A Project Report on

INVENTORY MANAGEMENT

AT

KAKATIYA OVERSEAS PVT LTD

A Project report submitted to osmania university

HYDERABAD

In partial fulfillment for the award of the degree of 

MASTER OF BUSINESS ADMINISTRATION

By

N.S AMBASA

(10908123) 

Under the esteemed guidance of

(KEERTHI)

SRI INDU P.G COLLEGE

(Affiliated to osmania University)

Hyderabad

ACKNOWLEDGEMENT 

I express my sincere gratitude to (G.Rama Rao) (Director) for allowing to carry out this project in KAKATIYA OVERSEAS PVT LTD. 

I am also thankful to the employees of KAKTIYA OVERSEAS PVT.LTD, for their kind cooperation in completion of my project. 

I express my sincere thanks to L.Swetha Reddy(Export Executive) for her guidance in completion of my project. 

I extend my heart-felt gratitude to Keerthi, sri indu pg college for

her valuable guidance in my project and the preparation of report and

making this work successful

I would like to thanks Mr SUNDARAM, Head of Department, SRI INDU P.G COLLEGE for his valuable support.

DECLARATION 

I here by declare that this Project Report titled “INVENTORY MANAGEMENT” At “KAKATIAYA OVERSEAS” submitted by me to the Department of Master of Business Administration is a bonafide work done by me and it is not submitted to any University or institution for the award of any Degree or Diploma or published any time before. 

N.S AMBASA                                                                                    

H.T.NO: 10908123

SRI INDU P.G COLLEGE

DATE:

PLACE: (N.S AMBASA)  

     

CERTIFICATION

This is to certify that the Project Report title Inventory

Management submitted in partial fulfilment for the award of

MBA Programme of Department of Business Management,

OU HYD, was carried out by Ms KEERTHI under my

guidance. This has not been submitted to any other

University or Institution for the award of any

degree/diploma/certificate.

Name and address of the Guide Signature of the Guide

CHAPTERISATION:

Chapter 1: Industry profile

1.1 Introduction of industry profile

Chapter 2: Company and product profile

2.1 Introduction of company

Chapter 3: Project details

3.1 Introduction

3.2 Need for study

3.3 Benefits of study

3.4 Methodology & Data base

3.5 Objectives

Chapter4: Introduction to inventory management

4.1 Introduction

4.2 Inventory control & its impact on cost

4.3 Inventory corporate finance

4.4 Risks & costs of holding inventory

4.5 Inventory Accounting

4.6 Objectives of inventory management

4.7 Tools & techniques

4.8 System & overview

Chapter 5: Analysis and interpretation

5.0 Making ABC analysis

5.1 calculation of inventory

Chapter 6: Suggestions & conclusion

6.1 Findings & suggestion

6.2 Conclusion

6.3 bibliography

INDIAN STONE INDUSTRY PROFILE

INTRODUCTION

India has major resources of marble, granite, sandstone, Kotahstone, quartzite & slate. Granite resources are largely in South India and Marble deposits are largely in Western India (Rajasthan & Gujarat).

A variety of stone products like all types of marble, tile, granite etc are available in the market. The beauty and opulence of natural stone products have prevailed as the most sought after finish in any building in crafting customized floors, walls, countertops, columns, fireplaces and bathroom.

These stone products are available in polished as well as unpolished state. These stone products come with various price ranges suiting every individual's budget. They are available in different size, shape, type, thickness etc. Some of these stone products are available in block, some in slabs and some in tile. They are imported sometimes and sometimes locally made. Stone products are strong and sturdy and can carry a lot of weight.

Natural stone products are mostly used in making and decorating building, office, industry, organizations etc. These are also custom made as per the requirement and specifications of the customer. They are used in construction industries and in most of the industrial sectors.

The range of natural stones includes slate stone, sand stone, mosaic stone, cobble & pebble, marble, granite, minerals and genuine, natural stones that

are not dyed, synthesized, stabilized or enhanced - just genuine cut and polished gemstones, or pure rough gem material for your use.

Granite tile and marble flooring are excellent floor materials. Both marble and granite tile are natural stone products, very durable and stain resistant. Other options for floors include slate and terrazzo. All except for terrazzo are installed like ceramic tile. Marble and granite tile exhibit a wide range of stain resistance. Marble is more porous than granite.

Natural beauty, durability, resistance to heat and a sense of permanence are the hallmarks of a granite tile. Granite is an important structural and ornamental stone, and due to its high compressive strength and durability, it is used for massive structural work. Fine-grained granite is employed for ornamental and monumental work as well as for inscription purposes. It is the hardest of structural natural stones. Granite tiles are quite literally, as old as the earth, perfect for use in residential and commercial flooring applications. Granite slabs are ideal for fabricating granite counter tops, flooring, retaining walls and landscaping around a center fountain/pond.

