INTRODUCTION OF INVENTORY MANAGEMENT

A major component of working capital of an enterprise is Inventory and is much needed for
smooth running of production activity of an enterprise. Inventory is the most important link
between all the activities of an enterprise from beginning of production to the distribution
finished goods. It is very essential to plan, organize, control and manage the inventories
throughout the production process in order to smoothen out the working of the enterprise.

2.1 MEANING OF INVENTORY

The word inventory was first recorded in 1601. The French term inventory, or detailed list of
goods, dates back to 1415. Any stock that a firm keeps to meets its current and future
requirement of production and sales are called inventory and stock. The basic reason for holding
the inventory is to keep up the production activities unhampered. It is neither physically possible
nor economically justifiable to wait for the stock to arrive at the time when they are actually
required. The unforeseen fluctuation in the demand and supply of the goods also necessitate the
want of the inventory. The investment in the inventor consist the most significant part of the
current asset/working capital in most of the organization. Hence, holding o inventory is must for
the efficient working of the business unit.
Inventory management is very important aspect to ensure the availability of inventory as and
when required in exact quantity and at price and time. The quantity of inventory to be maintained
by the firm is to be determined to considering to major aspects:

IF INVENTORIES ARE TOO LARGE

They become strain of resource of the firm-large amount of money gets blocked.
IF INVENTORIES ARE TOO SMALL
The firm may lose the sales-less production due to small inventories available leading to lose
sales. The word inventory was first recorded in 1601. The French term inventory, or detailed list
of goods, dates back to 1415. Any stock that a firm keeps to meets its current and future

requirement of production and sales are called inventory and stock. The basic reason for holding
the inventory is to keep up the production activities unhampered. It is neither physically possible
nor economically justifiable to wait for the stock to arrive at the time when they are actually
required. The unforeseen fluctuation in the demand and supply of the goods also necessitate the
want of the inventory. The investment in the inventor consist the most significant part of the
current asset/working capital in most of the organization. Hence, holding o inventory is must for
the efficient working of the business unit.

2.2TYPES OF INVENTORY
RAW MATERIAL: Raw material is the basic input which initiates the production process
uninterrupted production. Raw materials are those units that are to purchased and stored for
future usage in production.
WORK-IN-PROGRESS: It means semi finished goods have not yet attain final shape of
finished goods. It stage after raw material but before finished goods.
FINISHED GOOD: Goods which are ready to be sold to the consumer. Finished goods need
to be maintained properly after production because there is lag between production and sales.
STOERS AND SPARES: Supplies like store and spares also form an integral part of
inventory of an enterprise depending upon nature of business.
Inventory management forecasts and strategies, such as a just-in-time inventory system, can help
minimize inventory costs because goods are created or received as inventory only when needed.

2.3 PRICING OF RAW MATERIALS

When issues are made out of various lots purchased at varying prices, the problem arises as to
which of the receipt price should be adopted for valuing the materials requisitions.
1. FIRST IN FIRST OUT
Materials received first will be issued first. The price of the earliest consignment is taken first
and when that consignment is exhausted the price of the next consignment is adopted and so on.
This method is suitable in times of falling prices, because the material charge to production will
be high while the replacement cost of materials will be low.

2. LAST IN FIRST OUT

Materials received last will be issued first. The price of the last consignment is taken first and
when that consignment is exhausted the price of the second last consignment is adopted and so
on. In timing of rising prices this method will show a charge to production, which is closely
related to current price levels provided that the last purchase is made recently.
3. WEIGHTED AVERAGE COST METHOD
Under this method, material issued is priced at the weighted average cost of material in stock:
WAC = Value of material in stock/Quantity in stock.
4. STANDARD PRICE METHOD
Under this method a standard price is predetermined. The price of issues predetermined for a
stated period taken into account all the factors affecting price such as anticipated market trends,
transportation charges, and normal quantity of purchase. Standard prices are determined for each
material and material requisition are priced at standards irrespective of the actual purchase price.
Any difference between the standard and actual price results in materials price variance.
5. CURRENT PRICE
According to this method, material issued is priced at their replacement or realizable price at the
time of issue. So the cost at which identical material could be purchased from the market should
be ascertained and used for valuing material issues.

2.4 NEED TO HOLD INVENTORIES

Maintaining inventories involves tying up of company funds and incurrence of storage and
handling cost but at the same time it shrinks ordering cost and help avail quantity discounts.
There are three general motives for holding inventories:
TRANSACTION MOTIVE: it facilitates continuous production and timely execution
of sales order.

 PRECAUTIONARY MOTIVE: it necessitates the holding of inventory for meeting the

unpredictable changes in the demand and supply of the material.
SPECULATIVE MATIVE: It induces to keep inventories for taking advantage of
fluctuations and quantity discount.

FIXATION OF NORMS OF INVENTORY HOLDINGS

Eitherby the top management or by the materials department could set the norms for inventories.
The top management usually sets monitory limits for investment in inventories. The materials
department has to allocate this investment to the various items and ensure the smooth operation
of the concern. It would be worthwhile if norms of inventories were set by the management by
objectives, concept. This concept expects the top management to set the inventory norms (limit)
after consultation with the materials department. A number of factors enter into consideration in
the determination of stock levels for individual items for the purpose of control and economy.
Some of them are:
1. Lead time for deliveries.
2. The rate of consumption.
3. Requirements of funds.
4. Keeping qualities, deterioration, evaporation etc.
5. Storage cost.
6. Availability of space.
7. Price fluctuations.
8. Insurance cost.
9. Obsolescence price.
10. Seasonal consideration of price and availability.
11. EOQ (Economic Order Quantity), and
12. Government and other statuary restriction
Any decision involving procurement storage and uses of item will have to be based on

an

overall appreciation of the influence of the critical ones among them. Material control
necessitates the maintenance of inventory of every item of material as low as possible ensuring at
the same time, its availability as and when required for production. These twin objectives are

achieved only by a proper planning of inventory levels. It the level of inventory is not properly
planned, the results may either be overstocking or under stocking. If a large stock of any item is
carried it will unnecessarily lock up a huge amount of working capital and consequently there is
a loss of interest. Further, a higher quantity than what is legitimate would also result in
deterioration. Besides there is also the risk of obsolescence if the end product for which the
inventory is required goes out of fashion.

2.5 INVENTORY MANAGEMENT

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different location within a facility or with in multi location
of a supply network to protect the regular and planned course of production against the random
disturbance of running out of material and goods. The scope of inventory management also
concerns the fine line between replenishment lead time, carrying cost of inventory, asset
management, inventory forecasting, inventory valuation, inventory visibility, future inventory
price forecasting, physical inventory, available physical space for inventory,

quality

management, replenishment, returns and defective goods and demand forecasting.

Inventory management ensures that the right material is available in the right quantity at the right
time and at the right place with the right amount of investment. In simple words, it is the
systematic control over the purchasing, storing and using of material so as to have a minimum
possible cost of material. Efficient control inventory make the firm flexible. Inefficient inventory
control result in imbalanced inventory and inflexible which further increase the level of
investment an makes the firm unprofitable. The purpose of inventory management is to keep the
stock in such a way that neither there is over-stocking and under-stocking.Every enterprise needs
inventory for smooth running of its activities. It serves as a link between production and
distribution processes. The investment in inventories constitutes the most significant part of
current assets / working capital in most of the undertaking. The purpose of inventory

management is to ensure availability of material in sufficient quantity as and when required and
also to minimize investment in inventories.
An efficient system of inventory management will determine:

What to purchase?
How much to purchase?
From where to purchase?
Where to store?

2.6 OBJECTIVE OF INVENTRY MANAGEMENT

To maintain a proper size of inventory for efficient and smooth production and sale
operation.
To maintain minimum investment in inventories to maximize the profitability.
To avoid both under-stocking and over-stocking.
To keep material cost under control so that they contribute in reducing cost of production
and overall cost.
To minimize loss through deterioration, pilferage, wastage and damage.
To facilitates furnishing of data for short term and long term planning and control of
inventory.
Through the efficient Management of Inventory of the wealth of owners will be maximized. To
reduce the requirement of cash in business, inventory turnover should be maximized and
management should save itself from loss of production and sales, arising from its being out of
stock. On the other hand, management should maximize stock turnover so that investment in
inventory could be minimized and on the other hand, it should keep adequate inventory to
operate the production & sales activities efficiently. The main objective of inventory
management is to maintain inventory at appropriate level so that it is neither excessive nor short
of requirement Thus, management is faced with 2 conflicting objectives.

