Saturday, May 26, 2012

Inventory Management - Chapter of Financial Management

Inventory Management

Inventory Management


Inventory management theory is same for both inventory managers and financial managers. Financial managers have to explain the need for inventory investments to the financial institutions like banks who finance working capital investments.

Need for inventories
Transaction need: You cannot buy an item at the instant you want to use at the location you want to use.
Lot sizing: Frequent buying will result in higher transaction costs
Precaution: There is a possibility that material may not be available in the market when you want it.
Inventory planning - ABC analysis
inventory is categorised as A,B and C categories

Inventory planning policies for A, B and C category of items

A category items are planned for purchase after estimating their requirements during specified periods.

B category items are planned on the basis of lot size models.

C category items are planned for purchase in lots of one year requirement generally.

EOQ Models

Q = SQRT (2AS/I)
A = annual demand
S = Ordering cost per unit
I = Inventory carrying cost per annum per unit

Cost information for EOQ models

Ordering cost per unit and inventory carrying cost per annum per unit have to be estimated by inventory managers in collaboration with finance managers. The required information could be past costs and expected costs. Hence cost accounting department has a role to provide information on these items of cost and also has a responsibility to monitory these items of cost.

Pricing of raw materials and valuation of stock in process and finished goods

Monitoring of inventories


Prasanna Chandra, Financial Management, 5th Ed.,  Tata McGraw Hill, 2001
Brealey and Myers, Corporate Finance, Fifth Edition, Prentice Hall India, 2001


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