A marble is a metamorphic rock formed by alteration of limestone or dolomite, often irregularly colored by impurities and used especially in architecture and sculpture. Marble tiles are suitable for bathrooms, entryways and fireplaces, living & dining areas. Marble floor tiles are also used for both interior and exterior flooring applications. Some of the different colors of marble are white, red, black, mottled and banded, gray, pink, and green. Marble flooring adds class to the home and gives it a feel of luxury. The best thing about the marble floors is that, they lend a very soothing cooling touch to the home.

The highest producer of stones

- Highest producer of dimensional stones in the world accounting for over 27% of the world stone production.

- 16.16 million tons of stone production in the year 1997-98 out of a total world production of 61 million tons.

- Over 2 million people are employed in stone sector.

Indian Stone Production (In Thousand tons)

1991-92 1992-93

1993-94

1994-95

1995-96

1996-97 1997-98

Marble 1966 2244 2086 2627 3186 3712 3622

Granite 989 3073 3618 4460 4555 4550 4950

Sandstone 4411 4435 3978 3304 4562 5501 5461

Flaggy Limestone

620 996 823 1407 1760 1710 2118

Slate 3 5 4 9 7 11 8

Total 7989 10753 10509 11807 14070 15484 16159

(Source: State Department of Mines & Geology and All India Granites & Stones Association)

Marching towards global leadership

- Export of Stones - US $ 301 million (Rs.13,000 million) in 1997--98 - India ranks 3rd in world stone exports with a 10.8% share in 1997 (in

terms of tonnage). - India ranks 1st in Raw Siliceous product (Granite & Sandstone) exports. - India ranks 5th in Raw Calcareous product (Marble & Flaggy Limestone)

exports. - India ranks 9th in exports of finished stone products

The bulk (90%) of the Indian stone exports is by way rough granite and marble blocks and only about 10% is by way of value added or branded products. Indian stone industry and the Government have set a target of raising this to 50% over the next 5 years. The bulk of the Indian stones are produced in the Indian states of Rajasthan, Tamilnadu, Karnataka and Andhra Pradesh. Rajasthan accounts for nearly 90% of all the marble produced and the other three states in Southern India produce almost all the granite exported.

STATISTICAL OUTLOOK

Major Importers

India possesses enormous deposits of all types of natural dimensional stones with a

variety of properties

Marble Granite Kotahstone(Flaggylimestone) Sandstone Slate

 

- Dimensional blocks - Slabs and tiles - Monuments - Architectural and sculptured

pieces - Moulded pieces - Cobbles and pavement

stones - StoneHandicrafts/Artifacts

 

MARBLE INDUSTRY

Indian marble is highly acclaimed in the international market. World famous Taj mahal is testimony of exotic quality snow white marble from Makrana region.

Availability: In districts of Nagaur, Udaipur, Banswara, Jaipur Sirohi, Bhilwara, Ajmer, Bundi, Pali, Dungarpur,Chittorgarh, Jaisalmer and Sikar, Rajsamand, Alwar . Color & Pattern: Snow white, Creamish white, White with grayish/ black bands and   Wavy patterns, pink, pink with bluish  bands,  green, yellow, black, multi-color etc. Export varieties:  Snow white - very fine-grained, green and pink. Indian green is highly priced and is the most desired marble in demand the world over.

Number of mining leases: About 3600

Marble Processing Capacity: Slabs - 1000 million sq.ft. p.a.Tile - 300 million sq.ft. p.a. 

 

 

Marble the pride of India

Practically inexhaustible marble deposits -over 1200 million tons Splendid varieties of white, green, black, grey, pink, yellow Physical and mechanical properties complying with international

standards Amongst the top 5 countries in marble exports A Vibrant Industry

Total Investment - over Rs.40,000 million (US $1,000 million) About 4,000 mining leases Block production 3.7 million tons in 1996-97 About 1,100 modern gangsaw units and 50 Automatic tiling plants More than 5,000 trading companies Employing about 1 million people Fast developing modern mechanised quarries Over 300 quarries using diamond wiresaw & chainsaw cutter quarrying

technology Modern & well equipped factories with advanced Italian technology for

cutting, processing, polishing and handling Marble slab & tile production: 1300 million sq. ft per annum Impressive Marble Export Increase of over 300% from US $ 9 million in 1992-93 to US $ 27

million in 1996-97 Excellent quality export varieties - Green, Onyx, Indo Italian, White and

Pink marble High quality polished marble tiles & slabs and green & white marble

blocks correspond to demand in the foreign market High export demand for marble handicrafts Key marble export markets - USA, Canada, Japan, Singapore, UAE, EC

countries

Major Marble Centres of India

Prominent marble quarrying and processing centres in India are:

Rajasthan Udaipur-Rajsamand -Chittorgarh region Makrana-Kishangarh region Banswara - Dungarpur region Abu region Andhi (Jaipur) - Jhiri (Alwar) region Jaisalmer region

