CHAPTER 3

THEORITICAL FRAMEWORKS
SIGNIFICANTS OF
INVENTORY MANAGEMENT

Introduction:
Inventory management is primarily about specifying the shape and percentage of stocked goods. It
is required at different locations within a facility or within many locations of a supply network to
proceed the regular and planned course of production and stock of materials.
The scope of inventory management concerns the fine lines between replenishment lead time,
carrying costs of inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory, available physical space
for inventory, quality management, replenishment, returns and defective goods and demand
forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an
on-going process as the business needs shift and react to the wider environment.
Inventory management involves a retailer seeking to acquire and maintain a proper
merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It
also involves systems and processes that identify inventory requirements, set targets, provide
replenishment techniques, report actual and projected inventory status and handles all functions
related to the tracking and management of material. This would include the monitoring of material
moved into and out of stockroom locations and the reconciling of the inventory balances. Also may
include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with
the primary objective of determining/controlling stock levels within the physical distribution
function to balance the need for product availability against the need for minimizing stock holding
and handling costs.

Accounting for inventory:

Each country has its own rules about accounting for inventory that fit with their financial-reporting
rules arrangements but with their own GAAP and national agencies instead. It is intentional that
financial accounting uses standards that allow the public to compare firms' performance, cost
accounting functions internally to an organization and potentially with much greater flexible A
discussion of inventory from standard and Theory of Constraints-based (throughput) cost
accounting perspective follows some examples and a discussion of inventory from a financial
accounting perspective. The internal costing/valuation of inventory can be complex. Whereas in the
past most enterprises ran simple, one process factories, such enterprises are quite probably in the
minority in the 21st century. Where 'one process' factories exist, there is a market for the goods
created, which establishes an independent market value for the good.

Today, with multistage-process companies, there is much inventory that would once have been
finished goods which is now held as 'work in process' (WIP). This needs to be valued in the
accounts, but the valuation is a management decision since there is no market for the partially
finished product. This somewhat arbitrary 'valuation' of WIP combined with the allocation of
overheads to it has led to some unintended and undesirable results.

Role of inventory accounting:

By helping the organization to make better decisions, the accountants can help the public sector to
change in a very positive way that delivers increased value for the taxpayer’s investment.
It can also help to incentivise progress and to ensure that reforms are sustainable and effective in the
long term, by ensuring that success is appropriately recognized in both the formal and informal
reward systems of the organization.
To say that they have a key role to play is an understatement. Finance is connected to
most, if not all, of the key business processes within the organization. It should be steering the
stewardship and accountability systems that ensure that the organization is conducting its business
in an appropriate, ethical manner. It is critical that these foundations are firmly laid.
Finance should also be providing the information, analysis and advice to enable the organizations’
service managers to operate effectively. This goes beyond the traditional preoccupation with
budgets – how much have we spent so far, how much do we have left to spend? It is about helping
the organization to better understand its own performance. That means making the connections and
understanding the relationships between given inputs – the resources brought to bear – and the
outputs and outcomes that they achieve. It is also about understanding and actively managing risks
within the organization and its activities.
To maintain an in -stock position of wanted items and to dispose of unwanted
items, it is necessary to establish adequate controls over inventory on order and inventory in stock.
There are several proven methods for inventory control. They are listed below, from simplest to
most complex.

Visual control enables the manager to examine the inventory visually to determine if
additional inventory is required. In very small businesses where this method is used,
records may not be needed at all or only for slow moving or expensive items.

Tickler control enables the manager to physically count a small portion of the inventory
each day so that each segment of the inventory is counted every so many days on a regular basis.

Click sheet control enables the manager to record the item as it is used on a sheet of
paper; such information is then used for recorder purposes.

Stub control (used by retailers) enables the manager to retain a portion of the price ticket when
the item is sold. The manager can then use the stub to record the item that was sold.

As a business grows, it may find a need for a more sophisticated and technical form of
inventory control. Today, the use of computer system to control inventory is far more feasible for
small business than ever before, both through the widespread existence of computer service
organizations and the decreasing cost of small - sized computers. Often the justification for such a
computer-based system is enhanced by the fact that company accounting and billing procedures can
also be handled on the computer.

Point-of-sale terminals relay information on each item used or sold. The manager
receives information printouts at regular intervals for review and action.

Off-line point-of-sale terminals relay information directly to the supplier's computer who
used the information to ship additional items automatically to the buyer/inventory manager. The
final method for inventory control is done by an outside agency. A manufacturer's representative
visits the large retailer on a scheduled basis, takes the stock count and writes the record. Unwanted
merchandise is removed from stock and returned to the manufacturer through a predetermined,
authorized procedure. A principal goal for many of the methods described above is to determine the
minimum possible annual cost of ordering and stocking each item.

