Post on 23-Oct-2014
transcript
INTRODUCTION
Finance in the modern business world is regarded as life
and blood of a business enterprise. Finance function has become so important
that it has given birth to financial management as a separate subject. Therefore,
this subject is acquiring a universal applicability.
Financial management is that managerial activity which is
concerned with the planning and controlling of the firm’s financial resources. As
a separates activity or discipline is of recent origin it was a branch of economics
till 1890. Still today, it has no unique body of knowledge of its own, and it
draws heavily on economics for its theoretical concepts.
The subjects of financial management are of immense
interest to both academicians and practicing managers. It is of great interest to
academicians because the subject is still certain area where controversies exist
for which no unanimous solutions have been reaching yet. Practicing managers
are interested in this subject because among the most crucial decisions of the
firm’s are those which relate to finance and un understandings of theory of
financial management provides them with conceptual and analytical insights to
make decisions skillfully.
1
The modern thinking in financial management accords a far
greater importance to management in decision-making and formulation of
policy. Financial management occupies key position in top management and
plays a dynamic role in solving complex management problems. They are now
responsible for shaping the fortunes of the enterprise and are involved in
allocation of capital.
DEFINITIONS:
“Financial Management is an area of financial division
making, harmonizing individual motives and enterprise goals”.
-Weston and Brigham
“Financial Management is the application of the planning
and control functions to the finance function”.
-Howard and Upon
2
NEED FOR THE STUDY
Materials are equivalent to cash and they constitute an important part of
the total cost. It is essential that materials should be properly safe-guarded and
correctly accounted. Proper control of material can make a substantial
contribution to the efficiency of a business. The success of a business concern
largely depends upon efficient purchasing, storage, consumption and
accounting.
3
OBJECTIVES OF THE STUDY
To learn various inventory management procedures followed at Ravali
Spinners ltd.
To understand relative advantages and disadvantages of various
techniques
To review the various techniques and their impact on business inventory.
4
METHODOLOGY
Information is collected from primary and secondary sources.
Primary sources of data:
The data has been gathered through interactions and discussions with the
Executives working in the division. Some important information has been
gathered through couple of informal discussion of executives.
Secondary source of data:
Referred standards texts and reference books for collecting the
information regarding the theoretical aspects, of the topic.
Annual reports and other magazines published by the Company are used
for collecting the required information.
Many websites pertaining to the industry and pertaining to inventory
management have also been used as secondary sources of data.
5
SCOPE OF THE STUDY
The study is done on inventories held by Ravali Spinners Pvt. Ltd.
The scope of the study includes various methods & techniques used for
management of inventories like Raw Material, WIP, Finished goods for four
financial years.
This study of items for a period of 4 years provides insight to the management
of inventory.
The study thus provides a scope to the management to understand their
inventory position and take necessary actions as per the findings and
suggestions.
6
LIMITATIONS OF THE STUDY
The study of inventory management of the company had a few constraints
One of the factors construing the study was the lack of availability of ample
information.
The information collected for the study had been taken from documents,
which had been, let out to the public.
To the extent that the executives could spare their time, they gave me the
information by way of small discussions for the purpose of data collection.
Most of the information has been kept confidential and as such was not
passed on as part of the policy of the company.
The time allotted for the completion of the project was very limited and
proved to be a major constraint in the successful completion of the project.
7
INDUSTRY PROFILE
Spinning is the conversion of fibers into yarn. These fibers can be natural fibers
(cotton) or manmade fibers (polyester). Spinning also entails production
of manmade filament yarn (yarn that is not made from fibers). Final product
of spinning is yarn. Cotton value chain s tar t s f rom Ginning tha t adds
va lue to i t by separa t ing cot ton f rom seed and impurities. Spinning
is the foundation process and all the subsequent value additions i.e. Weaving,
Knitting, Processing, Garments and Made ups, depend upon it. Any variation in
quality of spinning product directly affects the entire value chain.
Product Characterization
The process of making fabr ic f rom raw cot ton i s a long one and
consis ts of var ious stages. There are two technologies available to
spin the yarn, first and the foremost is Ring Spun and second is Open End.
With the development in technology, and changing need of people world over
different types of cotton yarns like 100% cotton compact yarn,100% organic
cotton yarns, 100% cotton mercerized yarns etc. have been developed
which are used to manufacture a wide variety of cotton fabrics and clothing.
Mostly ring spun yarns are used for producing f ine qual i ty
c lo th ing, bed l inens , bed sheets , bed spreads, pillow covers etc., while
open end yarns are used for manufacturing denim wear, towels, etc This is
similar to treating different diseases with different medicines. Like a wrong
medicine can prove hazardous for the heath of a patient, in a similar way a
wrong choice of yarn will result in the creation of the wrong type of fabric or
clothing. The basic difference between the yarns is their count. Different counts
8
are used to make different type of fabrics. In some cases, the cotton yarn is
blended with some other yarn in different ratios to provide different effects like
shining or to lend more elasticity to the yarn. It is the yarn count and the
twisting mode of the yarn that actually determines the overall strength
and look of the manufactured fabric. 100% cotton compact yarn
and100% cotton mercerized yarns have less hairiness and the fabric
made from these is of fine quality are is used for manufacturing luxury
clothing and bedding The count of Yarn can vary from 2’s to 72’s, the higher the
number, the finer the yarn is.
Spinning Companies in India
The spinning indust ry i s dominated by la rge uni t s and i t has
been able to undergo significant modernization since the 1990s. The
main factors behind the modernization include lowering of custom
duties and other restrictions on imports of machinery and equipment
and lowering of restrictions on imports and exports of raw cotton and
yarn. The spinning industry, which is dominated by medium and large
units producing more than 90 percent of the output and total value
added. During an early period of policy reform (1983–1990), the demand
increased due to spurt in exports, which caused better utilization of existing
spindles and led to reduction in idle capacity. During later phase
(1990–2005), the investment in new spindles increased at a very rapid rate. This
lead to rise in efficiency of the working spindles and relative
productivity of working spindles compared to the most recent technology
improved over time.
9
The units in spinning sector are relatively less as most of the units in this
segment belong to large sector. This becomes clear as units belonging to cotton
and synthetic spinning in terms of value added accounts for 22.4 per cent
in the total value added in textile and clothing sector. The high share in
value added compared to units is mainly because of dominance of
medium and large units in spinning sector. The share of large units in total value
addition in cotton and synthetic spinning sector accounts for 86.1 per cent
Company Capacity
Vardhaman Group 8,00,000 spindles
Spindles Nahar Group 3,70,000 spindles
Bannari Amman Spinning Mills Limited 2,20,000 spindles
Sangam Group 1,93,920 spindles
Malwa Cotton Spinning Mills 1,40,000 Spindles
Sambandam Spinning Mills Ltd 1,10,000 Spindles
There are1834 cotton/man-made fiber textile mills (non-Small Scale) in the
country with37.07 million spindles, 4, 89,718 rotors and 56,524 looms.
Share in GDP
10
Its importance is underlined by the fact that The Textile industry accounts for
around 4% of Gross Domestic Product, 1 4 % o f i n d u s t r i a l
p r o d u c t i o n , 9 % o f e x c i s e collections, 18% of employment in the
industrial sector, and 16% of the country’s total exports earnings. The
Spinning sector, w h i c h i s i n t e g r a t e d t o t h e T e x t i l e industry
accounts to 22.4% of the total value of the Textile Industry Economic trends.
The Textile industry has been witnessing a massive upsurge in the
recent years. The industry size has expanded from USD 49 billion in 2006-07
to USD 65 billion in 2009-10. During this era, the local market witnessed a
growth of USD 15 billion, that is, from USD 30 billion to USD 45 billion
Domestic Production
The Production of Yarn has been on the rise. Raw material has been less with
respect to the demand for Spun Yarn. The prices of Cotton Hank Yarn increased
by 32.5% in Oct.2010 in comparison to the prices of Oct. 2009.The
consumption of the Raw material i.e. Cotton and the production of yarn
have been going up gradually.
