costs to which they apply.
Fortunately, the FIFO method constitutes a very useful approximation
to the specific identification method if on can reasonably assume that the
actual flow of materials is first-in first-out. This assumption is not
unreasonable and thus we have stated the main argument for the FIFO
inventory scheme, that is, the physical flow of materials would match the flow
of costs under the first in first out method.
When the units in inventory are identical, interchangeable and do not
follow any specific pattern of physical flow, the average cost system would
seen to appropriate.

The primary difference between the FIFO and average methods is

centered on the physical flow since both methods could involve identical and
interchangeable units. The FIFO method fits a first-in first-out physical flow.
The average method fits a system which has no specific pattern of physical
flow. Finding a situation where there is no specific pattern of physical flow
should be quite difficult because of the fact that most inventory items are
subject to deterioration by instituting a person would attempt to reduce such
deterioration and any reasonable person would attempt to reduce such
deterioration by instituting a physical flow approximating first-in-first-out.
The major reason for the use of the average method is something other than
the lack of specific physical flow.
Ordinarily the LIFO method cannot be justified on the basis of the
physical flow of materials. Under conditions of changing prices, the advocate
of LIFO says that the only method which matches costs and revenues is the
LIFO method. The LIFO method assumes that the latest item is the first item
out, and thus the current costs of materials are matched with the other hand,
assumes that the first item in is the first item out, and thus the non-current
costs of matching current costs with current revenues is the essence of the
argument for the LIFO method.
As can be seen by the above comments, there is no one best method of
valuing inventories. The method chosen should fit the situation. A physical
flow pattern comparable to FIFO would force one to consider the FIFO
method. The lack of a discernible physical flow pattern would force one to
consider the average method. Concentration on cost flows, as distinct from
physical flows, would force to consider the LIFO method especially where
there appears to be a discernible trend towards rising prices (or falling prices)
as has been the case in our economy during recent years.

Inventories valued at standard cost:

A very useful method of valuing inventories is at a standard cost. With
a standard cost system is no need of spending a great deal of time and money
tracing unit cost through perpetual inventory record.

PERPETUAL INVENTORY CARD UNDER A STANDARD

COST SYSTEM
Perpetual inventory Plant: Standard cost:
Location: Order Quantity:.....
Date

Description

On order

Order Point: ..
Available
Received Issued
On order On hand

As shown above, there is need only for physical quantities since the
inventory values is the physical quantity multiplied by the standard cost. With
the cost and value columns disposed off, a perpetual inventory card can
include additional data such as quantities on order, quantities reserved, and
quantities available. These additional data are very useful for inventory and
production control purpose. On the basis of a few calculations concerning into
inventories on a FIFO, a LIFO, or an average cost basis.

Inventory of Obsolescence:

Absolvent inventories cannot be used or disposed off at values carried

on the books. Frequent reviews should be made of all inventories, and when
obsolescence is indicated a request for revaluation should be prepared for
approval by management. The difference between original and obsolete value
should be recorded by a change to an operating account. Inventory
obsolescence, and a credit to inventory. If the material is scrapped, this will be
for the full inventory value or used in areas where it will be work less than its

Original value, the entry would be only for the amount of write down. Some
companies carry a salvage inventory and transfer to it materials which may be
sold or used at reduced values. Where this is done, the entry would be:
Dr. Salvage inventory
Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies
inventory.
Inventory cost in relation HMT TOOLS LIMITEDs shall to classifieds
follows:
Inventory can be classified as capital and revenue certain items through
titled as capital in nature. Hence, due care is to be take whole drawing the
material.
Materials which are to be imported from other countries have to be
planned well in advance nearly about 24 months are to initiate the proposals
for procurement.
Similarly some of the items do not require any lead time some they are
available in the local market.
MACHINES is highly energy intensive industry, the inputs like power
and coal are the major part of the variable cost since Government controls the
coal & fuel sector, and increase is rates adversely effects the MACHINES
industry.