2.7 INVENTORY CONTROL AND REVIEW

The efficiency of inventory control affects the flexibility of the firm. There are several tools of
inventory control. Some of these are:
(a) The economic order quantity which enables determination of optimal size of order to place on
the basis of demand or usage of the inventory.
(b) The technique of safety stocks to overcome problems of uncertainty.
(c) The order point formula, which tells us, the optimal point at which to reorder a particular item
of inventory.
Together, these tools provide the means for determining an optimal average level of inventory for
the firm.
Ratio analysis has a wider application as a measure of inventory control among most
manufacturing firms. Some of the important ratios are explained below:
(1) Inventory to Sales (Total Inventory/Sales for the Period)
The ratio explains variations in the level of investment. An increase in inventory levels,
substantially beyond that which might be expected from an increase in sales, may reflect such
phenomena as the result of a conscious policy shift to higher stock levels, of unintended
accumulation of unsold stocks, and of inventory speculation, or simply stocking in anticipation
of an almost certain surge of orders.
(2) Inventory Turnover (Cost of Goods Sold/Average Inventory)
The ratio tells us the rapidity with which the inventory is turned over into receivables through
sales. Generally, the higher the inventory turnover, the more efficient the management of a firm
is. However, a relatively high inventory turnover ratio may be the result of too low a level of
inventory and frequent stock outs. Therefore, the ratio must be judged in relation to the past and
expected future ratios of the firm and in relations of similar firms or the industry average or both.
(3) Sales to Inventory (Annual Net Sales/Inventory at the End of Fiscal Period)
The ratio indicates the volume of sales in relation to the amount of capital invested in
inventories. When inventory for a firm is larger in relation to sales (the condition which causes it

to have a lower net sales to inventory ratio than other firms) the firms rate of return is less since
it has more working capital tied up in inventories than has the firm with a higher ratio.
(4) Inventory to Current Assets (Total Inventory/Total Current Assets)
The ratio indicates the amount of investment in inventory per rupee of current assets investment.
Generally an increasing proportion of inventory is indicative of inefficient inventory
management. The ratio may also indicate the state of liquidity position of concern. The lower the
inventory to current assets lowers the liquidity as compared to other current assets, viz.,
receivables, cash and marketable securities.
(5) Inventories Expressed in Terms of Number of Days Sales (Inventory/Sales x 365)
The ratio indicates the size of inventory in terms of number of days sales. For this purpose first
the sales per day are calculated and inventory is divided by the amount of sales per day. The
increasing inventory in terms of number of days sales may indicate either accumulation of
inventory or decline in sales. Inventory for this purpose is assumed to include finished goods
only. While the former situation signifies poor inventory management, the later indicates the
poor performance of the marketing department.
(6) Sundry Creditors to Inventory (Sundry Creditors/Inventory)
The ratio reveals the extent to which inventories are procured through credit purchases.
Inventories for this purpose are assumed to include raw materials and stores and spares only. If
the ratio is less than unity, it reveals that the credit available is lower than the total inventory
required. It also explains the extent of inventory procured through cash purchases. Indirectly it
emphasizes the inventory financing policy of the firm. If the ratio is more than one, it explains
that the entire inventory is purchased on credit.
(7) Inventory to Net Working Capital (Inventory/Net Working Capital).

INVENTORIES CONTROL TECHNIQUES

ABC ANALYSIS OF INVENTORIES
The ABC inventory control technique is based on the principle that a small portion of the items
may typically represent the bulk of money value of the total inventory used in the production
process, while a relatively large number of items may from a small part of the money value of
stores. The money value is ascertained by multiplying the quantity of material of each item by its
unit price.
According to this approach to inventory control high value items are more closely controlled
than low value items. Each item of inventory is given A, B or C denomination depending upon
the amount spent for that particular item. A or the highest value items should be under the tight
control and under responsibility of the most experienced personnel, while C or the lowest
value may be under simple physical control.
It may also be clear with the help of the following examples:
A Category 5% to 10% of the items represent 70% to 75%
Of the money value.
B Category 15% to 20% of the items represent 15% to 20%
Of the money.
C Category The remaining number of the items represent
5% to 10% of the money value.
ADVANTAGES OF ABC ANALYSIS
1. It ensures a closer and a more strict control over such items, which are having a sizable
investment in there.
2. It releases working capital, which would otherwise have been locked up for a more profitable
channel of investment.
3. It reduces inventory-carrying cost.

4. It enables the relaxation of control for the C items and thus makes it possible for a sufficient
buffer stock to be created.
5. It enables the maintenance of high inventory turnover rate.
Inventory control involves the procurement, care and disposition of materials. There are three
kinds of inventory that are of concern to managers:
Raw materials,
In-process or semi-finished goods,
Finished goods.
If a manager effectively controls these three types of inventory, capital can be released that may
be tied up in unnecessary inventory, production control can be improved and can protect against
obsolescence, deterioration and/or theft,
The reasons for inventory control are:
Helps balance the stock as to value, size, colour, style, and price line in proportion to demand
or sales trends.
Help plan the winners as well as move slow sellers
Helps secure the best rate of stock turnover for each item.
Helps reduce expenses and markdowns.
Helps maintain a business reputation for always having new, fresh merchandise in
wanted sizes and colours.
Three major approaches can be used for inventory control in any type and size of operation. The
actual system selected will depend upon the type of operation, the amount of goods.

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of
inventory. Many small business owners fail to appreciate fully the true costs of carrying
inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of
money tied up in inventory. This fine line between keeping too much inventory and not enough is
not the manager's only concern. Others include:

THE REASONS FOR INVENTORY CONTROL ARE:

Helps balance the stock as to value, size, color, style, and price line in proportion to demand or
sales trends.
Help plan the winners as well as move slow sellers.
Helps secure the best rate of stock turnover for each item.
Helps reduce expenses and markdowns.
Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes
and colors.
Both in adequate & excessive quantities of inventory are undesirable for business. These
mutually conflicting objectives of inventory management can be explained is from of costs
associated with inventory and profits accruing from it low quantum of inventory reduces costs
and high level of inventory saves business from being out of stock & helps in running production
& sales activities smoothly.

2.8 ROLE OF INVENTORY ACCOUNTING

By helping the organization to make better decisions, the accountants can help the public sector
to change in a very positive way that delivers increased value for the taxpayers investment. It
can also help to incentivise progress and to ensure that reforms are sustainable and effective in
the long term, by ensuring that success is appropriately recognized in both the formal and
informal reward systems of the organization. To say that they have a key role to play is an
understatement. Finance is connected to most, if not all, of the key business processes within the
organization. It should be steering the stewardship and accountability systems that ensure that the
organization is conducting its business in an appropriate, ethical manner. It is critical that these
foundations are firmly laid. So often they are the litmus test by which public confidence in the
institution is either won or lost.
Finance should also be providing the information, analysis and advice to enable the
organizations service managers to operate effectively. This goes beyond the traditional

preoccupation with budgets how much have we spent so far, how much do we have left to
spend? It is about helping the organization to better understand its own performance. That means
making the connections and understanding the relationships between given inputs the resources
brought to bear and the outputs and outcomes that they achieve. It is also about understanding
and actively managing risks within the organization and its activities.

2.9 OPERATION OF INVENTORY MANAGEMENT

The operating object of inventory management is to minimize cost. The cost associated with
inventory fall into two categories carrying cost and ordering cost
a) ORDERING COST
Ordering cost is associated with acquisition or ordering of inventory. The ordering cost incurred
requisition, purchasing order, transportation, receiving, inspection and storing. Ordering cost
increases with the increase in the number of orders placed.

b) CARRYING COS
The costs incurred for maintaining the given level of

inventory are termed as carrying cost.

These costs include storage, insurance, taxes, deterioration and obsolescence. The carrying costs
vary with the size of inventory. Further it is divided into two categories:

THOSE THAT ARISE DUE TO THE STORING OF INVENTORY

Here the main components are Storage cost i.e. tax, depreciation, insurance, maintenance of
building etc.
THE OPPORTUNITY COSTS OF FUNDES
These consist of expenses in raising funds to finance the acquisition of inventory. If funds are not
locked in inventory, they would have earned a return. These are the opportunity cost of fund or
the financial component of cost.

