IHM KOLKATA
INVENTORY CONTROL
The main objective of stocktaking is to ascertain the actual value of goods in hand as distinct from the
book value of the stock. It is the process physical counting of all stock items in the storerooms and
kitchen. It is carried out by F& B control department of the hotel. In case of food stores, it is done
once in a month, for housekeeping item once in two months and for alcoholic beverage and bar once
in 24 hours. It solves the following purpose
To determine the value of goods held in stock (to check total value of stock held is in accordance with
the financial policy the establishments)
To compare the value of goods actually in stores with the book value of the stock at the particular
time.
To list slow-moving items.
To compare usage with sales to assess food percentage as a deterrent against loss of pilferage.
To determine the rate of stock turnover.
It provides variance between actual quantities and calculated quantities on hand.
Some senior staff or account personnel aided by concerned department staff carries the physical stock.
All the goods are recorded on the printed stock sheet. Stock taking should be done on the end of one
trading period & when it carried out the movement of goods should not take place.
There are two ways of carrying it.
1. Perpetual inventory
2. Monthly inventory
METHODS OF INVENTORY CONTROL
There are two methods to control the inventory of stores:
1. Physical inventory system
2. Perpetual inventory system
Physical inventory system
A physical inventory system is a periodic actual counting of all the products in the storage areas.
Usually store items are counted once in a month and usually, the physical counting is done either
before the normal opening timings of stores or after the normal closing hours as otherwise, it may
disturb the normal issuing schedules to various departments. In large organizations, a complete
inventory may not be taken at one time. Instead, inventories can be taken in parts on weekly basis. The
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inventory process should involve at least two people out of which one is from control department and is not
directly involved with the storeroom operations. And the other should be from the accounts department. One
person counts the food which is arranged systematically in the storeroom. The store’s items are either stored in
the form of groups; like all pulses are stored at one place and all bottled and canned items are stored at one
place, or they are stored alphabetically. Usually, the items which are issued more frequently are stored near the
delivery window and others can be stored at different place. The other person records the data on a physical
inventory from which is designed according to the physical arrangement of foods on shelves. This helps in
taking the physical inventory of all the items in the shortest possible time. The expensive items should be
physically counted / weighed more frequently.
Perpetual Inventory
The process of maintaining a continuous record of all purchases and items being issued is called
perpetual inventory system. This process provides a continuous record of goods available at hand at
any given time as well as the value of supplies at hand. Generally, a perpetual record is used to restrict
the products in dry stores and frozen stores. Perpetual inventory requires a considerable amount of
labour to maintain and is maintained only for selected items, usually, very expensive ones. A
perpetual inventory record is not sufficient for accurate accounting and control of food and supplies.
Therefore, it becomes necessary that a perpetual inventory is tallied with the physical inventory.
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LEVELS AND TECHNIQUE: INVENTORY CONTROL
Some of the most important techniques of the inventory control system are
1. Setting up of various stock levels.
2. Preparations of inventory budgets.
3. Maintaining perpetual inventory system.
4. Establishing proper purchase procedures.
5. Inventory turnover ratios.
6. ABC analysis.
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1. Setting up of various stock levels:
To avoid over-stocking and under-stocking of materials, the management has to decide about the
maximum level, minimum level, re-order level, danger level and average level of materials to be kept
in the store.
(a) Re-ordering level:
It is also known as ‘ordering level’ or ‘ordering point’ or ‘ordering limit’. It is a point at which order
for supply of material should be made.
This level is fixed somewhere between the maximum level and the minimum level in such a way that
the quantity of materials represented by the difference between the re-ordering level and the minimum
level will be sufficient to meet the demands of production till such time as the materials are
replenished. Reorder level depends mainly on the maximum rate of consumption and order lead time.
When this level is reached, the storekeeper will initiate the purchase requisition.