HMT TOOLS LIMITED has it own power plant and through which it
saves energy consumption. By this the cost since Government controls the
coal & fuel sector, any increase rates adversely effects the MACHINES
industry.
Inventory cost of any organization also adversely affects by retaining
obsolete / scrap and inventory costs can be reduced by management with an
advance planning of procurement of materials, periodical reviews of existing
spares with reference to the fast consumption, ascertaining the information
regarding the availability of spares in other areas. Holding of extra inventory
will be an additional financial burden to the company due to payment of
interest charges on the materials purchased, diminishing value of materials
purchased, diminishing value of materials by keeping them in stores for a log
time, handling charges, spare rent etc.,
The inventory of HMT TOOLS LIMITED mainly includes Watches,
Stepper motors, CNC machines, Ball scrums.
Inventory in HMT TOOLS LIMITED during 2003 04 to 2007 08
are as follows: (Units in m.t)

Years

2003 04

2004 05

2005 06

2006 07

2007-08

Watches
Stepper

1096560

995650

976750

925720

1569543

51526

47567

43748

452256

67561

27567

25567

25567

250275

39565

5956

12567

19102

35765

179555

motors
CNC
machines
Ball
scrums

The value of the above raw materials for the year 2003 08 is as
follows: (Value in Rs.)

Value of imported and indigenous raw materials, stores, spare parts and
components consumed
Years

2003 04

2004 05

2005 06

2006 07

Watches

147261597

12554678

13853482

157130922 253512287

31696775

28081883

26991793

23577845

39525576

18515031

16561576

16561576

18679683

50022296

Stepper
motors
CNC
machines
Ball

2007-08

27506
745573
745573
2557949
20523505
scrums
Value of imported and indigenous raw materials, stores, spare parts and
components consumed during the year:
Imported

Years

2003 04

2004 05

2005 06

2006 07

Raw Materials

97365976

602775622 766175615

596226625

517577053

517577053

121656916

Years

2003 04

2004 05

Raw Materials

115567978

Stores spare
parts and

75646207

components

2007
08
15542
36729
51069
736

Indigenous

2005 06

2006 07

2007 08

4025674929 3787749527 5115402137 81251651616

Stores spare
parts and

712504256

991790149

199159560

1465764286

4978515267

components

MACHINES

FACTORY

RUNS

WITH

VARIOUS

EQUIPMENTS:
I.

II.

TECHNICAL DEPARTMENT
1.

BEARINGS

2.

MECHANICAL

3.

ELETRICAL

4.

CIVIL

COMMERCIAL DEPARTMENTS
1.

STORES

2.

PURCHASE

3.

ACCOUNTS

TO RUN THE PLANT AND MAINTAIN EQUIPMENTS DEPARTMENTS

REQUIRE SPARES.
FOR SUCH REQUIREMENT OF SPARES DEPARTMENTS RAISE
INDENTS AND SEND THE INDENTS TO PURCHSE DEPARTMENT
THROUGH STORES.

INDENTS:
1)

ANNUAL INDENTS

FOR

CONSUMABLE

ITEMS

(STORES

ITEMS).
2)

REGULAR INDENTS RAISED BY CONSUMING DEPARTMENTS.

3)

ANNUAL REQUIREMENT OF RAW MATERIALS PROMOP & QC.

ENQUIRIES:
1)

ENQUIRES WILL BE SENT APPROVED SUN CONTRACTORS.

ORDER PROCESSING FORM:

1)

RECEIVING QUOTATIONS FROM SUB CONTRACTORS.

2)

ENTER THE PRICE DETAILS OF ENQUIRY SENT IN THE

ORDER PROCESSING FORM.

3)

SELECTION OF PARTY ON MERIT BASIS.

PURCHASE ORDER:
1)

PREPARE PURCHSE ORDER ON SELECTED PARTY.

2)

SEND PURCHASE ORDER COPIES TO PARTY, STORES AND

DEPARTMENTS.