C) PURCHASING COST
Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that
goes into its finished product, the firm can determine its annual purchasing cost by multiplying
the cost of one purchased unit (P) by the number of finished products demanded in a year (D).
Hence, purchasing cost is expressed as PD.
Now
Total

total
=

Holding

inventory
cost

cost
+

can

Set-up/Order

be
cost

expressed
+

Purchasing

as:
cost

Total = H(Q/2) + S(D/Q) + PD.

RELATIONSHIP BETWEEN SIZE OF ORDER AND COST OF CARRYING
INVENTROY:The ordering and carrying cost have a reverse relation. The ordering costs go up with the
increase in the number of order purchased. On the other hand, carrying cost goes down per unit
with the increase in the number of the units, purchased and stored. Thus, lowering the total cost.

FINANCIAL PLANING
A growth in sales is an important objective of the most firms. Growth in sales will be sustained
with the help if investment in assets and inventory will affect the funds available with the firm,
therefore effect of investment in inventories upon the liquidity, solvency and profitability of the
firm, this requires holding optimum level of the inventory. For finding out the effect of inventory
investment upon a business, various, liquidity, solvency and profitability ratio can be calculated.
The process of financial planning involves the following steps

Evaluating the current financial condition of the firm.

Analyzing the future growth prospect and options.
Appraising the investment option to achieve the stated growth objective.
Estimating funds requirement and considering alternative financing option.
Comparing and choosing from alternative growth plans and financial options.

Measuring actual performance with the planned performance.

INVENTORY ACCOUNTING

By helping the organization to make better decisions, the accountants can help the public sector
to change in a very positive way that delivers increased value for the taxpayers investment. It
can also help to incentivize progress and to ensure that reform are sustainable and effective in the
long term, by ensure that success is appropriately recognized in both the formal and informal
reward system of the organization.
To say that they have a key role to play is an understatement. Finance is connected to most, if
not all, of the key business processes within the organization. It should be steering the
stewardship and accountability system that ensure that the organization is conducting its business
in an appropriate, ethical manner .It is critical that these foundation are firmly laid. So often they
are the litmus test by which public confidence in the institution is either won or lost.

PROBLEMS FACED BY INVENTORY MANAGEMENT

(i) To maintain a large size inventories for efficient and smooth production and sales operation.
(ii) To maintain only a minimum possible inventory because of inventory holding cost and
opportunity cost of funds invested in inventory.
(iii) Control investment in inventories and keep it at the optimum level.
Inventory management, therefore, should strike a balance between too much inventory and too
little inventory. The efficient management and effective control of inventories help in achieving
better operational results and reducing investment in working capital. It has a significant
influence on the profitability of a concern.

RESEARCH DESIGN
Research design plays an important role in a study. The research design is the conceptual
structure within which research is conducted; it constitutes the blue print for the collection
measurement and analysis of data. As such the design includes an outline of what the researcher
will do from writing the hypothesis and its operational implications to the final analysis of data.

NEED OF THE STUDY

Inventories constitute the most important part of the current assets. These are the first and most
important element of cost as a lot of money is invested in inventories. So the study is conducted
to find out, how inventory is managed at Acc ltd. and to analyze the profitability and financial
position of the company at the end of the year. After analyzing the profitability and financial
position various measures are suggested to bring efficiency and the working of the company.
Inventories are required for the smooth running of the business activities. It is necessary for
every business concern to give proper attention to its inventory management. An efficient system
of inventory management determines what to purchase, how much to purchase, from where to
purchase, where to store, etc.

3.3 SCOPE OF THE STUDY

The present study is confined to Acc ltd. The study aims at analyzing the inventory management
and financial position of the company. The finding of the study was helpful in throwing light on
both the aspects of the company.

3.4 OBJECTIVE OF THE STUDY

To assess how inventory is managed at Acc limited.
To analyze the profitability and financial position of the company.
To suggest possible measure to bring efficiency in the working of the company

WORKING CAPITAL INTRODUCTION

Working capital typically means the firms holding of current or short-term assets such as
cash, receivables, inventory, and marketable securities.
These items are also referred to as circulating capital.
Corporate executives devotes a considerable amount of attention to the management of
working capital.

Definition Of Working Capital

Working capital refer to that part of the firms capital, which is required for financial short-term
or current assets such as cash marketable securities, debtors and inventories. Funds thus, invested
in current assets keep revolving fast and are constantly converted into cash and this cash flow out
again in exchange for other current assets. working capital is also known as revolving or
circulating capital or short-term capital.

CONCEPT OF WORKING CAPITAL

There are two possible interpretation of working capital concept:

1. Balance sheet concept
2. Operating cycle concept

Management Of Accounts Payable

Creditor are vital part of effectives cash management and should be managed carefully to
enhance the cash position.
Purchasing

Stock Turnover Ratio (Times)

COGS
AVERAGE STOCK

Stock Turnover Ratio (Days)

Average Stock

x 365

COGS
Receivables Turnover Ratio (Times)

Net Credit Sales

Average Accounts Receivable

Average Receivables Period (Days)

Avg A/C Receivable x 365

Net Credit Sales

Payables Turnover Ratio (Times)

Net Credit Purchases

Average Accounts Receivable

Average Payables Period (Days)

Avg A/C Receivable x 365

Net Credit Sales

The firm has to maintain cash balance to pay the bills as they come due.

In addition, the company must invest in inventories to fill customer orders promptly.
And finally, the company invests in accounts receivable to extend credit to customers.
Operating cycle is equal to the length of inventory and receivable conversion periods.

Managme
nt Of Accounts Who authorizes purchasing in your company - is it tightly
spread among a number of (junior) people?

Are purchase quantities geared to demand forecasts?

managed or

Do you use order quantities which take account of stock-holding and purchasing

costs?
Do you know the cost to the company of carrying stock ?
Do you have alternative sources of supply ? If not, get quotes from major suppliers
and shop around for the best discounts, credit terms, and reduce dependence on a

single supplier.
How many of your suppliers have a returns policy ?
Are you in a position to pass on cost increases quickly through price increases to

your customers ?
If a supplier of goods or services lets you down can you charge back the cost of the
delay ?
Can you arrange (with confidence !) to have delivery of supplies staggered or on a
just-in-time basis ?countants Payables

Factor Determinng Working Capital

1.

Nature of the Industry

2.

Demand of Industry

3.

Cash requirements

4.

Nature of the Business

5.

Manufacturing time

6.

Volume of Sales

7.

Terms of Purchase and Sales

8.

Inventory Turnover

9.

Business Turnover

10. Business Cycle

11. Current Assets requirements
12. Production Cycle
13.

Credit control

14.

Inflation or Price level changes

15.

Profit planning and control

16.

Repayment ability

17.

Cash reserves

18.

Operation efficiency

19.

Change in Technology

20.

Firms finance and dividend policy

21.

Attitude towards Risk

EXCESS OR INADEQUATE
Every business concern should have adequate working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate or
shortage of working capital.
Both excess as well as shortage of working capital situations are bad for any business.
However, out of the two, inadequacy or shortage of excess or inadequate.

WORKING CAPITAL

Principles Of Working Capital Management Objective

The objective of Receivables Management is to take sound decision as regards to
investment in Debtors. In the words of BOLTON S E., the objective of receivables
management is
Management Of Inventories
To promote sale and profit until that points is reached where the return on
investment in future funding of receivingis less then the cost of funds raised to
finance thad additionalcredit
Economice Order Quantity (EOQ)
The ordering quantity problem are solved by the firm by determing the EOQ.
that is the minimum level of inventory.
ordering costs
carrying costs

Aggressive approach: The firm uses only short term financing. In this approach, the firm
finances a part of the permanent assets with short term financing. This approach refers to more

riWORKING CAPITAL POLICY / APPROACHES

It can be explained by two approaches:
Conservative approach
Aggressive approach
Conservative approach: A firm financing its common permanent assets & also with long
term financing & less risky so far as insolvency is concerned. However funds may be

invested in such investment which fetches small returns to build up liquidity sky but may at
return to the assets.