11
The Production of Yarn has been on the rise. Raw material has been less with
respect tothe demand for Spun Yarn. The prices of Cotton Hank Yarn increased
by 32.5% in Oct.2010 in comparison to the prices of Oct. 2009.The
consumption of the Raw material i.e. Cotton and the production of yarn
have been going up gradually.
12
The share of medium and large units in total value added of the sector
is 92.8 per cent whereas their share in value of output is 90.2 per cent.
These units employ around 66percent of the total labor engaged in the
spinning
Foreign Exports
The textiles industry accounts for 14% of industrial production and accounts for
nearly 12% share of the country's total exports basket. The Government
fixed the target for 2008-09 at US $ 26.55 billion an increase of 20%
over the actual performance of US$22.14 billion in 2007-08, for export of
textiles. However, no targets were fixed for 2009-2010.At present , Indian
text i le indust ry holds 3 .5 to 4 percent share in the to ta l text i le
production across the globe and 3 percent share in the export
production of clothing.USA is known to be the largest purchaser of Indian
textiles. Nearly half of Indian export was accounted by eight countries namely
Bangladesh, Egypt, China, Portugal, Italy, Turkey, Iran and South Korea
Russia (In order of export value).Las t year , the propor t ion was
accounted by only seven countr ies namely Turkey, Bangladesh,
Brazil, Egypt, Italy, South Korea and Peru.
13
The prices of Yarn export have been increasing with no sign of relief
due to the recent increase in demand after a lull period in 08-09.The Spinning
Industry in India is on set to hit the global market with other fabrics as well like
the cotton textiles with its enthusiasm and consistency in work. It has already
reached a phenomenal status in India by beating the obstacles that
caused a downfall since past few years and is now on its way to cover a wider
area in the spinning sector.
14
COMPANY PROFILE
AN OVERVIEW OF RAVALI SPINNERS PRIVATE LIMITED :
RAVALI SPINNERS PRIVATE LIMITED was incorporated as a private
limited company on 13-05-2005, with an objective to establish spinning and
textile mills.
Sri Vanka Ravindra Nadh is the chief promoter of the company. The
promoter till now is engaged in the export business of Human hair processing and
exports. He has started the unit in 1990 under the name of Indian Hair Industries
Private Limited. This company is engaged in human raw hair exports. The
managing director Sri Vanka Ravindra Nadh traveled all over and visited many
countries. The company engages 2000 workers every day for processing and
grading of human hair. This is the biggest human hair processing and export unit
in India. The company has got national export award from Government of India
twice in 1997 and 1999. The company has also got best export oriented unit from
Government of Andhra Pradesh twice in 1998 and 2001. The company has also
got top export award from ministry of commerce twice in 2001 and 2002. Today
they are pioneer in India in export of Human hair to all contents. Another
company, R.K hair products pvt limited is engaged in value addition in the human
hair like, Hair pieces, Hair extensions, etc.
15
Thus the chief promoter is having good cotton business back ground and
track record for more than 15 years. Now with the above back ground, as a
diversification, the promoters have proposed to setup a Spinning Mill with an
initial spinldlage of 16800 spindles at a project cost of rs.3000.00 lakhs at
khandavalli, Peravali (mandal), West Godavari district, A.P.
The advantage in setting up the unit in A.P is as follows:
There will be saving in transportation charges than south based spinning
mills. Guntur is main center for cotton lint availability, which are only
170KMs. is estimated on average there will be saving of Rs.400 per candy
on account of this.
Labor is available from the nearby villages at comparatively lesser rates
than in Tamil Nadu.
The site is on the National highway; hence transportation of both Raw
material and finished products can be done with competitive freights.
A.P. state Government in the industrial Investment Promotion Policy 2005-
2010 have proposed for the following benefits to the industry;
Reimbursement of power cost by Rs 0.75 per unit.
25% of the tax paid during one financial year will be ploughed back
as a grant towards the payment of tax during next year.
100% reimbursement of stamp duty and transfer duty on land.
16
As per the guidelines issued by the office of the textile Commissioner,
Ministry of textiles, Government of India dated 20 October 2004, in order to be
eligible for interest subsidy of 5% under TUF, the minimum economic size for
new spinning mill has been reduced to 12000 spindles and the stipulation for the
down stream value addition requirement has been done away with. As such the
company being established with 16800 spindles will be eligible for an interest
subsidy of 5% on the term loan for the total project period.
Considering the present market scenario for the spinning industry by the
Government of India by way TUFS scheme and also the experience of the
promoters in export business, the unit will be definitely viable.
HISTORY OF THE COMPANY
RAVALLI SPINNERS PRIVATE LIMITED is located at Kandavalli, and
was established on 13-05-2005 with an objective to establish spinning on textile
mills.
The promoter got equity support from Financial Institutions like IDBI, SBI,
ICICI, Andhra Bank, State Bank of India, State Bank of Hyderabad and Public
Deposits. The mills are stretched around an area of 21 acres. It entered into
commercial production on May 2005.Its initial capacity 3000, 00 lacks with
capacity of 16,800 spindles.
17
The company RAVALLI SPINNERS PRIVATE LIMITED is a broad
managed company with on the Board Sri Vanka Ravindranadh is the chairman
and Managing director.
The company is a manufacture of Hank Yarn and Cone yarn Production is
carried out in the plant situated in Khandavalli at West Godavari District in
Andhra Pradesh. The plant is being operated with sophisticated technical
collaboration and machinery by using high speed spinning and waving process.
The plant has dual feed facility with the help of which production can be carried
out either by cotton or polyester or viscose as one of the major raw materials.
With the recent expansion the capacity has been increased substantially.
The company directors are assisted by qualified and experienced
professionals in various fields of production, research and development exports,
finance, marketing , secretarial and legal functions. The total manpower of the
company including managerial, personnel, executive staff, trainers, and workmen
are amount of 852.
The company has been operating the plant constantly since its inception at
full capacity and has a mark with its quality product and it is after sales services.
The company has an impressive record in terms of increasing turnover (including
exports) and its profits, as revealed by the financial statements. The company pays
dividends to the shareholders.
18
The company being a progressive one, caries out research and development
in specific areas like reducing raw material consumption and reducing waste etc.
The company plant to manufacture value added polyester products as well.
With an already impressive track record, the company got safety award
from Andhra Pradesh Government for environmental safe.
The reasons for selecting the location are many. As there were very few at
that time in A.P the promoters thought of establishing this firm. It facilitates
employment to rural people. As the company is a manufacturer of textile products
it requires the raw-material in bulk so it is located neared to them. The climate
conditions are also in favor to the growth of cotton corps. Another reason for the
location of site is the transportation. The mill is located nearer to the railways and
roadways so there is no problem of transportation.
The company has expanded its spindles from time to time. Its installed
capacity in May 2005 a new spinning mill has been reduced to 12,000 spindles
(from the earlier 25,000 spindles) and the stipulation for the downstream value
addition requirement has been done away with. As such the company being
established with 16,800 spindles will be eligible for an interested an interest
subsidy of 5% on the term loan for the total project period.
19
BIO-DATA OF THE CHIEF PROMOTERS
Name of the Director : Sri Vanka Ravindra Nath
Father's Name : Satyanarayana
Age : 45 years
Address : Door No.23-7-11, Park Street,
Sajjapuram, Tanuku-534211
West Godavari Dist , A.P
Education Qualification : Diploma in sugar Tech ,
B.sc (chemistry)
Experience : 15 years of experience in export of raw
Human hair processed human hair
Continents
Name of the Director : Smt Vanka Raja kumari
Husband’s Name : Ravindra Nath
Age : 40 years
Address : Door No.23-7-11, Park Street,
Sajjapuram, Tanuku-534211
West Godavari Dist , A.P
Education Qualification: : M.A (economics)
Experience : She also participates in the Business
activities along with her husband. 15 years of
experience in export or raw human hair and
processed human hair to all continents
20
LOCATIONAL ADVANTAGES
Ravali spinners pvt .ltd has proposed to set up a cotton yarn spinning mill
at Khandavalli , Peravali (Mandal), W.G.Dt. Raw material required for the
spinning mill is available in AP Particularly from the spinning mills located in
GUNTUR .
