Writing Resources
Inventory is the most important part of the current assets of a large majority of companies in India and to maintain the inventory a large amount of fund is required by the company Therefore managing inventories efficiently and effectively in order to avoid unnecessary investment is very important WHAT IS INVENTORY Inventory is the entire stock of a business including Raw materials Work in progress Finished goods Tools and supplies Goods in transit FUNCTIONS OF INVENTORY 1 To meet the unexpected customer demand 2 To have smooth production requirement 3 To protect that there will be no stock outs 4 To hedge against price increases Purpose of holding inventory Holding inventories means blockage of funds and the various costs associated with it but still every business has to maintain a certain level of inventories to facilitate continuous production and smooth running of the business Three main purpose or motives of Holding Inventory 1 TRANSACTION MOTIVE Any business maintains inventories to avoid blockage in its production and sales and by maintaining the business ensures there are no interruption in production process thereby sales are not affected 2 PRECAUTIONARY MOTIVE Inventories are also held for sudden and unexpected demand arises for finished goods In this case the business should have some inventories in their warehouse to protect against the risk of such unpredictable changes 3 SPECULATIVE MOTIVE A business may hold inventory for any future change in the price level and have extra gain over the inventory in hold INVENTORY COSTS ARE OF VARIOUS TYPES 1 Purchase cost Cost paid to supplier to buy the inventory 2 Holding or carrying cost Cost relate to physically having items in storage It includes a Interest b Insurance c Depreciation d Warehousing costs 3 Ordering costs