INTRODUCION
In financial management, two important decisions are very vital and crucial.
They are decision regarding fixed assets/fixed capital and decision regarding
working capital/current assets. Both are important and a firm always analyzes
their effect to final impact upon profitability and risk.
Fixed capital refers to the funds invested in such fixed or permanent assets as
land, building, and machinery etc. Whereas working capital refers to the funds
locked up in materials, work in progress, finished goods, receivables, and
cash etc.
Thus, in very simple words, working capital may be defined as capital
invested in current assets. Here current assets are those assets, which
can be converted into cash within a short period of time and the cash received
is again invested into these assets. Thus, it is constantly receiving or
circulating. Hence, working capital is also known as circulating capital or
floating capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital :1. Gross working capital: (Total Current Assets)
The gross working capital, simply called as working capital refers to the firms
investment in current assets. Current assets are the assets, which can be
converted into cash within an accounting year or operating cycle. Thus, Gross
working capital, is the total of all current assets. It includes
1. Inventories (Raw materials and Components, Work-in-Progress, Finished
Goods, Others)
2. Trade Debtors
3. Loans and Advance
4. Cash and Bank Balances
5. Bills Receivables.
6. Short-term Investment
Working Capital Analysis
2. Net Working Capital: (Total Current Assets Total Current Liabilities)
Net working capital refers to the difference between current assets and

current liabilities. Current liabilities are those claims of outsiders, which are
expected to mature for payment within an accounting year. Net working
capital may be positive or negative. A positive net working capital will arise
when current assets exceed current liabilities and a negative net working
capital will arise when current liabilities exceed current assets i.e. there is no
working capital, but there is a working capital deficit. It includes
1. Trade Creditors.
2. Bills Payable.
3. Accrued or Outstanding Expenses.
4. Trade Advances
5. Short Term Borrowings (Commercial Banks and Others)
6. Provisions
7. Bank Overdraft
Working Capital represents the amount of current assets that have not been
supplied by current, short term creditors.
Gross working capital refers to the amount of funds invested in current assets
that are employed in the business process while, Net Working Capital refers
to the difference between current assets and current liabilities.
Working Capital is the excess of current assets that has been supplied by the
long-term creditors and the stockholders.
The two concepts of working capital, gross working capital and net working
capital are exclusive. Both are equally important for the efficient management
of working capital. The gross working capital focuses attention on two aspects
How to optimize investment in current assets? and How should current assets
be financed? While, net working capital concept is qualitative. It indicates the
10 James

C. Van Horne & John M. Wachowicz, Jr. Fundamentals of FinancialManagement,

Y. Khan & P K Jain, - Financial Management Text and Problems,
12 Prasanna Chandra Financial Management Theory and Practice
11 M.

Working Capital Analysis liquidity position of the firm and suggests the extent to which
working capital
needs may be financed by permanent sources of funds 3.5 RESEARCH

MATHODOLOGY
Research methodology refers to those methods which are followed by a researcher in a research
or a study. Research methodology is the way to systematically solve the research problem. Thus
when we talk about research methodology, we not only talk research method but also consider
the logic behind the method, we use in context of our research study and explain why we are
using particular method or technique.
The study was carrying out to find out the management and control of inventory at ACC limited.
For this purpose the relevant data of last five years was collected.

3.6 DATA COLLECTION

For the project data was collected from the following sources. Secondary source: data for
valuation and control of inventory and for analyzing the financial position of the company has
been obtained from the companys annual report, ledgers, files and other published record with
the company. Some help has been taken from the course book and websites. When we talk about
research methodology, we are not only talk about research method but also consider the logic
behind the method, we use in context of our research study and explain why we are using
particular method or technique so that the research results are capable of being evaluated by the
research himself or by other.
Mainly there are two types of data resources: Internal sources.
External sources.
Internal sources to collect the data refers to get data from within the company e.g:- companys
web site also is an internal source and External sources refers to collect the data from outside the
company e.g.:-journals, newspapers etc.
MAINLY THERE ARE TWO TYPES OF DATA
Primary data.
Secondary data.
PRIMARY DATA is a data which has been collected for a specific purpose at a first time and
this primary data is collected by researcher itself
SECONDARY DATA is a data which has been used for some other purposes and go through a
statistical process.
For my project data was collected from the secondary sources. Data for valuation and control of
inventory and for analyzing the financial position of the companys annual report, ledgers, and
published records of the company.

3.7 ASSUMPTION OF THE STUDY

Data pertaining to the cost and volume provided by the officials of the company are assumed to
be true and exact, which form the basis of the analysis.

3.8 ANALYTICAL TOOLS AND TECHNIQUES USED

After presenting data in various forms for the purpose of analysis, some research tools have been
used to assess the inventory management and financial position of ACC LIMITED. There are
different accounting and statistical tools which is used for this purpose, but in the present study
tools to control the inventory like safety stock, VED analysis etc and ratio analyses has been
used.

TECHINIQUES USED FOR CONTROL OF INVENTORY ARE

Determination of stock level.

Determination of safety stock.

Determination of economic order quantity.

V-E-D Analysis.

Inventory turnover ratio.

TOOLS USED FOR ANALYSING THE FINANCIAL POSITION ARE

Ratio Analysis.

TOOLS AND TECHINIQUES OF INENTORY MANAGEMENT FOR

CONTROL OF INVENTORY
DETERMINATIN OF STOCK LEVEL

An efficient inventory management require that a firm should maintain an optimum level of
inventory where the inventory cost are the minimum and at the same time there is no stock-out
which may result in loss of sale or stoppage of work.

VARIOUS STOCK LEVELS UNDER THIS ARE

MINIMUM LEVEL
This represents the quantity which must be maintained in hand at all the time. If stocks are less
than the minimum level then the work will stop due to shortage of material. Following factors
are taken into account while fixing minimum stock level:
LEAD TIME: Time taken in processing the order and then executing it is known as lead time.
RATE OF CONSUMPTION: it is the average consumption of material in the factory.
MINIMUM STOCK LEVEL= Reordering level (Normal consumption * Normal reorder
period)

RE-ORDERING LEVEL
When the quantity of material reaches at a certain figure then fresh order is sent to obtain
material again. This level is fixed between minimum level and maximum level. The order is sent
before the material reaches to minimum stock level
RE-ORDERING LEVEL = Maximum consumption * maximum re-order period

MAXIMUM LEVEL
It is the quantity of material beyond which a firm should not exceed its stock. If the quantity
exceeds that maximum level limit then there will be over-stocking. A firm should avoid the
overstocking because it will result in high material cost. Maximum stock level depends upon,
available capital. Cost of maintain the stock etc.

MAXIMUM STOCK LEVEL = Re-Ordering Level + Re-Order Quantity (Minimum

Consumption * Minimum Re-Order Period)

DANGER LEVEL
It is the level beyond which material should not fall in any case. If danger level arises then
immediate steps should be taken to replenish the stock even if more cost is incurred in arranging
the material. If the material is not arranger immediately there is a possibility of stoppage of work.
Danger level is determined with the fallowing formula.
DANGER LEVEL=Average Consumption * Minimum Re-Order Period for emergency
purposes.

SAFETY STOCK LEVEL

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory
cannot be perfectly forecasted, it fluctuates over the period of time, therefore, a firm usually in
the determination of this stock. Two costs involved in the determination so this stock i.e.
opportunity cost of the stock out and the carrying costs.
SAFETY STOCK=Re-order level Minimum stock level
ECONAMIC ORDER QUANTITY (E.O.Q)
Economic order quantity is a quantity of material, which can be purchased at minimum cost. It is
generally a point at which inventory carrying cast are equal to the ordering cost. The quantity to
be purchased should neither be small nor big because cost of buying and carrying material are
very high i.e. the cost of managing inventory made up of two parts ordering cost and carrying
cost.

CARRYING COST: -These are the cost for holding and maintaining the inventories. These
include storage, insurance, taxes, deterioration, and obsolescence. Carrying cost vary with
inventory size.

RELATIONSHIP BETWEEN SIZE OF ORDER AND COST OF CARRYING

INVENTORY
The ordering and carrying cost have a reverse relationship. The ordering cost goes up with the
increase in the number of order placed. On the other hand, carrying cost goes down per unit with
the increase in the number of the units, purchased and stored. Thus, lowering the total cost.
The determination of EOQ can be done with the following formula:EOQ
Where,

A= Annual Consumption (in Rupees)

S= Cost Of Placing An Order.