Two major control values are used:

1. The order quantity, that is, the size and frequency of orders and
2. The recorder point, that is, the minimum stock level at which additional quantities is ordered.

The economic order quantity (EOQ) formula is one widely used method of computing the minimum
annual cost for ordering and stocking each item. The EOQ computation takes into account the cost f
placing an order, the annual sales rate, the unit cost, and the cost of carrying inventory. Many books
on management practices describe the EOQ model in details Meaning and Nature of Inventory The
dictionary meaning of inventory is stock of goods or a list of goods. The inventory can be defined
as the sum of the value of raw material, fuels and lubricants, spare parts, maintenance consumables;
semi processed material and finished goods stock at any given point of time.

The term inventory refers to the study stockpile of the products a firm is offering for sale and the
components that make up the product.

The various forms in which inventories exists in a manufacturing are:

1. Raw Material.
2. Work-in-process (Semi finished goods).
3. Finished goods.
4. Consumables.
5. Spares.

Raw Material

The raw materials inventory contains item that are purchased by the firm from others
and are converted into finished goods through the manufacturing process. They are an
important input of the final product.

Work-In-Process

The work -in-process inventory consists of items currently being used in the production
process. They are normally semi-finished goods that are at various stages of production
process.

Finished Goods

Finished goods inventories are those final or completed products which available for
sale. The inventory of such goods consists of items that have produced but are yet to be sold.
These are the goods which are ready for customers. The purpose of maintain inventory is to
ensure proper supply of goods of customers.

Consumable

These are the materials which are needed to smoother the process of production. The materials do
not directly enter the production but they act as catalysts etc. Consumables and be classified
according their consumption and critically.

Spares

The consumption pattern of raw materials, consumables finished goods different from that of
spares, the stocking policies of spares are different 1 industry to industry. All decisions about spares
are based on the financial of inventory on such spares and the costs that may arise due to their non
liability.
3.2 Benefits of holding inventories

A company should maintain adequate stock of material for a continuously to the factory
for an uninterrupted production. Maintaining inventories gives tying up of company's funds and
incurrence of storage and handlings. A firm also needs to maintain inventories to reduce
ordering costs and 1 quality discounts. There are 3 main general motives of holding
inventories
1. Transaction motive.
2. Precautionary motive.
3. Speculative motive.

Transaction motive
This motive emphasizes the need to maintain inventories to facilitate smooth production and sales
operations.

Precautionary motive:
This motive is necessitates holding of inventories to guard against the risk of unpredictable demand
and supply forces and other factors.

Speculative motive:
This motive is influenced the decision to increase or reduce inventory levels to take advantage of
price fluctuations.

Objectives of inventory management:

The main aim of inventory management should be to avoid excessive and inadequate levels of
inventories and to maintain sufficient inventory for the smooth production and sales operations. The
main objectives of inventory management are operational and financial efforts should be made to
place an order at the right price and quality. The following are the objectives of inventory
management.
1. To maintain a large size of inventory for efficient and smooth production and also operations.
2. To ensure continuous supply of raw materials, spares and finished goods to facilitate
uninterrupted production.
3. To avoid both over stocking and under stocking of inventory.
4. To maintain sufficient finished goods inventory for smooth sales operations and efficient
customer service.
5. To maintain a minimum investment in inventories to maximize profitability.
6. To minimize loses through determination, pilferage, wastages and damages.
7. To minimize the carrying cost and time.
8. To maintain sufficient stock of raw materials in periods of short supply and anticipate price
changes.
9. To control investment in inventory and keep in an optimal level.
10. To design proper organization in inventory management. Clear cut accountability should be
fixed at various levels of the organization.

Techniques of Inventory Management

In managing inventories, the firm's objectives should be in being consonance with the shareholder,
wealth maximization principles. To achieve this principle the organization should maintain
appropriate levels of inventory. Effective inventory management requires are effective control
system for inventories. A proper inventory control not only helps in solving the acute problem of
liquidity but also increase profits 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 Economic Order Quantity.

2) Determination of Stock levels.
3) ABC analysis.
4) VED analysis.
5) Determination of safety levels.
6) Selecting a proper system of ordering for inventory.
7) Inventory turnover ratios.
8) Aging schedule of inventories.
9) Classification and modifications of inventories.
10) Preparation of inventory reports.

ECONOMIC ORDER QUANTITY:(EOQ)

Every organization will think about how much to order when ordering the inventories to solve this
problem order quantity will fix the appropriate order size.EOQ is the size of the lot order to be
purchased which is economically viable. This is the quantity of materials which can be purchased at
minimum costs. The EOQ is an optimum quantity of material to order consideration of the
following categories of costs, such as ordering costs, carrying costs, stock out costs.