Reordering level is calculated with the following formula:
Re-order level =Maximum Rate of consumption x maximum lead time
(b) Maximum Level:
Maximum level is the level above which stock should never reach. It is also known as ‘maximum
limit’ or ‘maximum stock’. The function of maximum level is essential to avoid unnecessary blocking
up of capital in inventories, losses on account of deterioration and obsolescence of materials, extra
overheads and the temptation to thefts etc. This level can be determined with the following formula.
Maximum Stock level = Reordering level + Reordering quantity —(Minimum Consumption x
Minimum re-ordering period)
(c) Minimum Level:
It represents the lowest quantity of a particular material below which stock should not be allowed to
fall. This level must be maintained at every time so that production is not held up due to the shortage
of any material.
It is that level of inventories of which a fresh order must be placed to replenish the stock. This level is
usually determined by the following formula:
Minimum Level = Re-ordering level — (Normal rate of consumption x Normal delivery period)
(d) Average Stock Level:
Average stock level is determined by averaging the minimum and maximum level of stock.
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The formula for determination of the level is as follows:
Average level =1/2 (Minimum stock level + Maximum stock level)
This may also be expressed by minimum level + 1/2 of Re-ordering Quantity.
(e) Danger Level:
Danger level is that level below which the stock should under no circumstances be allowed to fall.
Danger level is slightly below the minimum level and therefore the purchases manager should make
special efforts to acquire required materials and stores.
This level can be calculated with the help of following formula:
Danger Level =Average rate of consumption x Emergency supply time.
(f) Economic Order Quantity (E.O.Q.):
One of the most important problems faced by the purchasing department is how much to order at a
time. Purchasing in large quantities involve lesser purchasing cost. But the cost of carrying them tends
to be higher. Likewise, if purchases are made in smaller quantities, holding costs are lower while
purchasing costs tend to be higher.
Hence, the most economic buying quantity or the optimum quantity should be determined by the
purchase department by considering the factors such as the cost of ordering, holding or carrying.
This can be calculated by the following formula:
Q = √2AS/I
Where Q stands for quantity per order;
A stands for annual requirements of an item in terms of rupees;
S stands for cost of placement of an order in rupees; and
I stand for inventory carrying the cost per unit per year in rupees.
2. Preparation of Inventory Budgets:
Organisations having huge material requirement normally prepare purchase budgets. The purchase
budget should be prepared well in advance. The budget for production and consumable material and
for capital and maintenance material should be separately prepared. Sales budget generally provide
the basis for preparation of production plans. Therefore, the first step in the preparation of a purchase
budget is the establishment of sales budget.
As per the production plan, the material schedule is prepared depending upon the amount and return
contained in the plan. To determine the net quantities to be procured, necessary adjustments for the
stock already held is to be made. They are valued at the standard rate or current market. In this way,
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material procurement budget is prepared. The budget so prepared should be communicated to all
departments concerned so that the actual purchase commitments can be regulated as per budgets.
At periodical intervals, actuals are compared with the budgeted figures and reported to management
which provides a suitable basis for controlling the purchase of materials.
3. Maintaining Perpetual Inventory System:
This is another technique to exercise control over inventory. It is also known as an automatic
inventory system. The basic objective of this system is to make available details about the
quantity and value of stock of each item at all times. Thus, this system provides a rigid
control over stock of materials as physical stock can be regularly verified with the stock
records kept in the stores and the cost office.
4. Establishing Proper Purchase Procedures:
A proper purchase procedure has to be established and adopted to ensure necessary inventory
control. The following steps are involved.
(a) Purchase Requisition: It is the requisition made by the various departmental heads or
storekeeper for their various material requirements. The initiation of purchase begins with the
receipts of a purchase requisition by the purchase department.
(b) Inviting Quotations: The purchase department will invite quotations for supply of goods
on the receipt of the purchase requisition.
(c) Schedule of Quotations: The schedule of quotations will be prepared by the purchase
department on the basis of quotations received.
(d) Approving the supplier: The schedule of quotations is put before the purchase
committee who selects the supplier by considering factors like price, quality of materials,
terms of payment, delivery schedule etc.