I= Inventory Carrying Cost.

V-E-D ANALYSIS
It is generally used for spare parts. The demand for spares depends upon the performance of the
plant and machinery. Spare parts are classified as vital (V), essential (E), desirable (D).the vital
spare parts are a must for running the concern smoothly otherwise it will cause havoc in the
concern. The (E) types of spare parts are also necessary but there stock can be kept at the low
figures. If the lead time of D kind of spare part is less, then there stocking can be avoided.

INVENTORY TURNOVER RATIO

This ratio is calculated to indicate whether inventory has been used resourcefully or not. The
purpose to ensure the blocking of only required minimum funds in inventory. Inventory
conversion period is also calculated to find the average time taken for clearing the stocks.
INVENTORY TURNOVER RATIO= Cost Of Goods Sold/ Average Inventory

INVENTORY CONVERSION PERIOD

Inventory conversion period is calculated to find out average time taken for clearing the goods.
This period is calculated by dividing the number of days by inventory turnover ratio. The
formula may be as:
Inventory conversion period=

Days in the Year /I Inventory Turnover

Higher the ratio, better it is for the company.

DEBTORS TURNOVER RATIO

Debtors turnover ratio indicates the velocity of debt collection of firm. In simple words, it
indicates the number of times average debtors (Receivables) are turned over during a year, thus:
Debtors Turnover Ratio

= Net Sales/Debtors

AVERAGE COLLECTION PERIOD

The average collection Period represents the average number of days for

which a firm has to

wait before its receivables are converted in to cash. The ratio can be calculated as follows:
Average Collection Period = No. of Working Days/Debtors Turnover Ratio

PROCEDURE FOR FINANCIAL STATEMENT

There are three step involved in the analysis of financial statement.
SELECTION.
CLASSIFICATION.
INTERPRETATION.
The first step involves collection of the information relevant to the purpose of analysis of
financial statement. The second step involved is the methodical classification of the data. And the
third step involves drawing of inferences and conclusion.

TOOLS FOR DTERMINING FINANCIAL POSITION

RATIO ANALYSIS

It is the most powerful tool in analyzing and interpreting the financial statement to arrive at a
conclusion. It is the process of establishing and interpreting various ratio for helping in making
certain decision. It is a mean of better understanding the financial strengths and weakness of the
company. The following are the four step involved in ratio analysis.

Selection of relevant data from the financial statement depending upon the objective of the
company.
Calculation of appropriate ratios from the above data.
Comparison of the calculated ratios with the ratios of the same company in the past.
Interpretation of the ratio.

On the basis of purpose ratios may be classified as under:-

LIQUIDITY RATIOS
These ratios indicate the firms ability to meet its current obligations out of current resources.
These are used to assess the short term financial position of the firm. It includes:

CURRENT RATIO

This ratio is intends to ascertain the short term solvency of the firm. This ratio defines the
relationship between current assets and current liability. This ratio ia also known as working
capital ratio. A ratio of 2:1 is considered an idle ratio. Higher the ration, better it is fir the firm.
CURRENT RATIO: Current Assets/ Current Liabilities

QUICK RATIO

Quick ratio is also known as acid test or liquidity ratio. This ratio is more rigorous test of
liquidity then the current ratio. The ratio expresses the relationship between liquid asset and
current liabilities. A quick ratio of 1:1 is considered encouraging.
QUICK RATIO =

Liquid Assets/ Current Liabilities

SOLVENCY RATIOS

The ratio indicates the ability of the firm to pay its long-term liability in time. This ratio is
helpful to creditors as this ratios tells that firm will be able to pay the regularly interest on longterm borrowings or not. Solvency ratio measure the relationship between external equities and
internal equities. It includes:

DEBT EQUITY RATIO

Debt equity ratio is also known as external-internal equity ratio, is calculated to measure the
relative claim of outsider and the owner against the firm assets. The ratio indicates the
relationship between the external equities and the internal equities
DEBT-EQUITY RATIO = Outsiders Funds (Long Term Loans)/ Shareholders fund

EQUITY RATIO

A variant to the debt equity ratio is the proprietory ratio which is also known as Equity Ratio or
Shareholders to Total Equities Ratio or Net worth to Total Assets Ratio. This ratio establishes the
relationship between shareholders fund to total assets of the firm. The ratio can be calculated as
under:
Equity Ratio = Shareholders Funds( Net Worth)/Total Assets

ACTIVITY RATIO
Activity ratio measures the efficiency or effectiveness with which a firm manages its resources
or assets. This ratio is also known as turnover ratio because they indicate the speed with which
assets are turned over into sales. This ratio includes the following:

TOTAL ASSETS TURNOVER RATIO

The total asset turnover ratio measures the ability of a company to use its assets to efficiently
generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets,
like plant and equipment, as well as inventory, accounts receivable, as well as any
Total Assets Turnover Ratio = Net Sales/Total Assets

FIXED ASSETS TRUNOVER RATIO The fixed-asset turnover ratio measures a

company's ability to generate net sales from fixed-asset investments - specifically property,
plant and equipment (P&E) - net of depreciation. A higher fixed-asset turnover ratio shows
that the company has been more effective in using the investment in fixed assets to generate
revenues.

Cost of goods sold = Opening stock + Purchases + Directs expenses Closing stock
Net fixed assets = Total fixed assets Depreciation

PROFITABILITY RATIOS
This ratio measure the overall performance of a firm by determining the effectiveness of the firm
in generating profit and is computed by establishing relationship between profit figures and sales.
Profitability is considered essential for the survival of the business. The business needs profit not
only for its existence but also for expansion and diversification It includes:

GROSS PROFIT RATIO

The gross profit margin reflects the efficiency with which the management each unit of produces.
A high ratio implies that the firm is able to produce at relatively low price.
Gross profit ratio

Gross Profit*100
Net Sales

NET PROFIT RATIO

The Net Profit Margin Ration determines the between Net profit and sales of business firm.
This relationship is also known as net margin. This ratio shows the earning left for shareholder
(both equity and preference) as percentage of Net sales. Net Margin Ratio measures the overall
efficiency of production, Administration selling,Financing and pricing.
Net profit Ratio: -=

Net Profit*100
Net Sales
A high Net profit Margin indicates adequate return to the owners as well as enables a firm to
withstand adverse economic conditions when selling price is decanting, cost of production is
rising and demand for product is falling.

3.10 LIMITATIONS OF THE STUDY

Due to lake of time, busy schedule of the employees and unavailability of the
information, the present study has a narrow scope.
The study has been restricted to one organization only.
The actual figure has been rounded off or there estimated value has been taken for
the purpose of convenience in analysis & interpretation.
The data mainly used in for the study is in secondary nature. So all the limitations
of secondary data in my project.
The information that is available is not sufficient for my project. The main
limitations of the study are summarized as under: Qualitative parameters have not been considered in the present study.
The scope the study is restricted to the ACC LIMITED.

6.1 CONCLUSION
INVENTORY POSITION
Under project study are discussed and results obtained in order to help providing suggestions are
concluded at last in this report. ACC range of blended cement is marketed through a network of

12 regional marketing offices, several area offices and warehouses. And the customer is assured
of being able to get quality ACC products when and where he wants them.

Company is not utilizing its resources up to the maximum.

The company is more dependent on the outsiders fund.
The short-term financial position of the company is not good enough.
The long-term financial policy is not as good as it should be.
Low investment in innovative R&D. Company should invest more in R&D.
Company is not looking for increase in the plant capacity.
We suggest that the company should set maximum and minimum level for its
Inventory so that its investment should become less in the inventor.
Now a day through the advance technology of computers and internet. The work of
setting levels for the inventory has been easier through efficient Management Information

System (MIS).
In the end I suggest ACC ltd. that it should set the various levels for its inventory
planning like the maximum level, minimum level and danger level. From that the

investment in the inventory is being lowered.

VED Analysis
Packing material, general consumables and electric item stock are

categorized as vital (V) that revels that they are utilized very frequently.
Tool stock, plant/ machinery, spare stock and chemicals oil and lubricants are
labels as essential (E) which means that they are not daily as compare to the

other alloys categorized as vital.

Other items are classified as desirable (D) shows that there utility is not as much
as the other item under the category essential and vital.