Guntur is very big market for cotton trade and can supply the required
quality cotton to the proposed unit. As the raw material is available with in 170
kms, cost of transportation will be minimum.
RAW MATERIAL AND OTHER UTILITIES
RAW MATERIAL:
The proposed mill is Khandavalli Peravali (mandal), WG.dst. hundreds of
ginning mills are in operation in Guntur to manufacture 40"s count yarn the
required type of cotton is available from this ginning mills. Quality cotton is
available at comparatively cheaper rates than to south based spinning mills due to
the advantage in transport cost.
LAND AND BUILDING:
Ravali spinners pvt.ltd has purchased ac. 17.23 cents of site at
Khandavalli at a cost of RS 147.00 lakhs. It is proposed to construct 97,067 shift
machinery halls , stock godowns, power and generator rooms, office, staff and
workers quarters, canteen and ancillary buildings at a cost of Rs 354.76 lakhs to
establish the spinning mill.
21
PLANT AND MACHINERY:
It is proposed to buy all the machinery from reputed machinery
manufactures like LMW , RJK , Batliboi, Reiter (Switzerland), Schlafhorst
(Germany) etc., the promoters propose to enter export market also for sale of
cotton yarn. Hence thy have proposed to add machinery like combers and auto
corner to have good quality of cotton yarn. All the machinery will be new
machinery only
The main machinery consists of the following:
Name of Machinery/ equipment Name of the supplier Number of
machines
Blow room LMW, coimbatore 1
Carding machines -LC 300A -V3
and Chute feeds
LMW, coimbatore 10
Draw frames -LDO/6 LMW, coimbatore 3
Draw Frame-RSB 851 LMW, coimbatore 3
Speed Frames-LF 1400 A-144
spindles each
LMW, coimbatore 4
Ring Frams-LR\6s 1200 each LMW, coimbatore 14
Combers-E65 Reiter; Switzerland 5
uNllap- E 32 Reiter; Switzerland 1
Auto coner (Imported) (Schlafhorst) Germany 5
Cone Winding - 160 drums RJK Ahmedabad 1
With the above machinery the mill will be producing 100% 40s count combed
and auto coned yarn.
TECHINICAL ARRANGEMENTS:
22
The Company will appoint experienced people at all levels to run the
spinning mill through professional management. The suppliers of the machinery
will do erection of the machinery. The process not much technology is involved.
QUALITY CONTROLS
The Director proposes to supervise the purchase of cotton through
testing. One quality cotton is procured and processed the quality of the finished
product, yarn, will always be good and fetch a better rate in the market .The
technical persons through supervision and testing will insure quality control in all
stages of spinning. The company is purchasing laboratory equipment required to
test all parameters of cotton and yarn.
UTILITIES:
Power requirement of the unit is estimated at 2000 KEV which will be
draw from AP TRANSCO. As a standby, it is proposed to purchase a 500 KAV
diesel generator set. Ground water is abundantly available.
MANUFACTURING PROCESS
Cotton bales and boras are opened, mixed and sent through blow
room. IN' blow room cleaning if cotton will be done there by major impurities and
foreign particles are removed from cotton and cleaned cotton will be received.
The cleaned cotton will be sent from blow room through chutes to the cards.
In Cards, cotton fiber individualization and further cleaning will be
done .Processed material at this stage is called Card Silvers. These card silvers are
23
filled in HDPE cans. Card silvers received from ceding are fed to Breaker Draw
Frame and from there to Uni lap/which are comber preparatory and then to
Combers where depending on the quality requirement short fibers are removed
and combed Silvers are filled into cans.
Combed silvers received from combers will be fed to Drawing, where
there will be improvement of uniformity and parallelization of fibers. The
processed material at this stage is stage is called Drawing silvers.
Drawing silvers received from Drawing section will be fed to Simplex
Where yarn will be formed as Roving Bobbins to feed continently to ring Frames.
Bobbins received from Simplex will be fed to Ring Frames, Where final
yarn is received in the form of Cops.
Cops received from ring Frames will be fed to Auto Coners /cones
Winding, where auto cones/Coned yarn, the finished product will be obtained.
VISION:
24
To be a continuously growing company
Harness our growth potential and sustain profitable growth.
Deliver high quality and cost competitive products and be the first choice
of customers.
Create an inspiring work environment to unleash the creative energy of
people.
Achieve excellence in enterprise management.
Be a respected corporate citizen, ensure clean and green environment and
develop vibrant communities around us.
CORE VALUES:
The core values of the company are:
Commitment
Customer satisfaction
Continuous improvement
Concern for environment
Creativity and innovation.
Policies:
25
Ravali spinners take all necessary actions for the fulfillment of regulatory
requirements. It has dedicated departments for this purpose. Energy
conservation, Environmental preservation, safety in work place, and
occupational health gets highest priority in the company. Some of the policies in
this regard are reproduced below.
Quality, Environment and Occupational Health & Safety Policy:
Ravali spinners is committed to meet the needs and expectations of its
customers and other interested parties , the occupational health and safety of its
workforce and to preserve the environment . To accomplish this, it will
Supply quality goods and services to customers’ delight.
Document, implement, maintain & periodically review the management
systems including the policy, objective and targets.
Use resources efficiently and reduces waste & prevent pollution.
Comply with all relevant legal, regulatory and other requirements applicable
to products, activities and processes in respect of Quality, Environment,
Occupational health & Safety and also ensure the same by contractors.
Continually improve quality, environment, Occupational health and safety
performance with respect to products, activities, processes, premises and
services.
Encourage development and involvement of employees.
Maintain high level of quality, environment, occupational, health and safety
consciousness amongst employees and contract workers by imparting
education and training.
HR Policy:
26
Ravali spinners believe that its employees are the most important resources. To
realize the full potential of employees, the company is committed to:
Provide work environment that makes the employees committed and
motivated for maximizing productivity
Establishing systems for maintaining transparency, fairness and equality in
dealing with employees
Empower employees for enhancing commitment, responsibility and
accountability.
Encourage teamwork, creativity, innovativeness and high achievement
orientation.
Provide growth and opportunities for developing skill and knowledge.
Ensure functioning of effective communication channels with employees.
Customer Policy:
Ravali spinners Endeavour to adopt a customer-focused approach at all times
with transparency.
Ravali spinners will strive to meet more than the Customer needs and
expectation pertaining to Products, Quality, and Value for Money and
Satisfaction.
Ravali spinners greatly value its relationship with Customers and would
make efforts at strengthening these relations for mutual benefits.
THEORETICAL FRAMEWORK
27
INVENTORY MANAGEMENT – INTRODUCTION
Inventory cost account for nearly 55 percent of the cost of production, as
it is clear from an analysis of financial statements of large number of private and
public sector organizations. So, it is essential to establish suitable procedures for
proper control of materials from the time of purchase order placed with supplier
until they have been consumed properly and accounted for.
DEFINITION:
“The term inventory refers to current assets, which will be sold in
future in the normal course of business operations. The assets, which
the firm stores as inventory in anticipation of need, are raw materials,
stores & spares, work-in-progress\process, and finished goods.”
Inventory often constitutes a major element of a total working capital and
hence it has been correctly observed, “Good inventory management is good
financial management”.
Inventory control is a system, which ensures the provision of the required
quantity at the required time with the minimum amount of capital. Inventories
are the second largest asset category for the manufacturing firms next to plant
and equipment. Inventory control includes scheduling the requirements,
purchasing, rece3iving and inspecting, maintaining stock records and stock
control. Inventory control is a matter of coordination. A proper material control
helps in improving the input –output ratio.