Gujarat Ambaji region Makrana-Kishangarh region

GRANITE INDUSTRY

 

Granite Ranks 1st in Raw Siliceous Exports in the world Exports valued at 244 million dollars in 1997-98 Widespread availability - Karnataka, Andhra Pradesh,

Tamilnadu, Orissa, Rajasthan, Utter Pradesh, Bihar, West Bengal

Estimated Geological Reserves - Over 5,000 million cubic metres

Important Quarrying & Processing Centres - Bangalore, Bellary, Hospet, Chamrajnagar, Chennai, Hyderabad, Warangal, Jhansi, Jalore, Pali, Barmer etc.

Magnificent Varieties - Merry Gold, Platinum White, Mokalsar Green, Rosy Pink, Nagina Green, Tiger Skin, Royal Gold, Jhansi Red, Galaxy Black, Kashmir White, Paradiso, Cira Grey, Juparana, Absolute Black, New Imperial Red, Raw Silk etc.

Availability: In districts of Barmer, Jalore, Pali, Sirohi, Alwar, Jaipur Jhunjhunu, Tonk, Ajmer, Bhilwara, Sikar and Udaipur.

Color & Pattern: Pink, Grey, Green, Multi-color, Bluish white, Red, Golden Cream, Paradiso Black, Banded with wavy pattern, white with spots etc.

Export varieties:  Rosy Pink, Golden Pearl, Chima Pink, Anglo Grey, Royal Cream, Platinum white, Snow   white, Tiger black, Imperial Pink, Mokalsar Green, Nagina Green, Jalore Pink, Kharda Red, Blue Pearl, Paradiso Red, Brownish Green, Jhunjhunu Red, Yellowish & Pink.  Number of mining leases:  665   Geological Reserves: 1128 million Cu. M. Quality of Granite: Hardness 6 to 7 on Moh's scale Granite Processing Capacity: Slabs - 1.5 million sq.m.

Tiles - 5.0 million sq.m.

Sandstone

  

In India sandstone is extensively used in residential houses, office buildings, commercial complexes, hotels, restaurants and special monuments. Artefacts made of stone - screens, fountains, pedestals, columns, arches, balusters, railings -

have become popular. The present trend is to make these stone carvings in the best possible manner with man and machines. The recent example of the use of sandstone screens and columns was the renovation of Leela Palace Goa Resort in Goa, where the American architect decided to remove the existing granite/marble columns and decor and replace it with sandstone. Architects in Bahrain, Saudi Arabia and U.S.A have extensively promoted items made of sandstone. In the entire Middle East - Oman, Bahrain, UAE, Saudi Arabia and Kuwait – architects have used sandstone carved materials in residential villas. Even the architects from U.S.A. who are constructing villas in Saudi Arabia have used sandstone carvings. Some architects from Riyadh are very much fascinated with Indian sandstone architecture. In their each and every new creation, some stone carvings are used for their clients. They want century old stone art to be revived today.

Widespread availability - Rajasthan & Madhya Pradesh Important Quarrying & Processing Centres - Bharatpur,

Dholpur, Kota, Sawaimadhopur, Bundi, Chittorgarh, Nimbhahera, Jodhpur, Bikaner, Jhalawar, Pali and Jaisalmer

Impressive Colours & Patterns: Red, Buff, Beige, Pink, Flaggy sandstone.

Splendid Varieties: Rainbow, Teak, Modak, Kher, Budh, Bansi Pink, Mandana, Dholpur Red and Beige etc.

Estimated Geological Reserves: Over 1,000 million tons Production in 1997-98: Over 5 million tons Exports in 1997-98: US$ 2.5 million

FLAGGY LIMESTONE  

Widespread availability - Rajasthan, Andhra Pradesh Color & pattern - Greenish Blue, Pale Brown & Black Important Quarrying & Processing Centres -

Ramganjmandi, Modak, Cuddapah Estimated Geological Reserves - Over 2,000 million tons Production - Over 2 million tons

Important Export Varieties: Kota blue, Kota Brown Etc.

Occurrence:  In districts of Kota, - Chittorgarh & Jhalawar.

Important centres are Ramganj, Mandi, Suket, Chechat, Morak, Manpura          

No. of Mining Leases:          130 Export Potential: In Europe, USA, Canada, Japan and Singapore.  

SLATE

Occurrence: In districts of Alwar, Ajmer, Bharatpur, Tonk, Sawai Madhopur, Pali, Udaipur, Churu, Chittorgarh. However, slate deposits of Alwar district are of exportable quality.

Color & Pattern: Greyish black, multicolour, Brown, Red etc.

No. of mining leases: 32

Export markets: Holland, Germany, Australia, Japan and Singapore.