A) Ordering Costs
These are the costs which are associated with the purchasing of ordering of materials.
These costs include
1. Costs of placing an order.
2. Costs of receiving goods.
3. Transport costs.
4. Documentation processing costs.
5. Additional costs of frequent or small quantity orders
6. Costs of stationary, typing postage, telephone charges

B) Carrying Costs

These are the costs for holding inventories. These costs will no be incurred if
inventories are not carried. These costs include
1) Stores staffing equipment maintenance and running costs.
2) Handling costs.
3) Insurance and security costs.
4) Costs of storage which could have been for other purposes.
5) Pilferage and damage cost.
6) Obsolescence and determination costs.
7) Audit, stock taking or perpetual inventory costs.

C) Stock-out Costs:

The stock out costs is associated with running out of stock, this includes the following:
1) Lost contribution through the lost sale caused by the stock out.
2) Lost of figure sales because customers go elsewhere.
3) Lost of customer goodwill.
4) Cost of production stoppages caused by stock out of work in progress of raw material.
5) Lab our frustration over stoppages.
6) Extra costs associated with urgent often-small quantity replenishment purchases.

Determination of Stock Levels:

Various levels of inventory are fixed to see that no excess

inventory is aided and simultaneously there will not be any stock out. If the inventory is are too
little, the firm will face frequent stock outs involving heavy ring costs and if the inventory levels
is too high it will be unnecessary tie capital.

1)Reordering Levels

Reorder level is the level of stock availability when a new order should thirsted. The
stores department will initiate the purchase material when the stock of material reaches at this
point. This level fixed between the minimum and maximum stock
levels and the following formula is used for this purpose:

Reorder level = (maximum usage) (maximum lead time)

2) Minimum stock level

Minimum stock level is the lower limit below which the stock of any stock time item should not
normally be allowed to fall. This level is also called safety stock or buffer stock. The main object of
establishing this level is to protect against stock out of a particular stock item and in fixation of
which average rate of consumption and time required for replenishment i.e. lead time are given
prime consideration.
Minimum stock level=reorder level - (average or normal usage*average lead time)

3) Maximum stock level:

Maximum level represents the upper limit beyond which the quantity of any item is not normally
allowed to rise to ensure that unnecessary working capital is not blocked in stock items. Maximum
stock level represents the total of safety stock level and EOQ. Maximum stock level can be
expressed in the following.

Maximum stock level = reorder level + economic reordering quantity - (Minimum

usage*minimum lead time)

4) Danger level:
Danger level of stock is fixed below the minimum stock level and if stock reaches below
this level. Urgent action for the replenishment of stock should be taken prevents stock out
position.

Danger level = Average consumption*lead time for emergency purchases

5) Average stock level:

Average stock level is calculated as such:
Level Average stock = (minimum stock level + maximum stock level)/2
(Or)
(Minimum stock level + Y2*ROQ)
“ the company followed by determination stock levels”

ABC Analysis:
In this technique the items of inventory are classified according to value of usage. This method
divides inventory in classes namely.
A: Items in class a continue the most important class of inventories so far as the proportion in the
total values of inventories is concerned.
B: Item in class B constitute an intermediate position
C: Items in class C are quite negligible.

It is seen a very small percentage of the items say 15-20% account for the 75-80% of the total
material usage and large number of items say 75-80% of the total items accounting 15- 20% of the
monetary value. “this company followed by the abc analysis”

VED Analysis:
The VED analysis is used generally to spare parts. The requirements and urgently or spare parts is
different from that material. The VED system is widely used classification technique to identify
critically of various items for inventory control. This technique is based on the assumption that a
firm needs not exercised same degree of control on all items of inventory. On the basis of critically,
the various items of inventory are categorized into 3categories.
1. Vital
2. Essential
3. Desirable

Highly critical items like vital requires much closer attention by senior management compared to
that or less critical items. The record level depends on the critically of the items. For vital items
relatively more inventory is maintained compared to that of critically level 'E'. These items are
essential but not as much important as 'V' items. “the company followed by the VED analysis”

Determination of safety stocks:

Safety stock is a buffer to meet some unanticipated increase in usage .The usage of inventory
cannot be perfectly forecasted. If fluctuated over a period of time. The demand for material may
fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a
problem of stock out. The stock out can prove costly by affecting the smooth working of the
concern. In order to protect against the stock out arising out of usage fluctuation, firms usually
maintain some safety or safety. The basic problem is to determine the level of quantity of safety
stocks.
Two costs are involved in the determination of this i.e. opportunity cost of stock - outs and the
carrying costs.

Ordering systems of inventory:

The basic problem of inventory is to decide the reorder point. This point indicates when an order
should be placed. This order point is determined with the help of these things:
a) Average consumption rate.
b) Duration of lead time.
c) EOQ when the inventory is depleted to lead time should be placed.