TYPES OF INVENTORIES:
28
Inventories play a major role in a business or company depending on
nature of the business. The inventories may be classified as under,
1. Raw materials
The raw materials include the materials, which are used in the production
process, and every manufacturing firm has to carry certain stock of raw
materials in stores. These units of raw materials are regularly issued or
transferred to production operation. Inventory of raw materials are held to
ensure that the production process is not interrupted by storage of these
materials.
Amount of raw materials to be kept by a firm depends upon number of
factors, including the speed with which raw materials can be ordered and
received. Its purpose is to uncouple the production function from the purchasing
function i.e. to make these two functions independent of each other so that delay
in procurement of raw-materials do not cause production delays in procurement
of raw-materials do not cause production delay in procurement of raw-materials
do not cause production delays and the firm can satisfy its need for raw-
materials out of the inventory lying in the stores
2. Work in process\progress:
It refers to the raw materials & consumables engaged in various phases of
production process. The degree of completion may be varying for different units
some units may be 40% finished, or some other 90%completed. The value of
work in progress involves conversion cost incurred and the overheads if any, so
work in progress contains partially produced or completed goods.
The purpose of work-in-progress inventory is to uncouple the various
29
operations in the production process, so that machine failures and stoppage in
operations will not affected by one another.
3. Finished goods:
In trading firm purchase are made where as in the manufacturing firm
produce or process the goods. However, it may be. These are goods that are
either being purchased by the firm or are being produced or processed in the
firm. These are just ready for sale to customers.
Inventory of finished goods arise because of the time involved in
production process and to meet customer’s demand promptly. If the firms do not
maintain a sufficient finished goods inventory, they run the risk of losing sales
due to customer dissatisfaction.
The purpose of finished goods inventory is to uncouple the production
and sale can be made directly out of inventory,
NEED FOR INVENTORY CONTROL:
If a cost accounting system is to be effective there must be a proper
control of inventory and supplies form the time orders are placed with suppliers
until they have been effectively utilized in production.
Materials are equivalent to cash and they make up an important part of the
total cost. It is essential that materials should be properly safeguarded
contribution to the efficiency of a business. The success of a business concern
largely depends upon efficient purchasing, storage, consumption and
accounting.
30
In a large firm the planning and routing department is responsible for
arranging how and where the work is to be done and issue instructions. It sets
definite time schedules so that necessary materials are delivered to the proper
department in proper time not too long before hand neither lest it should
interfere with other work nor after they are required as this result in idle time.
Business firm keep inventories for different purposes. Every firm big or small
trading or manufacturing has to maintain some minimum level of inventories.
Based on some motives the inventories are maintained.
a. Transaction motives:
Every firm tends to maintain some level of inventory to meet the day to
day requirement of sales, production process and customers demand etc. in this,
raw materials are stored for smooth production process of the firm.
b. Precautionary motive:
A firm should keep some inventory for unforeseen circumstances also like
loss due to natural calamities in a particular area, strikes, layouts etc so the firm
must have some finished goods as well as raw-materials to meet circumstances.
c. Speculative motive
The firm may be made to keep inventory in order to capitalize an
opportunity to make profit due to price fluctuations
REASONS AND BENEFITS OF INVENTORY:
31
The optimal level of maintaining inventory is a subjective matter and
depends upon the features of a particular firm,
I.Trading firm:
In case of a trading firm there may be several reasons for holding inventories
because of sales activities that should not be interrupted moreover it is not
always possible to procure the goods whenever there is a sales opportunity as
there is always a time gap required between purchase and sale of goods in order
to under take sales activities independent of the procurement schedule.
Similarly, a firm may have several incentives being offered in terms of quantity
discounts or lower price etc by the supplier of goods .there is a trading concern
inventory helps in a de-linking between sales activity and also to capitalize a
profit of opportunity due to purchase made at a discount will result in lowering
the total cost resulting in higher profits for the firm
II. Manufacturing firm:
A manufacturing firm should have inventory of not only the finished
goods, but also of raw materials and work-in-progress for following reasons
Uninterrupted production schedule:Every manufacturing firm must have
sufficient stock of raw materials in order to have the regular and uninterrupted
production schedule if there is stock out of raw materials at any stage of
production process then the whole production may come to half. This may result
in customer dissatisfaction as the goods cannot be delivered in time moreover
the fixed cost will continue to be incurred even if there is no production.
Further work-in-progress would let the production process run smooth .in
most of manufacturing concerns the work in progress is a natural outcome of the
32
production schedule and it also helps in fulfilling when some sales orders ,even
if the supply of raw-materials have stopped.
Independent sales activity:
Inventory of finished goods is required not only in trading concern but
manufacturing firms should also have sufficient stock finished goods. The
production schedule is a time consuming process and in most the cases goods
cannot be produced just after receiving orders .therefore deliver the goods as
soon as the order is received
ESSENTIALS OF INVENTORY CONTROL:
The important requirements of inventory control are:
a) The proper co-ordination among the departments involved in buying,
receiving, inspecting, courage consuming and accounting.
b) Centralization of purchasing under the control of competent buyer
whenever possible
c) Proper scheduling of material requirements.
d) Proper classification of materials with codes, material standardization and
simplification.
e) The operation of a system of internal check to ensure that all transactions
involving Materials and equipment are checked by properly authorized and
independent persons.
f) The storage of materials are well planned and kept in properly designated
33
location, subject to adequate safeguard and supervision.
g) The operation of a system of perpetual inventory so that it is possible to
determine at any time, the amount and value of each kind of material in
stock.
Objectives of Inventory control:
The main objectives of inventory control are:
To maintain an optimum size of inventory for efficient and smooth
production and sales operation.
To maintain a minimum investment in inventories to maximize
profitability.
To ensure a continuous supply of raw materials to facilitate
uninterrupted production.
To maintain sufficient stocks of raw materials in periods of short
supply and anticipate price change.
To Maintain sufficient finished goods inventory for smooth sales
operation and efficient customer service.
To minimize carrying cost and time.
To control investment in inventories and keep it at an optimum level.
Advantages of inventory control:
34
The following are suggested advantages:
Eliminates wastage in use of material,
It reduces the risk of loss from fraud and theft.
It helps in keeping perpetual inventory and other records to facilitate
the preparation of accurate material reports to management,
To reduces the capital tied up in inventories,
It reduces cost of storage,
It furnishes quickly and accurately the value of materials used in
various departments. It prevents delays in production due to lack of
materials by supplying, proper quantities at the right time.
Disadvantages of lack of inventory control
Every firm has to maintain optimal level of inventories. If not the
following will be the result in form of losses.
Opportunity cost: every firm has to maintain inventory for that some
investment is known as opportunity cost and handle the investment in
inventory are more the funds are blocks up with inventory.
Excessive inventories: it will lead to firm losses due to excessive carrying
costs and the risk of liquidity. It is also referred as Danger level.
Inadequate inventory: it is another danger which results is production
hold-up and failure to meet delivery commitments .in adequate raw
materials and work -in- process inventors will results in frequent
production interruptions .it finished goods are not sufficient customers
35
may shifts to competitors.
Danger due to physical deterioration: it is one the reason with the
inventories due to maintaining stocks at high levels they will be
deteriorated due to passage of time, some times due to mishandling or
improper storage facilities.
Costs involved in inventory:
Every firms maintains inventory depending upon requirement and other
features of firm for holding such inventory some cost will be incurred there are
as follows:
1. Carrying cost:
This is the cost incurred in keeping or maintaining an inventory of one unit of
raw materials, work-in-process or finished goods. Here there are two basic cost
involved.
Cost of storage:
It includes cost of storing one unit of raw materials by the firm. This cost
may be for the storage of materials. Like rent of spaces occupied by stock,
stock for security, cost of infrastructure, cost of insurance, and cost of
pilferage, warehousing costs, handling cost etc.
Cost of financing:
36
This cost includes the cost of funds invested in the inventories. it includes
the required rate of return on the investments in inventory in addition to
storage cost etc. the Carrying cost include there fore both real cost and
opportunity cost associated with the funds invested in the inventories. The total
carrying cost is entirely variable and rise in directly proportion to the level of
inventories carried.