FINANCIAL POSITION
LIQUIDITY RATIO
Acc Ltd. needs to make bit improvement in the liquidity position of the company. As
manufacturing concern there is more investment in the capital goods but current assets also to be
increased accordingly to improve the current ratio. Current ratio revels that company has
sufficient fund to meet its current liability in time. Its in accordance with the bankers rule of
thumb (2:1). Quick ratio of the company is quite liquid in meeting the current liability. It is seen
that the company liquid ratio is according to the standard (1:1).

SOLVENCY RATIO
The debt equity ratio revels that lender contribution is decreasing as compare to owners
contribution. It is not in conformation with the bankers rule (1). Thus the long term debt equity
ratio of the company is not satisfactory. So the thus the long term solvency ratio of the company
is not satisfactory.
ACTIVITY RATIO
Activity ratio measures the efficiency or effectiveness with which a firm manages its resources
or assets. This ratio is also known as turnover ratio because they indicate the speed with which
assets are turned over into sales. A higher fixed-asset turnover ratio shows that the company has
been more effective in using the investment in fixed assets to generate revenues. The activity
ratio of ACC Ltd. is quite satisfactory.
PROFITABILITY RATIO
Profitability of the company is quite satisfactory. But, Acc ltd needs to keep intact with Gross
Profit Ratio and Net Profit Ratio .i.e. the proportion of G.P ratio is more as compared to N.P ratio
because company have more operational expenditure. Gross profit shows that the company
management is enough capable to control their expenses and thus giving the investor satisfactory
level of profit. Net Profit ratio indicates the efficiency of the management in manufacturing,
selling administrative and other activities of the firm. This ratio is the overall measure of firms
profitability. Acc ltd needs to lower down this expenditure in order to have more and more
profits.

4.2 SUGGESTIONS AND RECOMENDATIONS

The company can reduce its inventory cost by acquiring material domestically
rather depending completely on import.
In domestic market they can get the term in their favour by placing bulk order
for the material which are used in large quantity.
Liquidity position of the company is satisfactory but it need to maintain higher
amount of cash as the cash ratio is not in confirmation with the standard.
The company is highly relying on owners equity and therefore the debt equity
ratio is falling below standard. The company should increase debt ratio in its

capital structure.
The company has not been able to manage its debt properly therefore the debt
collection policy should be changed; it can be made more stringent.
The return on equity has been decreasing in the company. This is mainly
because of high use of equity by the company. The situation can be improved
by more debt financing.
First take an overall view in addressing inventory. When we solve the stock
that allows minimizing inventory for raw material therefore minimizing
investment in inventory. The next steps to be suggested that is to make efforts
to shrink lead-time, minimize inventory at every point, and drive wastage out
turnover issue correctively, everyone benefits in real terms. When the
company establishes partnering relationships with their customers, it can
enable them to make their demand for products more predictable thereby
allowing to minimize finished product inventory without falling to meet their
need for volume and timeliness .Supplier is also enables to produce and
deliver materials in tie and with low cost as it leads to reduction in unit cost.
Regarding efficiency of current assets sundry debtors can be considers as the
position of the turnover of the sundry debtor is good and improving in good
place This should be maintained in future and efforts should be made to
improve further. The company needs to optimize their supply chain, make
production inclined and optimize relationship to customers.

BIBLIOGRAPHY
1

I.M. Pandey, Financial Management, 3rd edition, New Delhi, Vikas

Publication House Pvt. Ltd. P-143to145(Approaches of working capital)

Maheshwari, S.N, Advanced Accounting, 4th edition Sultan Chand & Sons
Publication, New Delhi, 2004, P.No. (b40-b48)(tools of financial analysis)

Gupta Shashi.k,,Managemenet Accounting, 5 th ed,ition,Kalyani Publishers,

New Delhi, P.No 23.1-23.9(working capital management and finance)

Kothari C.R., Research Methodology Methods and Techniques (Second

Edition) New Age International Publishers, Ansari Road, Daryaganj, New
Delhi-110002.

Annual reports (ACC LTD.)

2015 (balance sheet and P&L account)

6 http://www.acclimited.com/financialreports.
7 http://www.acclimited.com/profile.

8 http://www.acclimited.com/management.
9 http://www.acclimited.com/achivements.
10 http://www.acclimited.com/productionunits.
11 http://www.acclimited.com/holcim.
http://www.acclimited.com/comparison.

INTRODUCTION

OF

INVENTORY MANAGEMENT
A major component of working capital of an enterprise is Inventory and is much needed for
smooth running of production activity of an enterprise. Inventory is the most important link
between all the activities of an enterprise from beginning of production to the distribution
finished goods. It is very essential to plan, organize, control and manage the inventories
throughout the production process in order to smoothen out the working of the enterprise.

2.2 MEANING OF INVENTORY

The word inventory was first recorded in 1601. The French term inventory, or detailed list of
goods, dates back to 1415. Any stock that a firm keeps to meets its current and future
requirement of production and sales are called inventory and stock. The basic reason for holding
the inventory is to keep up the production activities unhampered. It is neither physically possible
nor economically justifiable to wait for the stock to arrive at the time when they are actually
required. The unforeseen fluctuation in the demand and supply of the goods also necessitate the
want of the inventory. The investment in the inventor consist the most significant part of the
current asset/working capital in most of the organization. Hence, holding o inventory is must for
the efficient working of the business unit.
Inventory management is very important aspect to ensure the availability of inventory as and
when required in exact quantity and at price and time. The quantity of inventory to be maintained
by the firm is to be determined to considering to major aspects:

 IF INVENTORIES ARE TOO LARGE

They become strain of resource of the firm-large amount of money gets blocked.
IF INVENTORIES ARE TOO SMALL
The firm may lose the sales-less production due to small inventories available leading to lose
sales. The word inventory was first recorded in 1601. The French term inventory, or detailed list
of goods, dates back to 1415. Any stock that a firm keeps to meets its current and future
requirement of production and sales are called inventory and stock. The basic reason for holding
the inventory is to keep up the production activities unhampered. It is neither physically possible
nor economically justifiable to wait for the stock to arrive at the time when they are actually
required. The unforeseen fluctuation in the demand and supply of the goods also necessitate the
want of the inventory. The investment in the inventor consist the most significant part of the
current asset/working capital in most of the organization. Hence, holding o inventory is must for
the efficient working of the business unit.

2.2TYPES OF INVENTORY
RAW MATERIAL: Raw material is the basic input which initiates the production process
uninterrupted production. Raw materials are those units that are to purchased and stored for
future usage in production.
WORK-IN-PROGRESS: It means semi finished goods have not yet attain final shape of
finished goods. It stage after raw material but before finished goods.
FINISHED GOOD: Goods which are ready to be sold to the consumer. Finished goods need
to be maintained properly after production because there is lag between production and sales.
STOERS AND SPARES: Supplies like store and spares also form an integral part of
inventory of an enterprise depending upon nature of business.
Inventory management forecasts and strategies, such as a just-in-time inventory system, can help
minimize inventory costs because goods are created or received as inventory only when needed.

2.3 PRICING OF RAW MATERIALS

When issues are made out of various lots purchased at varying prices, the problem arises as to
which of the receipt price should be adopted for valuing the materials requisitions.
1. FIRST IN FIRST OUT
Materials received first will be issued first. The price of the earliest consignment is taken first
and when that consignment is exhausted the price of the next consignment is adopted and so on.
This method is suitable in times of falling prices, because the material charge to production will
be high while the replacement cost of materials will be low.
2. LAST IN FIRST OUT
Materials received last will be issued first. The price of the last consignment is taken first and
when that consignment is exhausted the price of the second last consignment is adopted and so
on. In timing of rising prices this method will show a charge to production, which is closely
related to current price levels provided that the last purchase is made recently.
3. WEIGHTED AVERAGE COST METHOD
Under this method, material issued is priced at the weighted average cost of material in stock:
WAC = Value of material in stock/Quantity in stock.
4. STANDARD PRICE METHOD
Under this method a standard price is predetermined. The price of issues predetermined for a
stated period taken into account all the factors affecting price such as anticipated market trends,
transportation charges, and normal quantity of purchase. Standard prices are determined for each
material and material requisition are priced at standards irrespective of the actual purchase price.
Any difference between the standard and actual price results in materials price variance.
5. CURRENT PRICE
According to this method, material issued is priced at their replacement or realizable price at the
time of issue. So the cost at which identical material could be purchased from the market should
be ascertained and used for valuing material issues.