There are 3 prevalent systems or ordering and a concern can choose any one these:
1) Fixed order quantity system generally known as economic order quantity system.
2) Fixed period order and system or periodic reordering review system.
3) Single order and schedule part delivery system.

Inventory Turnover Ratio

An inventory ratio indicates the efficiency of the firm in producing and selling its products. These
ratios are calculated to indicate whether inventories have been use efficiently or not. The purpose is
to ensure the blocking of only required of minimum funds in inventory. It is calculated by dividing
the cost of goods sold by the average inventory.

Inventory Turnover Ratio = Cost of goods sold/Average inventory

(Or)
Net sales/average inventory
Inventory holding period = Days in a year/inventory turnover ratio

Aging schedule of inventories

Classification of inventories according to the period (age) of their holding also helps in identifying
slow moving inventories there by helping in effective control and management of inventories.

Classification and codification of inventories:

The inventories of a manufacturing concern may consist of raw material, work in process, finished
goods, spares, etc. All these categories may be classified either according to their nature or
according to use. Generally materials are classified according to their nature such as construction
materials, consumable stocks, spares, etc. After classification, the materials are given code
members. The coding may be done alphabetically or numerically. The latter method is generally
used for coding. The third distinction in needed for the quality of goods and decimals are used to
note this factor.

Inventory reports:

From effective inventory control, the management should be kept informed with the latest stock
position of different items. This is usually done by preparing periodical inventory reports. These
reports should contain all information necessary for managerial action. On the basis of these reports
management takes corrective action wherever necessary. The more frequently these reports are
prepared the less will be chances of in the administration of inventories.

Just-in -Time inventory management:

The just-in-time inventory control system, originally developed by Touchy Know of Japan, simply
impels that the firm should maintain a minimal level of inventory and rely Japan of suppliers to
provide parts and components “just-in-time” to meet its assembly requirements. The major
emphasis of just-in-time philosophy if inventory management. It begins by identifying the problems
and forcing firms to tackle them. The main tactic used to reveal such problems in inventory
reduction.
The just-in-time inventory system, while conceptually very appealing is difficult to implement
because it involves a significant change in the total production and management system distinction
is needed for the quality of goods and decimals are used to note this factor.

It requires interlays:

1. A strong and dependable relationship with suppliers who are geographically from the
manufacturing facility.
2. A reliable transportation system.
3. An easy physical access in the form of enough doors and conveniently located docks and
storage areas to dove tail incoming suppliers to the needs of assembly line.
4. It attempts to minimize inventories through small incremental reduction rather than prescribe
particular technique or methodologies.

3.5 Valuation of Inventories

According to accounting standard 1-2 the valuation of inventories is given by the institute of
chartered accounts of India. Items such as expenses, revenues, or book debts can be recorded in the
books of accounts with a fair degree of accuracy. However, an elements of subjectively is involved
in the measurement of items such as depreciation or inventory value. Methods of valuing the
inventory may vary between different business and even between undertaking within the same trade
or industry.

Taking all these significant aspect into account, this standard deal with:

The determination of value at which inventories are carried until related revenues or
recognized.

Ascertainment of cost there of.

The circumstances in which carrying amount of inventory is written done below cost.

Valuation of inventory is critical importance:

Reasons:

Individual items may not be of significant value but taken together, would constitute a
significant portion of total assets.
Rapid turnover exception being race or seasonal turn over.
a. Susceptible to obsolescence and spoilage, slow or fast moving.
b. Held at different places.
c. Physical condition.
d. It may involve varying degrees of estimation.
e. Inventory is the second largest item after the progress of raw material.

Inventories:

Inventories are assets:

a. Held for the purpose of sale in the ordinary course of business.
b. In the process of production for such sale. In the form of material or supplies to be consumed in
production process or in enduring of services.

Inventory includes the following:

1. Goods purchased and held for resale.
2. Finished goods produced for sale
3. Work in progress generally.
4. Materials, maintenance supply consumables awaiting use in production process.

Measurement
The critical operative part of the study is that inventories valued at the lower of
a. Cost
b. Net reliable value. Cost:

The following elements that constitute cost of inventories should be kept in mind.

Cost includes:
Cost of purchase, net of trade discounts, rebates, duty drawbacks, convert credit available etc.
Cost of conversion.
Other costs incurred in bringing the in inventories to their present location and conditions. Cost
doesn’t include:
selling and distribution costs
abnormal wastage
storage costs
Cost formula:

In as much as cost do not remain static and vary from time to time, several types of cost formulae
can be used. In inventory valuation, therefore, the question that is with reference to the flow of
production, which inventory has been sold and which continued to remain in inventory. In this
backdrop, inventory valuation depends on cost flow assumption such as LIFO, FIFO base stock
methods etc.,

But the standard favor only 3 methods are as follows:

1. Specific identification method.

2. First in first out method.

3. Weighted average cost method.

1) Specific identification method:

This method is also known as specific price method. This is also known as actual cost
method because specific job bears the actual cost of material bought for the job. When using
this method units in inventory are specifically identified and each unit cost is identified with a
particular invoice. The advantage of this method is that cost changed to jobs is factual and not
notional.
Cost of items forming parts of inventory, that is not ordinarily interchangeable as also
goods or services produced and segregated for specific projects. Should be assigned by
specific identification of their individual costs. This formula has to be applied whenever
materials are purchased and set aside, for specific jog or work order.