Total carrying cost =(carrying cost per unit)*(Average inventor
2. Cost of ordering:
The cost of ordering includes the cost of acquisitions of inventories. It is
the cost of preparation and execution of an order including cost of paper work
and communicating with the supplier.
The total ordering cost is inversely proportion to annual inventory of firm.
The ordering cost may have a fixed component, which is not affected by the
order size: and a variable component, which changes with the order size.
Total Ordering Cost = (No. Of orders) * (cost per order)
3. Cost of stock out:
It is also called as hidden cost. The stock out is the situation when the
firm is not having units of an item in stores but there is a demand for the item
either for the customers or the customers or the production department. The
stock out refers to zero level inventories. So there is a cost of stock out in the
sense that the firm faces a situation of lost sales or back orders. The stock outs
are quite often expensive.
Even the good will of firm also be effected due to customers dissatisfaction and
37
may lose business in case of finished goods, where as in raw materials or work
in process can cause the production process to stop and it is expensive because
employees will be paid for the time not spend in producing goods. The carrying
cost and the ordering cost are opposite forces and collectively. They determine
the level of inventors in a firm.
Total cost = (cost of items purchased) + (total carrying and ordering cost)
Valuation of inventory:
The methods of valuing inventory are combination of the actual cost and
replacement cost plans. The main advantage of the cost or net realizable value
rule is that it is conservative. Hence the methods of valuation of inventory are
quite independent of system of financing.
1. Cost of raw materials in stock may include freight charges and carrying cost.
But such cost should not exceed market price,
2. Work-in –process is generally valued at cost, which includes cost of
materials, labor. And the proportionate factory overhead, as it is reasonable
according to degree of completion,
3. Cost of finished goods would normally to be total or full cost it includes
prime cost plus appropriate amount of the overhead. Selling and distribution
cost is deducted on the other hand work in progress may be valued at work in
progress may be valued at work cost, marginal cost, prime cost or, even
direct materials
Material cost:
38
Materials cost of a job or cost unit can be ascertained by multiplying the
quantity consumed for the job or cost unit by the price of the materials, for
ascertaining the quantity consumed for each job or cost unit we have devised
material requisition which will indicate the quantity required for the job and the
job number against which the material cost will be change directly.
For indirect material issued the material requisition will not indicate the job
number but the cost center number will be indicated for charging to relevant cost
center as indirect materials.
Thus in order to ascertain material cost,
1. Make valuation of purchase.
2. Make use of proper valuation of material issue and closing stock
following different method such as FIFO, LIFO WEIGHTED AVG.
3. The purchase price of material is directly obtained from the suppliers
receives and have to be issued to production before the invoice of
materials is received.
The rate per unit, total price of the item as shown in the purchase order plus
sundry charges such as delivery and forwarding charges tax., duty etc may be
borne by suppliers, governments controlled prices by notifications, suppliers,
catalogues and circulars may be valuable guides for obtaining rates of
materials. Delivery charges may be estimated with reference to the kind of
transport with charges incurred.
The price may also include sales tax, excise duty, fright etc, so the total cost
39
and rate per unit can be computed and rate per unit can be computed and
entered in the stores received registered and posted to stores ledger for the
issues of material to production.
In some cases material needs adjustment for any discount allowed:
Charges for transports containers etc.
Discounts may be like trade discounts quantity discount, cash discounts etc.
transportation and storage costs may not include the cost of air, sea on land
transport and other stores costs, where the purchaser has to bear the cots. Cost of
containers with regard may not make a separate charge because of non
refundable and also sales tax, excise duty, insurance etc., all the items are added
to purchase price.
RECEIVING AND INSPECTION DEPARTMENT:
1. Receiving all raw materials and other supplies from various suppliers.
2. Verify items by count, weight etc. and report any shortage.
3. Inspect materials and supplied as to quality by analyzing them suitably.
4. Inform the purchasing department and account department all facts that may
require adjustment with vendor.
5. Analyze and give them the code depending up on the type of materials.
40
Stores keeping department:
1. Check and accept all materials from the received department
2. Identity each material received with the stock list, check the code number
and pace in the respective bins.
3. Issue materials and supplies for use upon presentation of authorized
requirement.
4. Record quantities received and issued on bin lards or stock ledger cards
consisting the perpetual inventory records.
Production departments:
Make out materials requirement note I.e. requisition of requisite quantity
and quality of materials at the right moment so the all materials may be available
without delay on production.’
Check and verify that the materials of requisite quantity and quality have
been have been received and charged to production.
Keep proper records of materials received and their progress through
different operations or progress.
prepare materials return note for excess materials.
Prepare materials transfer note to cover any transfer of materials.
Prepare report on scrap for reporting to management.
Inventory control department:
In may be a subdivision of the cost accounting department, although in
many concerns, it is a part of the stores keeping department
41
1. It keeps perpetual inventory records.
2. Adjust the stock on receipt of the property authorized adjustment notes.
3. Prepare statements of receipt, issue, balance and average consumption of
materials both in terms of quantity and value weekly or monthly.
RECEIPT AND ISSUE OF INVENTORIES
1. Receipt of inventories in to stores:
After incoming materials have been examined and approved they are passed on
to the appropriate stores together with the goods received note. Articles are
inspected and on the stores in the usual way. In order to keep the accounting
procedure uniform, it is desirable that a goods received note be prepared for
these articles also: The store necessary entries in appropriate bin or shelf and
make necessary entries in the receipt column of the bin card.
A location code for materials helps in proper store –keeping with grater
efficiency, because stores can be easily identified. It is a part and parcel of stock
control Location code helps in mechanized accounting and safeguard against
omission in procedure.
BIN CARD
For each kind of materials or article a Bin card is attached to the bin on
which each individual’s materials is stored. A bin card provides a running record
of receipts, issues and stock in the simplest form. An entry will be made at the
time of receipt or issue and a new balance will be extended.
42
These cards should agree with the quantities entered in the relevant
accounts in the stores ledger. The main advantage is to enable the stores keeper
to ascertain at a glace the quantity of materials in stock and remind him to place
purchased requisition for further suppliers the ordering level has been reached
more over they provide on independent check on stores ledger and anciently a
second perpetual inventory. If the bin card is from three years then the
transactions are made in same card. If Bin card does not exist new Bin card to
be opened.
2. Issues of Materials from Stores:
The storekeeper issue materials on receipt of proper authorized document
usually called a materials requisition is a document which authorities and
records the issue of materials for use. The materials requisition details the items
required for use showing the quantity, code or past number and the cost center
of job to be charged. Requisition is normally prepared in triplicate; the
department receiving the goods retains one copy and the other two copies are
handed over to the copies are handed over to the storekeeper. He keeps one
along with him and enters on the issue sides of the appropriate bin card Day-to
day transactions are noted in stores ledger. Stores ledger:
The stores ledger which is usually a loose leaf or card type, contains an
account for each class of materials their ledger is kept in the cost department and
contains such information as well facilitate the ascertainment of all details
relating to the materials in the minimum of time.
43
3. Materials retuned to stores:
Where materials are issued in excess of requirement the excess quantity is
return to the stores together with materials Return note.
Since the materials return to store from a works order is a reduction in the
amount recorded as issued, the preferable entry is to enter the number of units
and the value of the stores ledger account. These values are deducted form total
issues, and amount returned by each department as shown by materials return
note is deducted from total issues and amount returned by each department as
shown by materials return note is deducted from the total amount charged to
each department. In enterprises where return of materials to stores is a major
problem it is customary to use a materials and supplies journal for keeping
records
4. Transfer of materials:
Transfer of materials form one job to another is prohibited unless the
detail is adequately recorded on the materials Transfer note. Such transfer is
permissible only where an urgent order has to be made and work started on a
less urgent order may be appropriates. Such notes how are incessancy date for
ordering and debiting the costs accounts affected. These notes are passed direct
to the cost office for the appropriate adjustment in the work-in-progress ledger.