2.4 NEED TO HOLD INVENTORIES

Maintaining inventories involves tying up of company funds and incurrence of storage and
handling cost but at the same time it shrinks ordering cost and help avail quantity discounts.
There are three general motives for holding inventories:
TRANSACTION MOTIVE: it facilitates continuous production and timely execution
of sales order.
PRECAUTIONARY MOTIVE: it necessitates the holding of inventory for meeting the
unpredictable changes in the demand and supply of the material.
SPECULATIVE MATIVE: It induces to keep inventories for taking advantage of
fluctuations and quantity discount.

FIXATION OF NORMS OF INVENTORY HOLDINGS

Eitherby the top management or by the materials department could set the norms for inventories.
The top management usually sets monitory limits for investment in inventories. The materials
department has to allocate this investment to the various items and ensure the smooth operation
of the concern. It would be worthwhile if norms of inventories were set by the management by
objectives, concept. This concept expects the top management to set the inventory norms (limit)
after consultation with the materials department. A number of factors enter into consideration in
the determination of stock levels for individual items for the purpose of control and economy.
Some of them are:
1. Lead time for deliveries.
2. The rate of consumption.
3. Requirements of funds.
4. Keeping qualities, deterioration, evaporation etc.
5. Storage cost.
6. Availability of space.
7. Price fluctuations.
8. Insurance cost.

9. Obsolescence price.
10. Seasonal consideration of price and availability.
11. EOQ (Economic Order Quantity), and
12. Government and other statuary restriction
Any decision involving procurement storage and uses of item will have to be based on

an

overall appreciation of the influence of the critical ones among them. Material control
necessitates the maintenance of inventory of every item of material as low as possible ensuring at
the same time, its availability as and when required for production. These twin objectives are
achieved only by a proper planning of inventory levels. It the level of inventory is not properly
planned, the results may either be overstocking or under stocking. If a large stock of any item is
carried it will unnecessarily lock up a huge amount of working capital and consequently there is
a loss of interest. Further, a higher quantity than what is legitimate would also result in
deterioration. Besides there is also the risk of obsolescence if the end product for which the
inventory is required goes out of fashion.

2.5 INVENTORY MANAGEMENT

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different location within a facility or with in multi location
of a supply network to protect the regular and planned course of production against the random
disturbance of running out of material and goods. The scope of inventory management also
concerns the fine line between replenishment lead time, carrying cost of inventory, asset
management, inventory forecasting, inventory valuation, inventory visibility, future inventory
price forecasting, physical inventory, available physical space for inventory,

quality

management, replenishment, returns and defective goods and demand forecasting.

Inventory management ensures that the right material is available in the right quantity at the right
time and at the right place with the right amount of investment. In simple words, it is the
systematic control over the purchasing, storing and using of material so as to have a minimum

possible cost of material. Efficient control inventory make the firm flexible. Inefficient inventory
control result in imbalanced inventory and inflexible which further increase the level of
investment an makes the firm unprofitable. The purpose of inventory management is to keep the
stock in such a way that neither there is over-stocking and under-stocking.Every enterprise needs
inventory for smooth running of its activities. It serves as a link between production and
distribution processes. The investment in inventories constitutes the most significant part of
current assets / working capital in most of the undertaking. The purpose of inventory
management is to ensure availability of material in sufficient quantity as and when required and
also to minimize investment in inventories.
An efficient system of inventory management will determine:

What to purchase?
How much to purchase?
From where to purchase?
Where to store?

2.6 OBJECTIVE OF INVENTRY MANAGEMENT

To maintain a proper size of inventory for efficient and smooth production and sale
operation.
To maintain minimum investment in inventories to maximize the profitability.
To avoid both under-stocking and over-stocking.
To keep material cost under control so that they contribute in reducing cost of production
and overall cost.
To minimize loss through deterioration, pilferage, wastage and damage.
To facilitates furnishing of data for short term and long term planning and control of
inventory.
Through the efficient Management of Inventory of the wealth of owners will be maximized. To
reduce the requirement of cash in business, inventory turnover should be maximized and
management should save itself from loss of production and sales, arising from its being out of

stock. On the other hand, management should maximize stock turnover so that investment in
inventory could be minimized and on the other hand, it should keep adequate inventory to
operate the production & sales activities efficiently. The main objective of inventory
management is to maintain inventory at appropriate level so that it is neither excessive nor short
of requirement Thus, management is faced with 2 conflicting objectives.

2.7 INVENTORY CONTROL AND REVIEW

The efficiency of inventory control affects the flexibility of the firm. There are several tools of
inventory control. Some of these are:
(a) The economic order quantity which enables determination of optimal size of order to place on
the basis of demand or usage of the inventory.
(b) The technique of safety stocks to overcome problems of uncertainty.
(c) The order point formula, which tells us, the optimal point at which to reorder a particular item
of inventory.
Together, these tools provide the means for determining an optimal average level of inventory for
the firm.
Ratio analysis has a wider application as a measure of inventory control among most
manufacturing firms. Some of the important ratios are explained below:
(1) Inventory to Sales (Total Inventory/Sales for the Period)
The ratio explains variations in the level of investment. An increase in inventory levels,
substantially beyond that which might be expected from an increase in sales, may reflect such
phenomena as the result of a conscious policy shift to higher stock levels, of unintended
accumulation of unsold stocks, and of inventory speculation, or simply stocking in anticipation
of an almost certain surge of orders.
(2) Inventory Turnover (Cost of Goods Sold/Average Inventory)
The ratio tells us the rapidity with which the inventory is turned over into receivables through
sales. Generally, the higher the inventory turnover, the more efficient the management of a firm

is. However, a relatively high inventory turnover ratio may be the result of too low a level of
inventory and frequent stock outs. Therefore, the ratio must be judged in relation to the past and
expected future ratios of the firm and in relations of similar firms or the industry average or both.
(3) Sales to Inventory (Annual Net Sales/Inventory at the End of Fiscal Period)
The ratio indicates the volume of sales in relation to the amount of capital invested in
inventories. When inventory for a firm is larger in relation to sales (the condition which causes it
to have a lower net sales to inventory ratio than other firms) the firms rate of return is less since
it has more working capital tied up in inventories than has the firm with a higher ratio.
(4) Inventory to Current Assets (Total Inventory/Total Current Assets)
The ratio indicates the amount of investment in inventory per rupee of current assets investment.
Generally an increasing proportion of inventory is indicative of inefficient inventory
management. The ratio may also indicate the state of liquidity position of concern. The lower the
inventory to current assets lowers the liquidity as compared to other current assets, viz.,
receivables, cash and marketable securities.
(5) Inventories Expressed in Terms of Number of Days Sales (Inventory/Sales x 365)
The ratio indicates the size of inventory in terms of number of days sales. For this purpose first
the sales per day are calculated and inventory is divided by the amount of sales per day. The
increasing inventory in terms of number of days sales may indicate either accumulation of
inventory or decline in sales. Inventory for this purpose is assumed to include finished goods
only. While the former situation signifies poor inventory management, the later indicates the
poor performance of the marketing department.
(6) Sundry Creditors to Inventory (Sundry Creditors/Inventory)
The ratio reveals the extent to which inventories are procured through credit purchases.
Inventories for this purpose are assumed to include raw materials and stores and spares only. If
the ratio is less than unity, it reveals that the credit available is lower than the total inventory
required. It also explains the extent of inventory procured through cash purchases. Indirectly it

emphasizes the inventory financing policy of the firm. If the ratio is more than one, it explains
that the entire inventory is purchased on credit.

(7) Inventory to Net Working Capital (Inventory/Net Working Capital).

