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GROUP MEMBERS
NAME OF THE MEMBER
ROLLNO.
Gina Mendes Anjana pal Hemali Panchal ANJALI TRIPATHI
10 14 15 33
Submitted To: Neeta MISS F.Y.B & I (SEM-II) Group no. 7
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ACKNOWLEDGEMENT
We would firstly like to thank our Institution & sincere thanks to Principal Prof. A. E. Lakdawala and Vice Principal Prof. Kamala Arunachalam for providing us support and giving us an opportunity for doing B&I course and completing this project.
We would also like to extent our profound and sincere gratitude to our project guide Prof. Neeta Miss who has guided our project with her vast fund of knowledge advice and constant encouragement. We kindly appreciate her implicit and valuable contribution in drawing up this project.
We also take an opportunity to highlight the invaluable contribution of our B&I cocoordinator Prof. Kamal Rohra who have always supported and encouraged us.
We also thank our parents and all our colleagues without who this project would have not been completed.
Thank you all for your contribution towards the project whether big or small and will forever be indebted to each and every one of you. We also thanks to all those whom we have forgotten to mention in this space.
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INTRODUCTION
In the USA and Canada the term has developed from a list of goods and materials to the goods and materials they, especially those held available in stock by a business; and this has become the primary meaning of the term in North American English, equivalent to the term "stock" in British English. In accounting, inventory or stock is considered an asset. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs 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. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for
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product availability against the need for minimizing stock holding and handling costs.
DEFINITION OF INVENTORY:
A company's merchandise, raw materials, finished and unfinished products which have not yet been sold. These are considered liquid assets, since they can be converted into cash quite easily. There are various means of valuing these assets, but to be conservative the lowest value is usually used in financial statements.
INVENTORY EXAMPLES:
While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-forprofits - also have inventories (fixtures, furniture, supplies ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into: Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable.
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REASONS FOR KEEPING STOCK
There are three basic reasons for keeping an inventory: 1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product stage.
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SPECIAL TERMS USED IN INVENTORY
Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Stock out means running out of the inventory of an SKU. "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time. Holding Cost: In business management, holding cost is money spent to keep and maintain a stock of goods in storage. The most obvious holding costs include rent for the required space; equipment, materials, and labor to operate the space; insurance; security; interest on money invested in the inventory and space, and other direct expenses. Some stored goods become obsolete before they are sold, reducing their contribution to revenue while having no effect on their holding cost. Some goods are damaged by handling, weather, or other mechanisms. Some goods are lost through mishandling, poor record keeping, or theft, a category euphemistically called shrinkage. Carrying cost: In marketing, carrying cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishibility, shrinkage and insurance.
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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 incentivize 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.
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ECONOMIC ORDER QUANTITY
Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known as Wilson EOQ Model or Wilson Formula. The model was developed by F. W. Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, is given credit for his early in-depth analysis of it. EOQ only applies where the demand for a product is constant over the year and that each new order is delivered in full when the inventory reaches zero. There is a fixed cost charged for each order placed, regardless of the number of units ordered. There is also a holding or storage cost for each unit held in storage (sometimes expressed as a percentage of the purchase cost of the item). We want to determine the optimal number of units of the product to order so that we minimize the total cost associated with the purchase, delivery and storage of the product The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. Note that the number of times an order is placed will also affect the total cost, however, this number can be determined from the other parameters.
ASSUMPTIONS:
1. The ordering cost is constant. 2. The rate of demand is constant. 3. The lead time is fao. 4. The purchase price of the item is constant i.e. no discount is available.
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5. The replenishment is made instantaneously; the whole batch is delivered at once. EOQ is the quantity to order, so that ordering cost + carrying cost finds its minimum. (A common misunderstanding is that the formula tries to find when these are equal.)
VARIBLES:
Q = order quantity Q * = optimal order quantity D = annual demand quantity of the product P = purchase cost per unit S = fixed cost per order (not per unit, in addition to unit cost) H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc. usually not related to the unit cost).
COST FUNCTION:
The single-item EOQ formula finds the minimum point of the following cost function: Total Cost = purchase cost + ordering cost + holding cost - Purchase cost: This is the variable cost of goods: purchase unit price annual demand quantity. This is PD - Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to order D/Q times per year. This is S D/Q - Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H Q/2 .