All these four notes including stores ledger and bin card are major for inventory
management which are valued and checked for every quarterly of half yearly or
annually.
44
Valuation of materials issues:
The fixations of the price at which the materials are issued are to be charged
to production is an important one form the point of view to inventory
management. These are numerous factors to be taken into amount in pricing the
material they are the nature of the business and type of production, the
frequency of purchase price fluctuations and issues of materials.
Range of price fluctuations and value of material issued and size of
bath of materials issued.
Requirement that purchasing efficiency should be revealed or not.
The accuracy with which issues can be computed.
The durability of stock that’s evaporates, absorbs moisture or
deteriorates quickly.
The length of inventory turnover period and quantity of material to
be handled with necessity for maintaining uniformity within an
industry.
45
ISSUE PRICING METHODS:
There are two categories:
I. Cost prices:
a) FIFO (first in first out) b) LIFO (last in first out)
c) Specific price d) Base stock price
e) HIFO (highest in first out)
II. Derived from cost prices:
a) Simple average price
b) Periodic simple average price
c) Periodic simple average price
d) Periodic weighted average price
e) Moving simple average price
f) Moving weighted average price
III. National prices:
a) Standard price
b) Inflated price
c) Re-use price
d) Replacement price
46
First in first out (FIFO):
This is the price paid for the material first taken into stock form which the
material to be pried could have been drawn.
Under this method stocks of materials may not be used up in
chronological order but for pricing purpose it is assumed that items longest in
stock are used up first. The method is most suitable for use where in material in
slow- moving and comparatively high unit cost.
ADVANTAGES:
1. Price is based on actual cost and not on basis of approximations such as
no profits or losses arises by reasons of adopting this method.
2. The resulting stock balance generally represents fair commercial valuation
of stock.
3. It is based on traditional principles.
DISADVANTAGES:
1. The number of calculations in the stores ledger involved tends to be
complicated with increase in clerical error.
2. The cost of consecutive similar jobs will differ if the price changes
suddenly.
3. In times of rising prices, the charge to production is unduly low as the
cost of replacing the material will be higher.
47
LAST IN FIRST OUT (LIFO):
This is the price paid for the material last taken into stock form which the
materials to be priced could have been drawn. This method also ensure material
being issued at the actual cost. Its use is based on the principle that costs should
be as closely as possible related to current price level. Under this method
production cost is calculated on basis on replacement cost.
ADVANTAGES:
1. Production is charged at the most recent prices so that it is based on the
principle that cost should be related to current price levels.
2. It obviates the necessity for continuously ascertaining the replacement
price.
3. Neither profit nor loss is usually made by using this method.
4. In the times of rising prices there is no wind fall profit as would have been
obtained under FIFO method.
DIS-ADVANTAGES
1. Needs more clerical work
2. Compassion among similar jobs is very difficult
3. Stock valves relating to prices of the oldest cost on hand may by entirely
out of the current replacement prices
48
WEIGHTED AVERAGE PRICE:
This is the price which is calculated by dividing the total cost of material
in the stock form which the material to be priced have been drawn, by the total
quantity of material in the stock. This method differs from all other methods
because here issue prices are calculated on receipts of materials and not on issue
of materials. Thus as soon as new lot is received a new price is calculated and
issues are then taken.
ADVANTAGES:
1. This method is advantageous where the price varies widely as its use
even out the effect of these wide variations.
2. The basis of price calculations is a simple one involving only the
division of total amount of material in stock by quantity in stock.
3. Calculation of new prices arises only when receipt of stock are received.
4. Stock records under this method give a fair indication of the stock
values, which can be used in financial analysis.
DISADVANTAGES:
1. Profit or loss may be incurred as in simple average price.
2. As LIFO OR FIFO this method calls for many calculations.
3. `In order to calculate the accurate value of issues the average price must
normally be calculated to four to five decimal places.
49
STANDARD PRICE:
It is the predetermination of fixed price on basis of specification of all
factors affecting price like the quantity of materials in hand and to be normally
purchased and rate of discount compared with existing price including or
excluding freight and ware housing expense.
A standard price for each material is set and the actual price paid is compared
with standard. It is paid exceeds the standard a loss will be realized if not profit
will be obtained.
ADVANTAGES:
1. This method is easy to operate.
2. Comparing the actual prices with the standard price will determine the
efficiency of
3. Purchase department.
4. The effect of price variations is eliminated from job costs.
5. It reduces classical costs by eliminating detailed cost records.
6. In times of inflation or price fluctuations is very difficult to fix a
standard price.
7. This method also incurs a profit or loss on issues and closing
50
INFLATED PRICE:
This is the price, which includes a charge designed to cover the cost of
contingencies or related costs.
This price includes not only the cost involved in bringing the material to
the purchases premises but also the loss due to evaporation and breakage etc. as
well as carrying cost.
TECHNIQUES OF INVENTORY MANAGEMENT:
Main problems in inventory management are to answer.
1. Are all items of inventory important if not what are items to be given
more importance ?
2. What should be the size of the order for replenishment be placed?
3. What should be the over level?
To answer these following techniques are used.
I. ABC analysis II. Economic order quantity
III. VED analysis IV . RE-ORDER level
V. Safety stock VI. Just –in time inventory
51
ABC ANALYSIS:
It is based on proposition that
1. Managerial items and efforts are scare and limited
2. Some items of inventory are more important than others.
ABC ANALYSIS:
ABC analysis classifies various inventory into three sets or groups of
priority and allocates managerial efforts in proportion of the priority the most
important item are classified into class-A, those of intermediate importance are
classified as class – B and remaining items are classified into class – C.
The financial manager has to monitor the items belonging to monitor the
items belonging to different groups in that order of priority and depending upon
the consumptions.
The items with the highest value is given top priority and soon and are
more controlled then low value item. The re-rational limits are as follows
Category % of items % of total materials
A 5-10 70-85
B 10-20 10-20
C 70-85 5-10
52
PROCEDURE:
1. Items with the highest value is given top priority and soon.
2. There after cumulative total of annual value of consumption are
expressed as percentage of total value of consumption.
3. Then these percentage values are divided into three categories.
ABC analysis helps is allocating managerial efforts in proportion to
importance of various items of inventory.
ECONOMIC ORDER QUANTTY:
After various inventory items are classified on the basis of the ABC
analysis the management becomes aware of the type of control that would the
appropriate for each of the three categories of the inventory items.
The determination of the appropriate quantity to be purchased in each lot to
replenish stock as a solution to the order quantity problems necessitates
resolution of conflicting goals. Buying in higher average inventory level will
assure.
1. Smooth production \ sale operation and.
2. Lower ordering or setup costs. But it will involve higher
carrying costs. On the other hand small orders would reduce
the carrying cost of inventory by reducing the average
inventory level but the ordering costs would increase, as there
is a likelihood of interruption in operations due to stock –outs.
53
A firm should not place either too high or small orders on the basis of a
trade off between benefits derived from the availability of inventory and the cost
of carrying that level of inventory, appropriate or optimum level of order to be
placed should be determined. The optimum level of inventory is popularly
referred to as the economic order quantity or economic lot size.
3. It may be defined as that level of inventory order that minimizes the
total lost associated with inventory management. It is based on some
assumptions, which are restrictive.
a) The firm knows with certainty the annual usage of a
particular item of inventory.
b) Rate at which the firm uses inventory is steady over
time.
c) The orders placed to replenish inventory stocks are
received at a exactly that point in time when
inventories reach zero
EOQ can be illustrated by
1. Trial and error approach
2. Mathematical approach
54
Trial and error approach:
In this approach the procedure of procuring the inventory is assumed the
smaller the lot lower is average inventory and vice versa and high average
inventory would involve high carrying costs. This approach is used for
determination of EOQ uses different permutation and combination of lots
inventory purchase so as to find out the least ordering and carrying cost
combinations.
The carrying cost and acquisition cost for different sizes of order to purchase
inventories are computed and the order size with lowest total cost of inventory is
EOQ.