2) First- in –first- out method:

This method is based on the assumptions that the materials, which are purchased first,
are issued first, issues of materials are priced in the sequence of incoming order of purchases.
The flow of cost of materials should also be in the same order.
Issued are priced on the same basis until the first lot received i.e., exhausted, after
which the price of the next lot received becomes the basis of cost for issues. This materials
issued are priced at the cost pertaining to the earliest lot, and as a corollary the inventory in
hand is valued a price representing recent purchases.
The FIFO method is most successfully used when
A. Size of raw materials is very large and cost is high.
B. Materials are easily identified as belonging to a particular purchase lot.
C. Not more than two or three different receipts on material card at one time.
D. Price of materials does not fluctuate widely, so that clerical labor involvement is
minimized.
E. Materials are subject to deterioration and obsolescence.

3) Weighted average cost method:

This is calculated by dividing the total cost of material in stock by the total quantity of
material in stock. Under this method costs are averaged after weighing by their quantities. The
weighted average cost is determined, either at periodical intervals or each item when fresh
materials arrived on purchase. The average cost at any time is thus balance valued figure
divided by the balance unit figure. This method evens out the effect of widely varying prices of
different lots of purchases which makes up the stock. There will be no profit or no loss arising
out of pricing issues.
Net realizable value:
Net realizable value is defined as the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to make
for sale.
 CHAPTER 4
ANALYSIS AND INTREPRETATION
 ANALYSIS AND INTREPRETATION OF INVENTORY

MANAGEMENT IN M/S FAL

It requires interlays:
1 A strong and dependable relationships with supplies who are geographically
not very remote from the manufacturing facility

2.A reliable transportation system

3.An easy physical access in the form of enough doors and conveniently located docks and storage
areas to dove tail incoming supplies to the needs line of assembly line

4.It attempts to minimize inventories through small incremental rather than prescribe particular
techniques or methodological

Valuation of inventory is critical importance reasons:

1.Individuval items may not be of significant portion of total assets

2.rapid turnover exception being race or seasonal turn over

a. Susceptible to obsolescence and spoilage slow of fast moving

b. Held at different places

c. Physical condition

d. It may involve varying degrees of estimation

e. Inventory is the second largest item after the progress of row material

f. Effects both results of operations as well as the finance position as reflected in balanced sheet.

Inventories :

1.Inventories are assets:

a. Held for the purpose of sale in the ordinary course of business.

b. In the process of production for such sale.

c. In the form of material or suppliers to be consumed in production process or in rendering of

services.

2.Inventory include the following :

a. Goods purchased and held for resale.

b. Finished goods produced for sale.

c. Work in progress generally .

d. Material maintenance supply awaiting use in production process

Measurement :

The critical operative part of the study is that inventories valued at the lower.

a. Cost

b. Net reliable

Cost :

The following elements that constitute cost of inventories should be kept in mind

Cost Includes :

a. Cost of purchase , net of trade discount , relates drawbacks , convert credit available

b. Cost of conversion

c. Other costs incurred in bringing the in inventories to their present location and conditions .

Cost doesn’t include :

a. Selling and distribution costs

b. Abnormal wastage

c. Storage costs.

Cost formula :

In as much as cost do not remain static vary from time to time ,several types of cost
formula can be used. In inventory valuation their fore , the question that is with reference to the
flow of production , which inventory. In this backdrop , inventory valuation depends on cost flow
assumption such as LIFO. FIFO base stock method etc. but the standard favor only 3 methods are
follows:

1. Specific Identification method

2. First in first out method

3. Weighted identification method

1 Specific identification method :

This method is also known as specific price method. this is also

known as actual cost method because specific job bears the actual cost of material bought for the
job. when using this method units in inventory are specifically identified and each unit cost is
identified with a particular invoice. the advantage of this method is that cost changed to jobs is
factual and not notional cost of items forming parts of inventory , that is not ordinary
interchangeable as also goods or services produced and segregated for specific projects. should be
assigned by specific identification of their individual costs . this formula has to be applied whenever
material are purchased and set aside for specific job or work order .

2. First in first out method:

This method is based on the assumption that the material , which are
purchased first are issued first issues of material are priced in the sequence of incoming order of
purchase. the flow of cost of materials should also be in the same order.

