Chapter 9- Inventories

by • 10/06/2011 • B.COM PART 1 Introduction to BusinessComments (0)731

Q1- Define inventory. Also discuss steps of inventory control.

Inventory Control:

Inventory control regulates the need for sufficient stock of goods keeping in view the relevant costs of buying, storing, and handling and maintaining its records.


Following are the steps of inventory control.

1.   Use Of Inventory Record:

The record of the stock for the inventory control should be available. The production organization which keeps the large stock for sale should know that what stock was received from the manufacturing unit, how much have been sold and what is the blanace. All these information should be balanced.

2.   Inventory Accounts:

Inventory is also required to be controlled that the company should know how much of the capital is blocked in the stock. It could be known if the receipts and sales, in the inventory are properly recorded. The inventory accounts should be prepared properly.

3.   Nature Of Control:

The size of the firm play a crucial rule in the inventory control. The producing unit produced on the basis of the “ Job Order”. When any order is received, the organizer has to see that in what quantity the order has been given

4.   Physical Checking:

The difference between the recorded stock and factual stock may be created due to the following reasons:

Theft of the stock

Maintaining the stock at other place

Errors committed at the time of recording

It is, therefore necessary that the stock should physically be checked with the interval of time and is the error is observed, it should be rectified with the record.

5.   Minimum Ordering Point:

If the stock decreases extra ordinarily, the prompt supply of the order is suspected and In this situation the supply will be delayed which will be damaging the reputation of the company. It is, therefore necessary for the organizer to have a constant watch so that the stock should not be decreased below a reasonable limit.

6.   Maximum Ordering Point:

Like the minimum point, an organizer should also keep the maximum ordering point in view because if the stocks increase beyond the maximum limit, the stock carrying charges will increase and the space for stocking will decrease.

Q2- Write short notes on the following:


a-   E.O.Q

b-   Handling Cost

c-   Reorder Costs

d-   Large Scale Economies

Economic Order Quantity (E.O.Q)

E.O.Q suggests that the size of the order should be such that the buying costs should equal the carrying cost. It controls over and under stocking and checks unnecessary costs emanating from unplanned purchases and stocking.

Handling Cost:

The cost included the following:

a-   Loading, unloading and movement of materials

b-   Cost of stationery, cupboards, furniture, vans, etc.

c-   Wages of the staff

Reorder Costs:

Reorder costs are incurred when inventory is replenished. These are:

a-   Cost of locating a new source of supply.

b-   Cost of time involved in haggling.

c-   Cost of processing orders.

d-   Mailing and telephonic charges.

e-   Typing and stationery costs.

f-    Transportation cost.

g-   Explained and unexplained risks involved in reordering.

Large Scale Economies:

Inventories are adequately maintained to achieve large scale economies. Buying or manufacturing in large quantities brings the cost down. Large scale manufacturing allows better utilization of plant capacity. In other words, large scale production brings down the unit cost.

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