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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.

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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

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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http://lacs.lt/

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:

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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

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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:

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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:

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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:

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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

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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:

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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

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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.

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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:

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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.

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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.

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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.

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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

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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


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

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a)Share Capital 330,047,700 445,59,700 115,545,000b)Reserves and surplus 5,506,795 5,605,7952.LOANS 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


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


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

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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


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


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


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

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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

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http://WWW.GOOGLE.COM/

http://WWW.RAVALISPINNERS.COM/