Issued are priced on the same basis until the first lot received i.e. exhausted ,after which the
price of the next lot received becomes the basis of cost for issues. this materials issued are priced at
the cost pertaining to the earliest lot and as a corollary the inventory in hand is valued a price
representing recent purchases

The FIFO method is most successfully used when

a) Size of raw material is very large and cost is high .

b) Material are easily identified as belonging to a particular purchase lot .

c) Not more that two or three different receipts are on material card at one time .

d) price of material does not fluctuate widely so that clerical labour minimized .

e) Material are subject to deterioration and obsolescence .

Weighted average method :

This is calculated by dividing the total cost of material in stock by the

total quantity of material in stock . under this method costs are averaged after weighting by their
quantities. the weighted average cost is determined ,either at periodical intervals or each item when
fresh materials arrived o purchase. the average cost at any time is thus balance valued figure divided
by the balance unit figure.

Net Realizable value: Net realizable value is defined as the estimated selling price in the ordinary
course of business less estimated costs of completion and the estimated costs necessary to make for
sale

MANAGEMENT IN M/S FAL

Now a days inventory management is gaining importance in every organization. a firms inventory
management reveals its against their smooth flow of production. in any inventory management
plays a vital role ,by this firm can achieve its goals. the organization should maintain optimum
sufficient level of inventory management . the importance of inventory management can be viewed
from the fallowing facts .
1. There is a continuous supply of material, spares and finished goods so that production should not
suffer at any time and customers demand should also be met.

2. To remove the both over stocking and under stock .

3. eliminate duplication in ordering or replenishing stocks .

4. Minimize losses and get profit maximization .

M/S FAL Under inventory management :

FAL is multi product integrated high carbon with capacity of 72500 tunes per annum.
this makes FAL, handle and process of huge quality of material .also FAL being a process industry
running 365 days throughout the year 24 hr a day it makes costly to afford stopping on the
account of non availability of stock of material this calls from efficient inventory management the
part of FAL . FAL holds five types of inventory ; They are stores and spares , loose tools , work in
progress , finished goods and raw material . the stores department can carry out the procurement
storage and control of these inventories .

Raw material :

The raw material are produced and stored by raw materials department . the raw
materials are holding by placing a purchase order is 7 days the lead time of FAL is 4 days

Stores and spares :

The stores and spares are produced stocks and stored by stores department , which
is purchased department.

Finished goods :

The finished goods comprise blooms and billets and finished goods are the various
products mentioned in product mix of FAL . the finished goods are stocked and controlled by stores
department .
 Inventory status in FAL

(DURING 2013-2018) (In lakhs)

Year Stores and Loose tools Work in Finished Raw total

Spares Progress goods Materials
2013- 3621.91 1754.68 - 60.00 1943.23 7379.82
2014
2014- 2633.79 1697.63 - 38.97 - 4370.39
2015
2015- 1594.08 1612.98 - 64.47 - 3271.53
2016
2016- 169418.55 15088.72 - 1866.63 1299.43 187673.33
2017
2017- 611921.58 13859.78 - 11699.34 722.36 638203.06
2018

700000

600000

500000
Stores and Spares

400000 Loose tools

Work in progress
300000 Fineshed Goods
Raw Materials
200000
Total

100000

0
2013-2014 2014-2015 2015-2016 2016-2017 2017-2018
Interpretation:

From the above table it can be said that the total inventory for the year 2013-2014
was 7379.82 lakhs in that year has been dropped to 3271.53 lakhs in the year 2015-2016 and again
raised to 187673.33 lakhs in 2016-2017 and again more raised to 638203.06 lakhs in the year 2017-
2018. the organization faced means ups and downs in inventory.

Inventory turnover ratio :

It is the ratio of sales to average inventory .inventory turnover ratio

includes the efficiency of inventory management

A high ratio the more efficient management of inventory

and vice versa . the inventory turnover ratio shows how rapidly the inventory is turning into
receivables through sales. the inventory turnover ratio of FAL has given below :

inventory turnover ratio = net sales / inventory

Inventory Turnover ratio

(During 2013-2018) (In Ratio)

Year Sales Inventory ratio

2013-2014 24554.05 6400.59 3.83621
2014-2015 209.91 6413.41 00.3273
2015-2016 185.24 6690.23 00.2768
2016-2017 13278.73 1042.53 12.7370
2017-2018 - - -
 30000

25000

20000

Sales
15000
Inventory
Ratio
10000

5000

0
2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Interpretation :

On observation of the above data we find the inventory turnover ratio fluctuating year
by year 2013-2014 inventory ratio 3.83621 it is slightly push to decrease 2015-2016 00.2767
comparative to be years 2016-2017 inventory has been increased 12.7370

.
 ECONOMIC ORDER QUANTITY

The economic order quantity is an important concept in the purchase of raw material , and ion the
storage of finished goods and in transit inventories . the EOQ is derived establishing relationships it
has with usage ordering cost and carrying cost by:

Q = √2AQ/C

Where Q is quantity ordered.