(e) Purchase Order: It is the last step and the purchase order is prepared by the purchase
department. It is a written authorisation to the supplier to supply a specified quality and
quantity of material at the specified time and place mentioned at the stipulated terms.
5. Inventory Turnover Ratio:
These are calculated to minimise the inventory by the use of the following formula:
Inventory Turnover Ratio = Cost of goods consumed/sold during the period/Average inventory held
during the period
The ratio indicates how quickly the inventory is used for production. Higher the ratio, shorter will be
the duration of inventory at the factory. It is the index of the efficiency of material management. The
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comparison of various inventory turnover ratios at different items with those of previous years
may reveal the following four types of inventories:
(a) Slow moving Inventories: These inventories have a very low turnover ratio. Management should
take all possible steps to keep such inventories at the lowest levels.
(b) Dormant Inventories: These inventories have no demand. The finance manager has to take a
decision whether such inventories should be retained or scrapped based upon the current market price,
conditions etc.
(c) Obsolete Inventories: These inventories are no longer in demand due to their becoming out of
demand. Such inventories should be immediately scrapped.
(d) Fast moving inventories: These inventories are in hot demand. Proper and special care should be
taken in respect of these inventories so that the manufacturing process does not suffer due to the
shortage of such inventories.
Perpetual inventory control system:
In a large b essential to have information about the continuous availability of different types of
materials and stores purchased, issued and their balance in hand. The perpetual inventory control
system enables the manufacturer to know about the availability of these materials and stores without
undergoing the cumbersome process of physical stock taking.
Under this method, proper information relating to receipt, issue and materials in hand is kept. The
main objective of this system is to have accurate information about the stock level of every item at
any time.
Perpetual inventory control system cannot-be successful unless and until it is accompanied by a
system of continuous stock taking i.e., checking the total stock of the concern 3/4 times a year by
picking 10/15 items daily (as against physical stocktaking which takes place once a year).
The items are taken in rotation. In order to have more effective control, the process of continuous
stock taking is usually undertaken by a person other than the storekeeper. This will check the
functioning of storekeeper also. The items may be selected at random to have a surprise check. The
success of the system of perpetual inventory control depends upon the proper implementation of the
system of continuous stock taking.
6. ABC analysis:
In order to exercise effective control over materials, A.B.C. (Always Better Control) method is of
immense use. Under this method, materials are classified into three categories in accordance with
their respective values. Group ‘A’ constitutes costly items which may be only 10 to 20% of the total
items but account for about 50% of the total value of the stores.
A greater degree of control is exercised to preserve these items. Group ‘B’ consists of items which
constitute 20 to 30% of the store items and represent about 30% of the total value of stores.
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A reasonable degree of care may be taken in order to control these items. In the last category i.e.
group ‘C’ about 70 to 80% of the items is covered costing about 20% of the total value. This can be
referred to as a residuary category. A routine type of care may be taken in the case of the third
category.
This method is also known as ‘stock control according to value method’, ‘selective value approach’
and ‘proportional parts value approach’.
If this method is applied with care, it ensures a considerable reduction in the storage expenses and it is
also greatly helpful in preserving costly items.
PERPETUAL INVENTORY: INVENTORY CONTROL
In this system, goods received or issued is immediately recorded on stocktaking sheet & compiled at
the end of the day. In this system, at any given time you know the value of stock in hand. An
individual card is required for each item. All figures are recorded, the balance figure on the card
should agree with the actual count of the item in the storeroom. The following are the advantage of
perpetual inventory
It indicates the reordering point.
It controls the overbuying and under buying.
It provides the constant inventory figure at glance.
Immediate comparison between actual and book value of items.
It indicates the slow-moving items
MONTHLY INVENTORY: INVENTORY CONTROL
In most business establishment physical inventories are taken. This is done at the close of accounting
period or after the close of the business day or monthly. The process of taking a physical inventory
requires that one physically count the actual number of units of each item in stock and record that
number at the appropriate place in the inventory book. Once the quantities are determined for each
item, total value also can be calculated for each. One of the principal difficulties with above procedure
is determining unit cost of each item since all purchases are not made at the same time.