GOODS RECEIPT NOTE:

1)

RECEIVING GOODS RECEIPT NOTE FROM STORES.

PURCHASE DEPARTMENT:
ACTIVITY RECEIVING INDENTS:
FLOW CHART:
Receipt of annual indents for consumable items / stores items from
stores department.

 Checking of indent number an authority of item, delivery time

consumption period.
In case of any deficiency, send the information to concerned
department for clarification.
Segregation of indents for attending at C.P.D. and Hyderabad Office.
Sent the Hyderabad indents to Hyderabad Office.
Enter the indents details in indent register.

PURCHASE DEPARTMENT
PURCHASE ENQUIRY
Ms.
Sl.

Material Code

Department

Quantity

Unit

When

No.

Required

ACTIVITY: FLOATING ENQUIRIES:

FLOW CHART:

Checking indented items and equipment name.

Taking previous suppliers information form previous supply. If

new equipment / item, information to be taken from concerned
department or from competitors / journals / yellow pages.

Prepare enquiry to approved sub contractors through enquiry

format.

If emergency requirement, send the enquiries through fax / e-mail.

Enter the details of enquiries sent in order processing form.

PURCHASE DEPARTMENT
ORDER PROCESSING FORM
Inden

Indent

Materi

Ref

al

Description

Size

Qty

No.Ite

Code

No.

Code
Descr
iption
QtyR
ateUn
itAm
ount5
6Rem
arksS
l. No.
ACTI
VITY
:
PREP
ARA
TION
OF
ORD
ER
PRO
CESS
ING
FRO
M
FLO
W
CHA
RT:

Sl.

34

ACTIVITY: PREPARATION OF PURCHASE ORDER

FLOW CHART:

Prepare purchase order after finalization of price and other

technical terms mentioning the following details.
1. Material code
2. Indent number
3. Material specification & part number
4. Quantity
5. Rate
6. Payment and other terms & conditions

Stipulation of terms of test certificate / ibr / manufactures

certificate where applicable.

Fill in and attach the purchase order review proforma to purchase

order.

Send the prepared purchase order to head (purchase) and

competent authority for approval.

Send the purchase order to identified approved sub contractor.

Send the purchase order copies to store and concerned departments.

Enter the details of purchase order in purchase order register.

PURCHASE DEPARTMENT
AMENDMENT / CANCELLATION OF ORDER

Material Code

Material

Price / Quantity

Amended Price /

as per Order

Quantity

ACTIVITY: ORDER AMENDMENT, ORDER FOLLOW UP AND

INFORM THE SUPPLIER FOR THE REJECTIONS / DAMAGES /
SHORTAGES:
FLOW CHART:

Issue of amendments in case of modification to purchase order.

Review the pending order and follow up the pending order for
breakdown requirement.

Send regular reminders to suppliers against pending purchase order

every month.

Receive shortage / excess / damages report from stores for the

material received.

Information the supplier for the rejections / damage / excess /

shortage.

PURCHASE DEPARTMENT
ACTIVITY: IMPORTS:
FLOW CHART:

Receipt of indents for import items from stores department.

Taking previous / item, information to be taken from concerned

department or from competitors / journals / Yellow pages.

Send enquiry to overseas supplier.

Receiving quotations against enquiries sent.

Enter price and other terms of the quotations received from

overseas supplier in the order processing form.

Examine order processing form and decide the sub contractor to

whom purchase order to be placed.

Prepare purchase order after finalization of price and other

technical terms mentioning the following details.

1) Material code
2) Indent number

3) Material specification & part number

4) Quantity
5) Rate
6) Payment
7) Insurance and other terms and conditions.

Send the prepared purchase order to head (purchase) and

competent authority for approval.

Send the purchase order to overseas supplier.

Send the purchase order copies to stores and concerned

departments.

Prepare IC documents and submit to bank for onward transmission

to overseas supplier.