A is Annual usage

O is Ordinary cost

C is Carrying cost

The cost economic order level of inventory Q represent maximum operating profit but it is net
optimum inventory policy. the value of the firm will be maximized when the marginal rate of return
on investment in inventory is equal to that marginal cost of funds. the marginal rate of return is
calculated by incremental investment in inventories and the cost of funds is the required rate of
return of supplies of fund.

ordinary cost * size of inventory

ordinary cost * size of inventory

The FAL can maintain different inventory techniques and procedures for the smooth
running of production . At this part the FAL can maintain economic order quantity also the EOQ is
profit maximization point for any organization ,where both the ordering cost and carrying cost are
equal . it is the quantity maintained for better results. the major products in FAL are chrome can be
maintained by the organization . the ordinary cost is the cost incurred by the organization after the
order is placed . it includes the cost of stationary , salaries of the those engaged in receiving and
inspecting , salaries of those engaged in preparing the purchase orders etc ,.The carrying cost
includes the cost of store keeping interest on capital locked up in stores , the incident of insurance
cost vaporization .
 The EOQ of major products in FAL

(During 2013-2018)

Year Chrome Coke Coal

2013-2014 846.1 809.3 539.7
2014-2015 Nil Nil Nil
2015-2016 639.95 957.3 479
2016-2017 916.5 948.5 -
2017-2018 1896.46 3414.2 1142.6

4000

3500

3000

2500
Chrome
2000
Coke

1500 Coal

1000

500

0
2013-2014 2014-2015 2015-2016 2016-2017 2017-2018

Calculation of EOQ for the year 2013-2014

The Formula of EOQ is √2AO/C

A = annual demand for raw material

O = ordering cost per order

C = carrying cost per annum

The Annual demand for Chrome = 71527 tones

The Annual demand for Coke = 12559 tones

The Annual demand for Coal = 6562 tones

Order cost per three components:

Chrome = 7812 tones

Coke = 16846 tones

Coal = 10632 tones

Carrying cost per annual of three components:

Chrome = 1561tones

Coke = 646 tones

Coal = 479 tones

EOQ for Chrome = √2*71527*7812/1561 = 846.1 tones

EOQ for Coke = √2*12559*16846/646 = 809.3 tones

EOQ for Coal = √2*6562*10632/479 = 539.7 tones

Calculation of EOQ for the year 2014-2015:

The Formula = √2AO/C

A = Annual demand for raw material

O = Ordering cost per order

C = Carrying cost per annum

the Annual demand for chrome = Nil

the Annual demand for coke = Nil

the aAnnual demand for coal = Nil

Ordering cost per order three components:

Chrome = Nil

Coke = Nil

Coal = Nil

Carrying cost per annual of three components:

Chrome = Nil

Coke = Nil

Coal = Nil

 We don’t get the values of Chrome Coke and Coal values because of the reason FACOR
Alloys lockout in the year.
Calculation of EOQ for the year 2015-2016:

The Formula = √2AO/C

A = Annual demand for raw material

O = Ordering cost per order

C = Carrying cost per annum

Annual demand for chrome = Nil

Annual demand for coke = Nil

Annual demand for coal = Nil

Ordering cost per order three components:

Chrome = Nil

Coke = Nil

Coal = Nil

Carrying cost per annual of three components:

Chrome = Nil

Coke = Nil

Coal = Nil

 We don’t get the values of Chrome Coke and Coal values because of the reason FACOR
Alloys lockout in the year

Calculation of EOQ for the year 2016-2017:

The Formula = √2AO/C

A = Annual demand for raw material

O = Ordering cost per order

C = Carrying cost per annum

Annual demand for Chrome = 61148 tones

Annual demand for Coke = 13787 tones

Annual demand for Coal = 530 tones

Ordering cost per order three components:

Chrome = 6560 tones

Coke = 22348 tones

Coal = 11174 tones

Carrying cost per annual of three components:

Chrome = 955 tones

Coke = 22348tones

Coal = 11174 tones

EOQ for Chrome = √2*61148*6560/955 = 916.55 tones

EOQ for Coke = √2*13487*22348/11174 = 232.26 tones

EOQ for coal = √2*530* 11174/ 11174 = 32.55 tones

Calculation of EOQ for the year 2017-2018:

The Formula = √2AO/C

A = Annual demand for raw material

O = Ordering cost per order

C = Carrying cost per annum

Annual demand for Chrome = 172800 tones

Annual demand for Coke = 32000 tones

Annual demand for Coal = 9200 tones

Ordering cost per order three components:

Chrome = 10806.071 tones

Coke = 20879.59 tones

Coal = 12992.10 tones

Carrying cost per annual of three components:

Chrome = 2500 tones

Coke = 550 tones

Coal = 550 tones

EOQ for Chrome = √2*172800*10806.07/2500 = 1222.2 tones

EOQ for Coke = √2*32000*20879.59/550 = 155.87 tones

EOQ for Coal = √2*9200*12992.10/550 = 659.27

XYZ Analysis

XYZ analysis of FAL for the year (2012-2017)

year X Y z total
2012-2013 9508844.16 676576.00 239840.86 10425261.08
2013-2014 5732010.51 682764.00 275453.62 6690228.13
2014-2015 5459125.87 690323.46 264031.95 6413481.28
2015-2016 5491290.46 647858.72 261444.40 6400593.57
2016-2017 4888883.68 649644.62 277904.80 5816433.10

12000000

10000000

8000000
X

6000000 Y
Z

4000000 Total

2000000

0
2012-2013 2013-2014 2014-2015 2015--2016 2016-2017
 INTERPRETATION

We observe that XYZ analysis of FAL in this table all the items are non-moving items. the
classification and classification of items XYZ analysis are similar as XYZ analysis. the total items
of XYZ analysis are 2016-2017 year. Rs 5816433.10/- . the total group of XYZ analysis in the year
2015-2016 Rs 6440593.57/- .the total values of XYZ analysis 2014-2015 Rs 6413481.28/- . the
total items of XYZ analysis are 2013-2014 year. Rs 6690228.13/- the XYZ analysis of the total
year of 2012-2013 Rs 1042526.08/- .the total year 2011-2012 the total group of XYZ analysis Rs
11804113.82/-. the total group of XYZ analysis in the year 2010-2011total values in this analysis
are Rs 6175846.13

CHAPTER 5
SUMMARY & SUGESTIONS
 SUMMARY

In The industrial scenario, FACOR ALLOYS LIMITED was established as public limited was
company in the year 1956.

The continuous demand for steel in our nation increase the Need for producing different FERRO
ALLOYS on large scale.

Hence FACOR was incorporated in the year 1956 with the Government investment of 1180.51
Lakhs in public sector With an annual production capacity of 72,500 Tonnes of high Carbon Ferro
Chrome

Facor today lost it glory and is suffering with losses In crores of rupees awaiting support
form government with Good faith the industrial liberalized policy of central government and
reduction in import duty has heavily troubled the Ferro Alloys industry of the country at large
extent in spite of All financial resources, Facor not position to maintain adequate Resources due to
fall in high carbon Ferro Chrome prices in the Today's market and also low demand for its products
it is concluded that by analyzing various techniques of inventory Management followed by Facor,
which are EOQ and levels of Material performance may be improved through the specific
Strategies for turnaround particularly through proper inventory Management techniques and
control because inventory plays Crucial role in organization profitability.
 FINDINGS

* Except 2014-2015 the company faced a loss of 1646.71 crores and it Has increased in the next
year to 807.36 crores

* 50% of total inventory consisting of finished goods that means Company products is always
available in the market.

* Form 2014 to 2016 the firm's inventory ratio is low. A low inventory turnover ratio indicates an
efficient management Of inventory. But in the 2016 and 2017 the inventory turnover ratio Is
increased to 12.73

* The company for is 2017-2018 is 1222.2 tones to as of all three components Chrome coke and
coal the 2017-2018 coal level is less the materials Levels of three components are maintained
comfortable position.

SUGGESTIONS
* M/s Fal is required to fix minimum, maximum reordering level in a scientific manner to Control
the growth of slow moving or non moving inventories

* The appropriate actions plan for disposal of inventory in M/s Fal may be taken for Making the
provisioned in the books of accounts on a systematic manner for write Off slow and non moving
inventories in the future.

* The turnover of inventory may be improved in order to reduce inventory maintenance

expenditure and working capital investment over inventory levels.

* Material coding system and items verification procedure may be improved in stores

Department

* There were fluctuations in this Gross profit. so necessary action must take to reduce

Express in order to get profits.

CONCLUSION

In spite of all finanancial sources M/s FAL is not in a position to maintain adequate working
capital due to fall in high Carbon Ferro Chrome prices in the Today’s market and also low demand
for its products. It is conclude that by analyzing various techniques of inventory management
followed by M/s FAL, the financial performance may be improved through the specific strategies
for turnaround particularly through the proper inventory management and control because inventory
plays a crucial role in any organizations profitability.
 BIBILOGRAPHY

S No AUTHOR BOOK PUBLISHER YEAR

1. I.M.PANDEY F.M VIKAS 2007

2. KHAN & JAIN F.M TATA Mc Graw 2006-2004

WEBSITES VISITED

http://www.facor.com

Facor profile & annual Reorts