Mathematical approach:
The EOQ quantity can use a shout cut method calculated by following
EOQ = Root of 2AB\C
Where,
A = annual usage of inventory
B= buying cost per order
C = carrying cost per unit
Limitation:
While using EOQ it should be noted that it suffers from shortcomings,
which are mainly due to the restrictive nature of the assumptions on which it is
based.
55
The important limitation is assumption of constant consumption usages
and, the instant replenishment of inventory is of doubtful validity.
There may be unusual and unexpected demand for stock to meet such
contingencies the firm has to keen additional inventories like safety stocks.
Another weakness is to assume known annual inventories is open to question
and there is likelihood of a discrepancy between the actual and expected demand
leading to wrong estimate of EOQ.
VED ANALYSIS:
Vital essential and desirable analysis is done mainly for control of spare
parts keeping in view of the criticality to production.
Vital spares are spare the stock-out of which even for a short time will
stop production for quite sometime. Essential spares are spares the absence of
which cannot be tolerated for more than a few hours a day. Desirable spares are
those, which are needed, but their absence for even a week or so will lead to
stoppage of production.
THE RE-ORDER LEVEL:
The re-order level is the level of inventory at which the fresh order for
that item must be placed to Procure fresh supply. The re-order level depends
upon.
1. Length of time between the placement of an order and receiving the supply.
2. The usage rate of the item. The inventory is constantly being used up. The
rate at which the inventory is being used up. The rate at which the inventory is
being used up is called the usage rate.
56
SAFETY STOCK:
The safety stock protects firm from trade off due to unanticipated demand
for the items level of inventory investment is however increased by the amount
of safety stock. Level is ascertained in inventory as a part because there is
always an uncertainty involved in time lag usage rate or other factor.
Usually smaller the safety level greater the risk of stock- outs. If stock-
levels are predictable then there is a change of stock out occurring. However
stock inflows and outflows are unpredictable or lesser predictable it becomes to
carry additional safety stock to prevent unexpected stock out so usage rate is
estimated if cost is low then no safety stock is needed.
JUST- IN- TIME INVENTORY:
The basic concept is that every firm should keep a minimum level of inventory
on hand. To rely on suppliers to furnish stock just in time as and when required.
JIT helps in emphasizing sufficient level of stocks to ensure that production will
not be interrupted. Although the large inventories may be idea due to heavy
carrying JIT is a modern approach to inventory management and the goal is
essentially to minimize such inventories and there by maximizing the turnover.
JIT system significantly reduces inventory-carrying cost by requiring that the
raw materials be procured just in time to be placed into production. Additionally
the work in process inventory is minimized by eliminating inventory buffers
between different production departments. If JIT is to be implemented
successfully there must be a high degree of coordination and co-operation
between the supplier and manufacturer and among different production centre.
JIT does not appear to have any relation with EOQ however it is in fact alters
some of the assumption of EOQ model. The average inventory level under the
57
EOQ model is defined as
Average inventory = 1/2EOQ
safety level JIT attacks this equation in two ways.
1. by reducing the ordering cost
2. by reducing the safety stock
The basic philosophy in JIT is that the benefits, associated with reducing
inventory and delivery time to a bare minimum through adjustment in the EOQ
model: will more than offset the costs associated with the increased possibility
of stock-out.
58
DATA ANALYSIS AND INTERPRETATION
TOTAL INVENTORY TREND:
(In Lakhs)
YEARS STORES & SPARES
RAW MATERIALS
WORK IN PROCESS
FINISHED GOODS
TOTAL
2006-07 7 171 15 30 2232007-08 15 1095 32 56 11982008-09 15 1101 88 69 12732009-10 16 1790 102 128 2036
59
2006-07 2007-08 2008-09 2009-100
500
1000
1500
2000
2500
223
11981273
2036
TOTAL
TOTAL
60
RAW MATERIALS:
(In Lakhs)
PARTICULARS RAW MATERIALS
2006-07 171.50
2007-08 1095.75
2008-09 1101.59
2009-10 1790.82
61
2006-07 2007-08 2008-09 2009-100
200
400
600
800
1000
1200
1400
1600
1800
2000
171.5
1095.75 1101.59
1790.82
RAW MATERIALS
RAW MATERIALS
INTERPRETATION:
The raw material inventory shows an increase from year to year and in the year 2007-08 it has increased by 84% and in the year 2008-09 it has increased by 0.5% and again it increased by 63% in the year 2009-10.
In the year 2007-08 the raw material inventory value is increased too much this may be due to increase in sales or increase in order or future forecast or decrease in price of RM.
62
STORES & SPARES TREND ACTIVITIES:
(In Lakhs)
PARTICULARS STORES & SPARES
2006-07 7.30
2007-08 15.18
2008-09 15.42
2009-10 16.56
63
2006-07 2007-08 2008-09 2009-100
2
4
6
8
10
12
14
16
18
7.3
15.18 15.4216.56
STORES & SPARES
STORES & SPARES
INTERPRETATION:
The spares are increased in the year 2007-08 by 52% and in the year 2008-09, it increased by 0.01% and again it increased by 0.06% in the year 2009-10.
The spares have increased in the year 2007-08 against the year 2006-07 as they have been ordered on the requirement of production (or) problem with local supplier.
64
WORK IN PROGRESS:
(In Lakhs)
PARTICULARS WORK IN PROGRESS
2006-07 15.31
2007-08 32.67
2008-09 88.80
2009-10 102.12
65
2006-07 2007-08 2008-09 2009-100
20
40
60
80
100
120
15.31
32.67
88.8
102.12
WORK IN PROGRESS
WORK IN PROGRESS
INTERPRETATION:
Here the work in progress increasing year to year. It increased in the year 2007-08 by 53% and in the year 2008-09 it increased by 63% and in year 2009-10 again it is increased by 13% this may be due to the increase in orders or sales.
66
FINISHED GOODS TREND ACTIVITIES:
(In Lakhs)
PARTICULARS FINISHED GOODS
2006-07 30.68
2007-08 56.97
2008-09 69.45
2009-10 128.96
67
2006-07 2007-08 2008-09 2009-100
20
40
60
80
100
120
140
30.68
56.97
69.45
128.96
FINISHED GOODS
FINISHED GOODS
INTERPRETATION:
The finished goods are increasing in the year 2007-08 by 46%, this may be due to the lack of sales and the finished goods have increased by 18% in the year 2008-09 which may be due to the increase in orders and in the year 2009-10 finished goods inventory is again increased by 46% due to lack of sales.
68
INVENTORY RATIO TREND:
PARTICULARS COST OF GOODS SOLD
AVERAGE INVENTORY
INVENTORY TURN OVER
RATIO
2006-07 155.13 108.75 1.42
2007-08 2005.59 75.74 26.47
2008-09 3535.77 1243.54 2.84
2009-10 6741.45 1658.27 4.06
69
2006-07 2007-08 2008-09 2009-100
1000
2000
3000
4000
5000
6000
7000
8000
155.13
2005.59
3535.77
6741.45
COST OF GOODS SOLDAVERAGE INVENTORY
INVENTORY RATIO TREND
INTERPRETATION:
This ratio indicates the number of times the stock has turned over into sales in a year. In the year 2006-07, 2007-08 the ratio is increasing by 25.05% but in the year 2008-09 the ratio is decreased by 23.63% which means stock is increasing even though working capital position is improving which means stock is not moving so it is not satisfactory. So management has to take steps to increase the ratio and again the ratio is increased by 1.22% that means stock is not moving from the plant.
70
FINDINGS
It is observed that some of the factors which are effecting working capital like functions in business credit policy business nature, availability of price etc. are effective the company working capital.
It is found that the company is maintaining good proportion of inventories in gross working capital.
It is observed that RAVALI SPINNERS PVT LTD using (FIFO) First in First Out method for raw material.
It is found that the Company’s inventory turnover ratio is fluctuating among the years.
71
SUGGESTIONS
Periodical stock verification will provide smooth production compared with annual stock verification.
The company management should take care for maintaining good performance of company.