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PRICING OF COMMODITIES: INVENTORY CONTROL
In a department, there must be a system established so that the department can be fairly charged for
what it has requisitioned for its use. The method of pricing the food issued depends mainly on the type
of commodities in question.
Perishables
In the case of perishable commodities as already stated they frequently go directly to the kitchen as
direct issues and priced against the actual purchase price of the commodities. When however a
perishable store system is operated the daily issues can be more effectively controlled and a much
more accurate gross profit calculated for each day some discrepancy do occur under this method at
times, e.g. the butchery department will draw food items from the stores, manufacture them into a
processed item and returned it to the stores to be issued at a later date. The method of costing here
must be clearly worked out, as often – central butchery departments are required to be self-supporting
and also the purchasing officer and food and beverage manager having previously decided it was
cheaper and more efficient to have a butchery department in the establishment, require to measure
than previous make or buy decision at periodic intervals. Perishables food may be priced out of in any
methods by which non-perishables and be priced in some instants the method used would be restricted
to the large establishment because of the high degree of skill necessary to install and control.
Non-perishables
In this case, one of several different methods may be adopted.
1. Actual Purchase Price: This may be applied to items, which are infrequent purchase, and of which
only a small stock is held and also for slow-moving items e.g. items costing Rs. 5/- each are issued at
Rs. 5/- each.
2. Simple Average Price: This may be applied to items, which have a fluctuating market price. When
a new purchase is made a new average price should be calculated e.g. 10 times are purchased in a
week at Rs. 5/- each and a similar 12 items are purchased in week 2 at Rs. 4/- each. If any of the 22
items in stock were to issue they would be at Rs. 4.5/- each.
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3. Weighted Average Price: This is a more accurate method which is sometimes used, the quantities
are taken into account as well as the price, thus giving a more accurate average price.
E.g.
10kg at Rs. 15/- = Rs. 150/-
20kg at Rs. 20/- = Rs. 400/-
Total 30kg = Rs. 550/-
WAP 550kg/30 = Rs. 18.3/-
4. Inflated Price: Here the goods are issued at cost plus, say 10 or 15 % to recover the cost of
handling and storage charged.
5. Standard Price: A Standard Price is to decide on for a given period, usually 3-6 months and the
positive and negative variances recorded when purchases vary in price from the standard. This method
of pricing will assist measuring the performance of the kitchen accurately by means of the kitchen
gross profit, as the typical excuse for a poor kitchen performance, a loss gross profit because of high
prices for commodities is no.1.
6. Last In First Out (LIFO): This may be applied to items which have a fluctuating market price. This
assumes that issues will be made with the normal rotation of stock, but priced out at the latest
purchase price for the items.
7. First In First Out (FIFO): This may also apply to items which do not have a fluctuating price. This
assumes that issues will be from the earliest purchases and priced accordingly.
COMPARISON OF PHYSICAL AND PERPETUAL INVENTORY
A perpetual inventory is an inventory that is maintained on a regular basis by the concerned
departments, taking into consideration the issues and usage. On the other hand, physical inventory is
an inventory which is recorded on the basis of regular checks which can be fortnightly, weekly or
monthly, depending on the organization’s policies. When we are talking about a comparison between
the perpetual and physical inventory; we mean that the perpetual inventory should be equal to the
physical inventory, i.e., the goods entered in the perpetual inventory should match with the goods that
result from the physical inventory. If there is a large discrepancy, i.e., any extra stock or stock not
matching with that of a physical inventory, desired actions need to be taken and any disciplinary
action if it needs to be taken, should be prompted.
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Source: adapted from Food and Beverage: Management & Cost Control by Jagmohan
Negi, ISBN-8173912548
Source:adapted from Principles of Food , Beverage and labor cost control for hotels and
restaurant by Paul R Dittmer & Gerld g Grifin
ISBN 0-8436-2087-0
Authorship: Subhankar Mondal
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