Receive shipping documents from overseas supplier and send same

to clearing agents for collection of the material.

STORES DEPARTMENT
ACTIVITY: RECEIPTS AND UNLOADING MATERIAL

Receiving of Goods through Trunk / Personnel Delivery.

Entry of vehicle at Gate Office.

Stamping on Dispatch Advise / Delivery challan by Gate Office.

Checking of challans / Dispatch Advise with purchase order.

Unloading of Goods at allotted place or in case of urgency direct at

works site.

All safety precautions are taken while unloading of material like

workers should wear safety shoes, helmets, leather head gloves,
noise respirator, nose mask.

Training is given to workers for unloading Heavy & Bulky material

by using chain pulley Blocks, Wire Rope Ceilings, Fork Lift. After
UIL receipt acknowledgement given to driver maintaining Lorry
receipts register.

STORES DEPARTMENT
ACTIVITY: PREPARATION OF RECEIPT AND APPROVAL BOOK
FOR GENERAL MATERIAL / D.C. ENTER OF BLOCK, REPAIR AND
STATIONARY MATERIAL MANUALLY IN REGISTER

Sorting of Delivery challans as below:

a) General
b) Stationery
c) Repairs
d) Block

Checking with P.O. and mentioning Material Code, Party Code,

Indent No. Department Name on each & every challans.

Creation of D.C. entry in system for general materials.

Preparation of identification tags for General Materials through

system.

Preparation of Receipt & Approval Book for General materials.

Manual entry of block, stationery, repair materials.

Preparation of intimations for block, stationery, repair materials.

STORES DEPARTMENT
ACTIVITY: PHYSICAL VERIFCATION OF GOODS:

All D.C. handed over to stores assistant physical verification like

measuring, counting and tallying with D.C.s Quantity /
Description of the materials by the Stores Assistant.

Identification tags to be attached to the verified material. Shortage /

Excess / Damages if any found to be noted on challans and inform
to section incharge.

Preparation of Shortage / Excess / Reports if any sending to parties

under copy to purchase / bills sections.

STORES DEPARTMENT
ACTIVITY: APPROVAL OF MATERIAL AND PREPARATION OF
GOODS RECEIPT NOTES:

Intimation is be sent to all the concerned departments. Showing

materials to concern person.

Taking approval of the material in receipt & approval book.

Preparation general material in receipt & approval book.

Preparation

general

material

GRNs

through

system

and

stationery / block / repairs GRNs manually.

Forwarding true copy to issue section of GRN for general material

forwarding true copy to issue section of GRN for General material
forwarding true copy of block / Repair / Stationery GRN to issue
section and copy to purchase department.

STORES DEPARTMENT
ACTIVITY: REJECTED MATERIALS

Rejected materials kept in allotted area of rejected materials.

Packing of rejected materials.

Preparation of gate passes for rejected materials.

Sending back to suppliers through our Hyderabad Office.

Sending consignee copy to party vide Register Letter for booking

of Register goods to partys other than.

STORES DEPARTMENT
ACTIVITY: EXCISE GATE PASSES

Sending duplicate for transport copy of excise invoice from

suppliers delivery challans.

Mentioning A.B. Sl. No. and named of concerned department.

Duplicate for transport copy of excise invoice over to bills section

for sending the same to Excise Department.

Corresponding with supplier. If the Excise Invoice is not found

with delivery challans.

STORES DEPARTMENT
ACTIVITY: RECEIPTS OF MEDICINES

Physical verification of Medicines as per Invoices.

Verification of expiry date on medicines.

Verification of MRP.

Sending shortage / excess note if any found.

Taking approval of Medical Officer.

Sending Rejection notes if any medicine is rejected.

Issuing to dispensary.

Bills forwarding to Account Department vide IOM for making the

payment.

