Cost of Inventory Accumulation and Depletion

Inventory control aims at maintaining the value of the inventories at the lowest possible level at the same time seeing that the required inventories are available at all times. These are two conflicting situations. If inventories accumulate, the value of the inventory carrying will increase but it will result into the stock outs endangering the production flow. Thus, a balance should be struck between the inventory accumulation and inventory depletion. Both are mutually exclusive situations. The advantages of one will be the disadvantages of the other.

Disadvantages of Inventory Accumulation:

1) Locking up of working capital
2) More storage space
3) High insurance charges
4) High taxes
5) Greater handling and distributing cost
6) High cost of recording and up keeping
7) Deterioration in quality
8) Chances of pilferage
9) Evaporation of alcoholic materials.

Disadvantages of Inventory Depletion:

It will result into stock out resulting into:

1) Production stoppages
2) Idle machine capacity
3) Idle labor
4) Burden of fixed overheads
5) Failure to meet delivery orders resulting into loss of ,good will

Major activities of inventory control:

The inventory control is mainly concerned with the following activities:

Planning the inventories: On the basis of the production schedule prepared from the sales forecasting in continuous production and customers orders in intermittent production, the periodic requirements of the inventories are planned in advance

Procurement of inventories: the inventories are procured from the selected suppliers according to the planned requirements. This is done through the determination of inventory needs, contacting the suppliers, comparing their quotations, selecting the supplier and placing the purchase order with the selected supplier.

Receiving and inspection if inventories: he incoming materials mare received, verified with the purchase order and packing slip and are inspected to the verification of the quality.

Storing and issuing the inventories: As noted above, the inventories are procured in advance of their use. They are stored till they are requisitioned by the production departments. The stored inventories are issued to the respective production departments against the authorized material requisitions.

Recording the receipts and issues of inventories:
Inventories are properly recorded in the bin card and attached to each bin (i.e. the container in which the inventories are stored) and in the stock ledger. At the end of each transaction, the entries are made in the Receiving or Issuing columns and the balance is stuck.

Physical verification of inventories: At the end of specified period the physical quantities of the inventories are verified with the book balance and the discrepancies are ascertained. The discrepancies are analyzed and the reasons for the inventory losses are located.

Follow up function: Inventory control also, involves the analysis of the excessive usage of the inventories. It tries to find out the reasons for such excessive consumption of raw materials and parts.

Materials standardization and substitution: Inventory also aims to standardize the materials and to, search for cheaper substitutes. Value engineering is a popular control technique which searches for cheaper substitutes.

Organization for Inventory Control:

Traditionally inventory control was treated as a routine clerical, function dealing with placing the order, receiving the inventories, storing and issuing them. As these activities involve more of writing and recording the facts, it was treated as a clerical function. It was and led by a junior, man in the production department. But in the modern manufacturing organizations, inventory control is given a strategic importance in the organization structure.

The inventory control, production is closely related to many other functions ad departments. The scheduling section is one which informs it about the need of various types of materials at different time intervals. This enables, it to determine its ordering sequence. The purchase department receives the requisitions from the inventory control section to initiate fresh purchases. The product engineering department prescribes the specifications of materials and bill of material for any specific job order. The manufacturing section controls the process planning which regulates the need for inventories. The top management is concerned with the prescription of optimum inventory levels which results into locking up of funds. It is also concerned with the cu9stomers services with the use of existing materials and the quality of the products and timely delivery of shipments. Thus, inventory control is a core function which is related to any other department.

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