INVENTORIES CONTROL TECHNIQUES

ABC ANALYSIS OF INVENTORIES
The ABC inventory control technique is based on the principle that a small portion of the items
may typically represent the bulk of money value of the total inventory used in the production
process, while a relatively large number of items may from a small part of the money value of
stores. The money value is ascertained by multiplying the quantity of material of each item by its
unit price.
According to this approach to inventory control high value items are more closely controlled
than low value items. Each item of inventory is given A, B or C denomination depending upon
the amount spent for that particular item. A or the highest value items should be under the tight
control and under responsibility of the most experienced personnel, while C or the lowest
value may be under simple physical control.
It may also be clear with the help of the following examples:
A Category 5% to 10% of the items represent 70% to 75%
Of the money value.
B Category 15% to 20% of the items represent 15% to 20%

Of the money.
C Category The remaining number of the items represent
5% to 10% of the money value.
ADVANTAGES OF ABC ANALYSIS
1. It ensures a closer and a more strict control over such items, which are having a sizable
investment in there.
2. It releases working capital, which would otherwise have been locked up for a more profitable
channel of investment.
3. It reduces inventory-carrying cost.
4. It enables the relaxation of control for the C items and thus makes it possible for a sufficient
buffer stock to be created.
5. It enables the maintenance of high inventory turnover rate.
Inventory control involves the procurement, care and disposition of materials. There are three
kinds of inventory that are of concern to managers:
Raw materials,
In-process or semi-finished goods,
Finished goods.
If a manager effectively controls these three types of inventory, capital can be released that may
be tied up in unnecessary inventory, production control can be improved and can protect against
obsolescence, deterioration and/or theft,
The reasons for inventory control are:
Helps balance the stock as to value, size, colour, style, and price line in proportion to demand
or sales trends.
Help plan the winners as well as move slow sellers
Helps secure the best rate of stock turnover for each item.
Helps reduce expenses and markdowns.
Helps maintain a business reputation for always having new, fresh merchandise in
wanted sizes and colours.

Three major approaches can be used for inventory control in any type and size of operation. The
actual system selected will depend upon the type of operation, the amount of goods.

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of
inventory. Many small business owners fail to appreciate fully the true costs of carrying
inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of
money tied up in inventory. This fine line between keeping too much inventory and not enough is
not the manager's only concern. Others include:

THE REASONS FOR INVENTORY CONTROL ARE:

Helps balance the stock as to value, size, color, style, and price line in proportion to demand or
sales trends.
Help plan the winners as well as move slow sellers.
Helps secure the best rate of stock turnover for each item.
Helps reduce expenses and markdowns.
Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes
and colors.
Both in adequate & excessive quantities of inventory are undesirable for business. These
mutually conflicting objectives of inventory management can be explained is from of costs
associated with inventory and profits accruing from it low quantum of inventory reduces costs
and high level of inventory saves business from being out of stock & helps in running production
& sales activities smoothly.

2.8 ROLE OF INVENTORY ACCOUNTING

By helping the organization to make better decisions, the accountants can help the public sector
to change in a very positive way that delivers increased value for the taxpayers investment. It

can also help to incentivise progress and to ensure that reforms are sustainable and effective in
the long term, by ensuring that success is appropriately recognized in both the formal and
informal reward systems of the organization. To say that they have a key role to play is an
understatement. Finance is connected to most, if not all, of the key business processes within the
organization. It should be steering the stewardship and accountability systems that ensure that the
organization is conducting its business in an appropriate, ethical manner. It is critical that these
foundations are firmly laid. So often they are the litmus test by which public confidence in the
institution is either won or lost.
Finance should also be providing the information, analysis and advice to enable the
organizations service managers to operate effectively. This goes beyond the traditional
preoccupation with budgets how much have we spent so far, how much do we have left to
spend? It is about helping the organization to better understand its own performance. That means
making the connections and understanding the relationships between given inputs the resources
brought to bear and the outputs and outcomes that they achieve. It is also about understanding
and actively managing risks within the organization and its activities.

2.9 OPERATION OF INVENTORY MANAGEMENT

The operating object of inventory management is to minimize cost. The cost associated with
inventory fall into two categories carrying cost and ordering cost
a) ORDERING COST
Ordering cost is associated with acquisition or ordering of inventory. The ordering cost incurred
requisition, purchasing order, transportation, receiving, inspection and storing. Ordering cost
increases with the increase in the number of orders placed.

b) CARRYING COS

The costs incurred for maintaining the given level of

inventory are termed as carrying cost.

These costs include storage, insurance, taxes, deterioration and obsolescence. The carrying costs
vary with the size of inventory. Further it is divided into two categories:

THOSE THAT ARISE DUE TO THE STORING OF INVENTORY

Here the main components are Storage cost i.e. tax, depreciation, insurance, maintenance of
building etc.
THE OPPORTUNITY COSTS OF FUNDES
These consist of expenses in raising funds to finance the acquisition of inventory. If funds are not
locked in inventory, they would have earned a return. These are the opportunity cost of fund or
the financial component of cost.
C) PURCHASING COST
Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that
goes into its finished product, the firm can determine its annual purchasing cost by multiplying
the cost of one purchased unit (P) by the number of finished products demanded in a year (D).
Hence, purchasing cost is expressed as PD.
Now
Total

total
=

Holding

inventory
cost

cost
+

can

Set-up/Order

be
cost

expressed
+

Purchasing

as:
cost

Total = H(Q/2) + S(D/Q) + PD.

RELATIONSHIP BETWEEN SIZE OF ORDER AND COST OF CARRYING
INVENTROY:The ordering and carrying cost have a reverse relation. The ordering costs go up with the
increase in the number of order purchased. On the other hand, carrying cost goes down per unit
with the increase in the number of the units, purchased and stored. Thus, lowering the total cost.

2.10 FINANCIAL PLANING

A growth in sales is an important objective of the most firms. Growth in sales will be sustained
with the help if investment in assets and inventory will affect the funds available with the firm,

therefore effect of investment in inventories upon the liquidity, solvency and profitability of the
firm, this requires holding optimum level of the inventory. For finding out the effect of inventory
investment upon a business, various, liquidity, solvency and profitability ratio can be calculated.
The process of financial planning involves the following steps

Evaluating the current financial condition of the firm.

Analyzing the future growth prospect and options.
Appraising the investment option to achieve the stated growth objective.
Estimating funds requirement and considering alternative financing option.
Comparing and choosing from alternative growth plans and financial options.

Measuring actual performance with the planned performance.

2.11 INVENTORY ACCOUNTING

By helping the organization to make better decisions, the accountants can help the public sector
to change in a very positive way that delivers increased value for the taxpayers investment. It
can also help to incentivize progress and to ensure that reform are sustainable and effective in the
long term, by ensure that success is appropriately recognized in both the formal and informal
reward system of the organization.
To say that they have a key role to play is an understatement. Finance is connected to most, if
not all, of the key business processes within the organization. It should be steering the
stewardship and accountability system that ensure that the organization is conducting its business
in an appropriate, ethical manner .It is critical that these foundation are firmly laid. So often they
are the litmus test by which public confidence in the institution is either won or lost.

2.12 PROBLEMS FACED BY INVENTORY MANAGEMENT

(i) To maintain a large size inventories for efficient and smooth production and sales operation.
(ii) To maintain only a minimum possible inventory because of inventory holding cost and
opportunity cost of funds invested in inventory.
(iii) Control investment in inventories and keep it at the optimum level.
Inventory management, therefore, should strike a balance between too much inventory and too
little inventory. The efficient management and effective control of inventories help in achieving

better operational results and reducing investment in working capital. It has a significant
influence on the profitability of a concern.

3.1 RESEARCH DESIGN

Research design plays an important role in a study. The research design is the conceptual
structure within which research is conducted; it constitutes the blue print for the collection
measurement and analysis of data. As such the design includes an outline of what the researcher
will do from writing the hypothesis and its operational implications to the final analysis of data.

3.2 NEED OF THE STUDY

Inventories constitute the most important part of the current assets. These are the first and most
important element of cost as a lot of money is invested in inventories. So the study is conducted
to find out, how inventory is managed at Acc ltd. and to analyze the profitability and financial
position of the company at the end of the year. After analyzing the profitability and financial
position various measures are suggested to bring efficiency and the working of the company.
Inventories are required for the smooth running of the business activities. It is necessary for
every business concern to give proper attention to its inventory management. An efficient system
of inventory management determines what to purchase, how much to purchase, from where to
purchase, where to store, etc.

3.3 SCOPE OF THE STUDY

The present study is confined to Acc ltd. The study aims at analyzing the inventory management
and financial position of the company. The finding of the study was helpful in throwing light on
both the aspects of the company.

3.4 OBJECTIVE OF THE STUDY

To assess how inventory is managed at Acc limited.
To analyze the profitability and financial position of the company.

 To suggest possible measure to bring efficiency in the working of the company.

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