CHAPTER IV

RATION ANALYSIS
The investment on raw materials over a period of 5 years from 2000 to
2008 is presented in the following table.
1. Investment on Raw Materials:
Year

Investment on Raw Material (in crores)

2002 2003

12376.95

2003 2004

11750.75

2004 2005

47550.86

2005 2006

41572.77

2006 2007

47265.66

2007 2008

92505.68

Interpretation:
1)

From the above table it can be understood that the inventory of HMT
TOOLS LIMITED was recorded at 12376.95 during the year 2002
03 and it is increased to 92505.68 during the year 2007 08.

2)

It shows that there is on increase in the inventory to the more extent of

82208.91.

3)

The average inventory of HMT TOOLS LIMITED was recorded at

Rs.47260.15.

4)

The highest investment in inventory was recorded in the years 2007-08

2.

Trend Analysis:
Trend analysis technique is applied to know the growth rate in

investment of raw material of HMT TOOLS LIMITED over the review period
which is shown in the following table.
Trend Analysis:

Year

Raw Material (in

Trend %

2002 2003

Lacks)
12376.95

2003 2004

11750.75

97%

2004 2005

47550.86

344%

2005 2006

41572.77

295%

2006 2007

47265.66

359%

2007 2008

92505.68

710%

100%

Interpretation:
1)

The investment on investment has increased in the year 2006 08. And
the lost year investment has declared continuously. The percentage in
2003 04 was 295% as compared to years 2004 05 to 2007 08.

2)

The trends in inventories show that inventory have been more in the
year 2007 08 and then it has shown a downward trend and again it
increased to some extent.

3)

The investment in inventories has shown fluctuating trend is initial

years and then it raised to 710% and again showing fluctuating trend.

3.

Inventory Turnover Ratio:

This ratio indicates the number of times the stock has been turned over
during the period & evaluates the efficiency with which a firm is able to
manage its inventory. This ration is calculated by applying the following
formula.
Cost of goods sold
Inventor turn over ration

_________________
Average inventory

Inventory turn over ration:

yrs

Cost of goods

2002 2003

sold
59567.65

2003 2004

57046.56

2004 2005

118561.78

2005 2006

126368.65

2006 2007

129568.89

2007 2008

299726.18

Avg. Inventory

Ratio

7200.12

8.27

36822.20

1.54

94022.27

1.26

11365.07

11.11

12225.77

10.59

155627.91

1.92

Interpretation:
1.

From the above table 2002 it can be observed that (1) inventory turn
over ratio is 8.27 during 2002 2003 and it gradually decreased to
1.26 during 2004 2005.

2.

In the year 2004 05 it is clear that the ratio is very less i.e., he stock
is not turned into sales quickly.

3.

As compared to all the years the ratio is very less in 2004 05.

4.

The average inventory turn over ratio was recorded at 6.3 times during
the review period.

4.

Inventory conversion period:

It may also be of interest to see average time taken for clearing the

stocks. This can be possible by calculating inventory conversion period. This

period is calculated by dividing the number of the days by inventory turn over.
This formula may be as:
Days in a year (360 days)
Inventory conversion period

_____________________
Inventory turnover ratio

Inventory conversion period: (in crores)

Year

Cost of

2002 2003

goods sold
59567.65

2003 2004

57046.56

2004 2005

118561.78

2005 2006

126368.65

2006 2007

129568.89

2007 2008

299726.18

Avg.
inventory

Ratio

ICP (Days)

7200.12

8.27

43

36822.20

1.54

233

94022.27

1.26

285

11365.07

11.11

32

12225.77

10.59

33

155627.91

1.92

187

Interpretation:
From the above table it can be identified the following observations:
1)

The inventory conversion period was 233 days during the year 2003
04 but it declined to 285 during 2004 - 05, which indicates that the
stock has been very quickly converted into sales which mean the
company is managing the inventory efficiently.

2)

The lowest inventory conversion period was recorded at 285 days in

the year 2004 05 and the highest inventory conversion was recorded
at 187 days in the year 2007 08.

3)

The average inventory conversion period was recorded at 97days

during the review period.