Company should try to the get the loan at low interest.
The company should have to maintain a good inventory turnover ratio.
The company has to maintained inventory to meet the inventory requirements.
72
ANNEXURES
Balance sheet as at 31st march 2006-2007
PARTICULARS 2006 2007 Increase DecreaseSOURCES OF FUNDS
1.SHARE HOLDER’S FUNDS
a)Share Capital 38,455,612 173,200,000 134,744,388b)Reserves and surplus2.LOANS FUNDS
a)Secured loans 166,565,929 166,565,9293.DEFERRED TAX LIABILITY 3,262,749 3,262,749
Total 38,455,612 343,028,678 304,573,066II.APPLICATION OF FUNDS
1.FIXED ASSETS
a)Gross Block 15,008,437 179,892,978 164,884,541b)L:Depreciation&other funds 8,100 1,866,904 18,588,04c)Net Block 15,000,337 178,026,074 163,025,737d)Capital Work-in-progress 7,364,667 105,310,926 97,946,259
Sub Total 22,365,004 283,337,000 260,971,9962.INVESTMENT
3.CURRENT ASSETS,LOANS&ADVANCES
a)inventories 22,481,739 22,481,739b)sundry Debtors 5,915,403 5,915,403c)Cash&Bank Balance 4,640,739 12,481,800 7,841,061d)Other Current assets 15,660,964 15,660,964e)Loans & Advances 10,987,973 207,172 10,780,801
15,628,712 56,747,078 41,118,336
LESS:CURRENT LIABILITIES & PROVISIONS
a)Current Liabilities 63688 5,519,006 5,455,318b)provisions 1,996 1,996
63,688 5,521,002 5,457,314
NET CURRENT ASSETS 15,565,024 51,226,076 35,661,052
4.Miscellanceous exp.(to the extent not written off of adjusted)
525,584 5,604,799 5,079,215
5.Profit and Loss a/c 2,860,803 2,860,803Total 38,455,612 343,028.678 304,573,066
73
Balance sheet as at 31st march 2007-2008
PARTICULARS 2007 2008 Increase DecreaseSOURCES OF FUNDS
1.SHARE HOLDER’S FUNDS
a)Share Capital 173,200,000 330,047,700 156,847,700b)Reserves and surplus2.LOANS FUNDS
a)Secured loans 166,565,929 266,203,391 99,637,4623.DEFERRED TAX LIABILITY 3,262,749 2,809,845 4,52,904
Total 343,028,678 599,060,937 256,032,259II.APPLICATION OF FUNDS
1.FIXED ASSETS
a)Gross Block 179,892,978 288,716,560 108,823,582b)L:Depreciation&other funds 1,866,904 37,921,284 36,054,380c)Net Block 178,026,074 250,795,276 72,769,202d)Capital Work-in-progress 105,310,926 75,288,102 30,022,824
Sub Total 283,337,000 326,083,378 42,746,3782.INVESTMENT 200,000 200,0003.CURRENT ASSETS,LOANS&ADVANCES
a)inventories 22,481,739 123,445,202 100,963,463b)sundry Debtors 5,915,403 10,425,016 4,509,613c)Cash&Bank Balance 12,481,800 89,334,761 76,852,961d)Other Current assets 15,660,964 37,151,522 21,490,558e)Loans & Advances 207,172 134,511 72661
56,747,078 260,491,012 203,743,934LESS:CURRENT LIABILITIES & PROVISIONS
a)Current Liabilities 5,519,006 9,205,210 3,686,204b)provisions 1,996 19,949 17953
5,521,022 9,255,159 3,734,157NET CURRENT ASSETS 51,226,076 251,565,854 200,039,7784.Miscellanceous exp.(to the extent not written off of adjusted)
5,604,799 4,524,799 1,080,000
5.Profit and Loss a/c 2,860,803 16,986,906 14,126,103Total 343,028.678 599,060,937 256,032,259
74
Balance sheet as at 31st march 2008-2009
PARTICULARS 2008 2009 Increase DecreaseSOURCES OF FUNDS
1.SHARE HOLDER’S FUNDS
a)Share Capital 330,047,700 445,59,700 115,545,000b)Reserves and surplus 5,506,795 5,605,7952.LOANS FUNDS
a)Secured loans 266,203,391 364,345,472 98,412,0813.DEFERRED TAX LIABILITY 2,809,845 8,206,147 5,396,302
Total 599,060,937 823,750,114 224,689,177II.APPLICATION OF FUNDS
1.FIXED ASSETS
a)Gross Block 288,716,560 791,816,418 503,099,858b)L:Depreciation&other funds 37,921,284 71,954,700 34,033,416c)Net Block 250,795,276 719,861,718 469,066,442d)Capital Work-in-progress 75,288,102 75,288,102
Sub Total 326,083,378 719,861,718 393,778,3402.INVESTMENT 200,000 200,0003.CURRENT ASSETS,LOANS&ADVANCES
a)inventories 123,445,202 130,160,049 466,256,467b)sundry Debtors 10,425,016 49,022,493 38,597,477c)Cash&Bank Balance 89,334,761 139,200,216 49,865,455d)Other Current assets 37,151,522 50,531,162 13,379,640e)Loans & Advances 134,511 26,133,884 25,999,373
260,491,012 395,047,804 134,556,792LESS:CURRENT LIABILITIES & PROVISIONS
a)Current Liabilities 9,205,210 293,592,675 284,387,465b)provisions 19,949 1,211,532 1,191,583
9,255,159 294,804,207 285,549,048NET CURRENT ASSETS 251,565,854 100,243,598 1510222564.Miscellanceous exp.(to the extent not written off of adjusted)
4,524,799 3,444,799 1,080,000
5.Profit and Loss a/c 16,986,906 16,986,906Total 599,060,937 823,750,114 224,689,177
75
Balance sheet as at 31st march 2009-2010
PARTICULARS 2009 2010 Increase DecreaseSOURCES OF FUNDS
1.SHARE HOLDER’S FUNDS
a)Share Capital 445,59,700 556,100,000 110,507,300b)Reserves and surplus 5,506,795 69,466,348 63,860,5532.LOANS FUNDS
a)Secured loans 364,345,472 480,246,625 115,901,1533.DEFERRED TAX LIABILITY 8,206,147 20,736,290 12,530,143
Total 823,750,114 126,549,263 697200851II.APPLICATION OF FUNDS
1.FIXED ASSETS
a)Gross Block 791,816,418 856,229,633 64,413,215b)L:Depreciation&other funds 71,954,700 180,574,487 108,619,787c)Net Block 719,861,718 675.655,146 44,206,572d)Capital Work-in-progress 92,198,241 92,198,241
Sub Total 719,861,718 767,853,387 47,991,6692.INVESTMENT 200,000 200,0003.CURRENT ASSETS,LOANS&ADVANCES
a)inventories 130,160,049 206,411,461 76,251,412b)sundry Debtors 49,022,493 63,017,822 13,995,329c)Cash&Bank Balance 139,200,216 58,148,072 81,052,144d)Other Current assets 50,531,162 67,863,424 17,332,262e)Loans & Advances 26,133,884 2,680,767 23,453,117
395,047,804 398,121,546 3,073,742LESS:CURRENT LIABILITIES & PROVISIONS
a)Current Liabilities 293,592,675 37,472,685 256119990b)provisions 1,211,532 4,517,784 3,306,252
294,804,207 41,990,469 25,281,738NET CURRENT ASSETS 100,243,598 356,131,077 255,887,4794.Miscellanceous exp.(to the extent not written off of adjusted)
3,444,799 2,364,799 1,080,000
5.Profit and Loss a/cTotal 823,750,114 126,549,263 697200851
76
BIBLIOGRAPHY
Material management … GOPAL KRISHNA
Financial management … I.M.PANDEY
Financial management … KHAN & JAIN
Management accounting & control … S.N. MAHESWARI
WWW.RAVALISPINNERS.COM
WWW.GOOGLE.COM
WWW.CITEFIN.COM
77