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To determine the minimum point of the total cost curve, set the ordering cost equal to the holding cost: Solving for Q gives Q* (the optimal order quantity):
Therefore: . Note that interestingly, Q* is independent of P; it is a function of only S, D, H. Following are the examples which show the application of above formula:
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Q1. A manufacturer has to supply his customer with 600units of his product per year. Shortages are not allowed and the storage cost amount to Rs. 0.60 per unit per year. The setup cost per run is Rs. 80. Find the optimum run size and the minimum average yearly cost. Sol: We are given, D= 600 units per year H= Re. 0.60 per unit per year S= Rs. 80 per production run The optimum run size, therefore, is Q0= 2DS/H = 2*600*80/0.60 = 400 units. T0= Q0/D = 200/600 = 2/3 years or 8 months. Hence, the manufacturer should produce 400 units of his product at an interval of 8 months. Minimum average yearly cost is given by, CA= 2DSH = 2*0.60*80*600 = Rs. 240.
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Q2. A company has a steady demand of a product of 40 items per month. The purchase cost is Rs. 6 per item and the cost of ordering and procuring the material is Rs. 15 per occasion. If stock holding cost is 20% per annum, how frequently should the company replenish the stock? Sol: We are given, D= 40*12 = 480 items per year S= Rs. 15 per occasion H= 20% of Rs. 6 Q0= 2DS/H = 2*15*480/6*0.2 = 110 items. Frequency of replenishment = 110/480 = 0.22 or 80 days.
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Q3. Using the following information, obtain the EOQ and the total variable cost associated with the policy of ordering quantities of that size. Sol: Annual demand= Rs. 20,000 S= Rs. 150 H= 0.24, We get, Q0 = 2DS/H = 2*150*20000/0.24 = Rs. 5,000 and CA= 2DSH = 2*150*20000*0.24 = Rs. 1,200.
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Q4. A manufacturer has to supply his customers with 24,000 units of his product per year. This demand is fixed and known. Since the units are used by the customer in an assembly line operation and the customer has no shortage space for the units, the manufacturer must ship a days supply each day. If the manufacturer fails to supply the required units, he will lose the amount and probably his business. Hence, the cost of a shortage is assumed to be infinite, and consequently, none will be tolerated. The inventory holding cost amounts to 0.10per unit per month, and the set up cost per run is Rs.350. Find the optimum lot size and the length of optimum production. Sol: We are given, D= 24000 units per year or 2000 units per month H= Re. 0.10 per unit per month S= Rs. 350 per production run Q0= 2DS/H = 2*24000*350/12*0.10 = 3,740 units T0= 3740/2000 = 1.87 months. Hence, the length of production run must be 1.87 months.
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Q5. The demand for a particular item is 18,000 units per year. The holding cost per unit is Rs. 1.20 per year, and the cost of one procurement is Rs. 400. No shortages are allowed, and the replacement rate is instantaneous. Determine: a) optimum order quantity, b) number of orders per year, c) time between orders. Sol: We are given, H= Rs. 1.20 per year S= Rs. 400 D= 18000 units per year a) Optimum order quantity is, Q0= 2DS/H = 2*400*18000/1.2 = 3,465 units. b) Number of orders per year is, T0= 18000/3465 = 5.2 order per year. c) Optimum time between orders is, T0= 3465/18000 = 0.1925 years.
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Q6. ABC manufacturing company purchases 4000 parts of a machine for its annual requirements, ordering one month usage at a time. Each part costs Rs. 20. The ordering cost per order is Rs. 15 and the carrying charges are 15% of the average inventory per year. You have been asked to suggest a more economical purchasing policy for the company. What advice would you offer and how much would it save the company per year? Sol: We are given, D= 9000 parts per year S= Rs. 15 per order H= 15% of the average inventory per year = Rs. 20*15/100 = Rs. 3 each part year Q0= 2DS/H = 2*15*9000/3 = 300 units T0= 300/9000 = 1/30year.
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CONCLUSION
If your goal is to make your business more profitable, you must increase efficiency and reduce costs. As a member of the distributions industry, inventory is the largest investment that you make. Careful classification of your inventory, and continuing analysis of those classifications, can play a vital role in maintaining cost at the efficient levels you have established as your goals. Payroll is an immediate expense of your business. The time you invest in inventory management will pay immediate and long-term dividends by reducing the amount of time your employees spend performing their tasks. With their increased speed, accuracy, and efficiency, you will no longer be paying them to repeat tasks that the Dealer can do for them. Inventory control is a constant requirement of doing business successfully. Procedures for pulling, receiving, and replenishing stock should be established, with considerations made for your particular environment. These procedures should be enforced as law at your company: inventory accuracy is developed only through adherence to consistent practices and procedures. Inventory management involves more than immediate and reactionary decisions that affect your business. Inventory management requires that you establish and enforce procedures that will serve as tools in utilizing your system on a daily basis in the most efficient manner to produce the most profits for your company.
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