5.

Percentage of Inventory over current assets:

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

Ratio of inventory to current assets is calculated and which is presented in the

following table.
Inventory over current assets ratio =

Inventory
__________ X 100
Current assets

Percentage of Inventory Over current assets:

Year

Inventory

2002 2003

12376.95

2003 2004

11750.75

2004 2005

47550.86

2005 2006

41572.77

2006 2007

47265.66

2007 2008

92505.68

Current Assets

Ratio (%)

20272.23

61%

29672.56

39%

57522.66

82%

49627.06

83%

52726.32

89%

90277.56

102%

Interpretation:
1)

From the above table it can be understand that the % of inventory over
current assets ratio was showing a declining trend for two years 2002 2003.

2)

However from the year2007 08 it is showing an increasing trend.

3)

The lowest inventory over current assets ratio was recorded at 39%
during the year 2003 04 and the highest inventory over current assets
ratio we recorded at 102% during 2007 08.

4)

The average inventory over current assets ratio was recorded at 65%.

6.

Percent of Inventory Over total current assets & fixed assets:

Inventory / Current + Fixed assets
Year

Inventory

2002 2003

12376.95

2003 2004

11750.75

2004 2005

47550.86

2005 2006

41572.77

2006 2007

47265.66

2007 2008

92505.68

Current Assets

Ratio (%)

85272.56

14.51%

85262.95

13.78%

106567.28

44.62%

110643.47

37.57%

110347.39

42.83%

182256.16

50.75%

Interpretation:
1)

During the year 2002 03the ratio was 14.51% on it declined to

13.78% in the year 2003 04

2)

From the year 200405 it is showing fluctuating trend but as compared

to above 2 years it is increasing.

3)

The lowest inventory over total assets ratio was recorded at 13.78%
during the year 2003 04 and the highest inventory ratio was recorded
at 50.75% during the year 2007 08.

4)

The average inventory to total assets ration was recorded at 34.81%

during the review period.

7.

Percentage of Inventory over current liabilities:

In order to know the percentage of inventory over current liabilities the

ration of inventory to current liabilities is calculated and which is presented in

the following table.
Inventory
Inventory over current liabilities ratio

= __________________ X 100
Current liabilities

Percentage of Inventory Over current liabilities:

Year

Inventory

2002 2003

12376.95

2003 2004

11750.75

2004 2005

47550.86

2005 2006

41572.77

2006 2007

47265.66

2007 2008

92505.68

Current
liabilities

Ratio (%)

7212.21

17%

7900.56

148%

13502.15

352%

13502.15

307%

16756.13

282%

33567.24

275%

Interpretation:
1. From the above table it can be understand that the % inventory
over current liabilities ratio was showing a declining trend for
two years 2002 03.
2. During the year 2003 04 the ratio was it gradually increased to
148and there is a net increase to the extent of 352.
3. The lowest inventory over total amounts ratio was recorded at
17 during the year 2002 03.
4. The highest inventory to current liabilities ratio was recorded at
275 during the year 2007 08.
5. The average inventory to current liabilities ratio was recorded
at 256 during the review period.

8.

Current Ratio:
In order to know the current ratio the percentage of current assets to

current liabilities is calculated and which is presented in the following table.

Current assets
Current Ratio

= _____________________
Current liabilities

Calculation of Current Ratios:

Year

Inventory

2002 2003

22275.16

2003 2004

25650.75

2004 2005

50052.02

2005 2006

42626.78

2006 2007

47722.14

2007 2008

82521.156

Current
liabilities

Ratio (%)

7212.21

3.08%

7900.56

3.24%

13502.15

3.70%

13502.15

3.15%

16756.13

2.84%

33567.24

2.45%

Interpretation:
1.

From the above table it can be interpreted that the % of current assets

over current liabilities ratio i.e., current ratio was showing a decreasing trend
from year 2003 04.
2.

In the year 2002 03 the ratio was 3.08% and has increaser to 3.24%

in the year 2003 04.

3.

The lowest current ratio was recorded at 2007 08 which is 2.45% and

the highest current ratio was recorded at 3.70% during the year 2004 05.
4.
period.

The average current ratio was recorded at 3.75% during the review

9.

Quick Ratio:
The quick ratio is the relationship between quick to current liabilities

quick assets is more rigorous test of liability position of a firm it is computed

by applying the following formula.
Quick ratio

Quick assets / Current Liabilities

Where Quick assets = Current Assets Inventory

Year

Inventory

2002 2003

12720.76

2003 2004

19560.52

2004 2005

5216.24

2005 2006

3775.78

2006 2007

4026.95

2007 2008

3600.57

Current
liabilities

Ratio (%)

7212.21

1.76%

7900.56

2.47%

13502.15

0.38%

13502.15

0.27%

16756.13

0.24%

33567.24

0.10%

Interpretation:
1.

From the above table it can be understand as that the % of

quick assets to current liabilities i.e., the quick ratio was 0.38% in
2004 05 and from that year it is showing decreasing trend.
2.

The highest quick ratio was recorded at 2.47% during the year

2003 04 and the lowest quick ratio was recorded at 0.10% during the
year 2007 08.
3.
period.

The average quick ratio was recorded at 0.78 during the review

CHAPTER V

CONCLUSIONS;
1)

Over all the inventory of HMT TOOLS LIMITEDs is up to the

mark

2)

Inventory procurement is also based on and does not confirm to

economic batch quantities leading to surplus inventories and nonmoving inventories.

3)

The production of clinker and MACHINES during 20032004was7,47,436 and 7,77,092 respectively which is higher as
compared to 2006 2007 which is 6,87,373 and 7,27,447.

4)

there is a regular physical verification for A and B class items by

internal audit department to highlight on non-moving inventories.

5)

Investment on raw material is 92505.68 crores which very high as

compared to 2006 07 which is only 47265.66 crores.

6)

The inventory turn over ratio shows that the stock has been
converted into sales is only 1.92 times.

7)

In the year 2005 06 the stock was cleared within 32 days whereas
it took 233 days in the year 2003 2004 which took more days for
clearing stock.

8)

In this type of process, it requires more number of employees and

supplier should also wait for until the accounts are matched.

9)

This process takes an input, adds value to it and provides an output

to an internal or external customer.

SUGGESTION:

1. A regular reporting system on inventory should be in place to highlight

on carrying costs and liquidity covering all the business groups and at
the corporate level.
2. Once non-moving inventory is observed and declared a quick disposal
action has to be initiated. This exercise has to be carried on through out
the year.
3. Though the production is higher is the year 2004 05 and the sales were
very high i.e., as per inventory conversion period it took 272 days. This
shows that there is demand for MACHINES and the funds unnecessarily
tied up. So, proper demand forecasting should be done and according to
that it may be manufactured.
4. The investment on raw material should be made as per the requirement.
Unnecessary investment may block up the funds.
5. Neither too high nor too low inventory turnover ratios may reduce profit
and liquidity position of the industry. So, proper balance should be made
to increase profits and to ensure liquidity.
6. The raw material should be acquired from the right source at right
quality and at right cost.
7. The process that was being used by HMT TOOLS LIMITEDs with the
purchasing department should undergo changes, so that, it seeks enhance
the celerity of the delivery of a product without compromising its quality
by improving the utilization of materials, labour and equipment.
8. To reduce the work, the purchasing department may enter the purchasing
order into database and did not send a copy to any one. When the
merchandise arrived, the receiving clerk would enter the database and
determine whether the order agreed with the electronic purchase order.

BIBLIOGRAPHY
1.

Financial Management

By IM Pandey

2.

Financial Management

By Prasanna Chandra

3.

Total Quality Management

By K. Shridhara Bai

4.

Companys Stores Manual

5.

Companys Annual Reports