FOCUS ON THE MAJOR CITY: RAJASTHAN

Rajasthan is the major producer of Marble in India. Granite is produced in the states of Karnataka, Tamil Nadu, Andhra Pradesh, Rajasthan, Madhya Pradesh, Orissa & Uttar Pradesh. 

 

Rajasthan's share in Indian   Stone production

Mineral% of India's total production

Marble 91%

Kotahstone (Flaggy limestone)

90%

Sandstone 90%

Slate 10%

Granite 2.2%

COMPANY PROFILE

HISTORY OF THE COMPANY:

Kakatiya Overseas was incorporated in 2002, and was promoted by G.Rama Rao. It is a processors and exporters of natural stones.

ABOUT THE COMPANY:

Kakatiya overseas is one of the reputed Organization in Mining & Processing of Non-metallic minerals..It is a renowned name in the field of Quartz and Natural stones for its finest quality. They have The own rich quarries spread across South-India with Administration Office at Hyderabad. Kakatiyaoverseas having highly skilled manpower working as coordinated units in the state-of-the-art factory equipped with the latest machinery for the eco-friendly processing, produce highest quality products. There are Successful vendors for many buyers across the world especially in South-East Asia, European and American Continents.

Kakatiya Overseas has carved a niche for itself for producing world class natural stones. This company has grown into one of the country’s largest corporate houses to the exporting quality granite in a wide spectrum finish to customer’s world wide.

PLANT LOCATIONS:#27, Road No.5Indraprasthan Industrial Area,Kota , Rajasthan

Narnaul Road,Kund-123102Rewari, Haryana.

Plot No. 56, 57 , 58Industrial Estate ,Markapur , AP

Plot #247,IDA , OFFICE:KAKATIYAOVERSEAS 127BKiranMansion,G-1 VengalaRaoNagar,Hyderabad AP, India

LOCATION:Kurnool Road,Betamcherla-518599Kurnool Dist,Andra Pradesh,India.

OFFICE:KAKATIYAOVERSEAS 127BKiranMansion,G-1 VengalaRaoNagar,Hyderabad AP, India

BOARD OF DIRECTORS:

G.Rama Rao. C.VINIL

BANKERS: HDFC ICICI.

COUNTRIES TO WHOM THEY EXPORT:

1. UK2. BELGIUM3. ITALY4. MOROCCO5. AUSTRALIA6. ALGERIA7. NETHER LANDS8.UNITED STATES OF AMERICA.9.Greece10.France11.UAEOBJECTIVE:

Established with a commitment to serve India’s Ornamental Stone IndustriesThat specialize in marbles, sandstone’s, slates, limestone, quartzite etc.,

All/India Natural Stones and Stone Association (AIGSA) has been serving India’s stoneand Allied Industries with a single track objective of our stone industries i.e. Granites,Marbles, Sandstone, Slates, Limestone’s and Ornamental Building Stones in anyform and its ancillaries Of Machinery too, Equipment, anything directly related to the stone.

Welfare:

Welfare activities include canteens supplying subsidized meals,

transport facilities, to employees.

Quality:

Standards and quality assurance group (SQAG) at kakatiya overseas is

a corporate quality assurance service facility. While the individual business

groups have their own quality control/quality assurance sections, this

corporate facility caters to the common requirements.

Faculty for training personnel in product divisions on ISO awareness

and on internal quality audits, helping in developing their quality system

documentation, planning, conducting and managing internal quality audits

and reporting of audit results.

RECEIPT DOCUMENTS:

CSRV : certified stores receipt voucher, which is issued by the stores

personnel to bills section in order to classify the material into Raw materials,

stores and spares, consumable tools, packing material, subcontractors

services, and other operational expenses, based on the purchased order, the

bills section does the provisional valuation by using fixed percentages for

freight, insurance and other incidentals and with regard to customs duty the

percentages as per tariff are adopted and the following entry proposed.

FLOW OR RECEIPT DOCUMENT (CSV)

Receipt of work order from Receipt stores.

Collection of data and Material for inspection

Material Inspection

Strategies:

Technical up gradation and R&D efforts.

Component Inspection report Given to head office for

Comments.

Material handed over to Receipt stores and shipped to nearest port.

Effective new markets and exports.

Gather delegation of authority and tuning up management information

system.

Diversification.

PRODUCT RANGE:

Natural stones being increasingly used by the construction industry is gradually replacing marbles and ceramic products due to its high durability and ability to give excellent garnish. Being a costly construction material , natural stones finds its Market in developing countries like Japan, Europe, and USA. Italy is the major market In this industry.

Indian natural stones is well accepted in the international market mainly because Of its better and uniform texture, grain and availability in variety of colors. India’s Share in the international trade, estimated at about RS.1000 Crores works out 1% And there is considerable potential for increasing the volume of granite exports from India. While the export potential for the slabs are satisfactory, the market for the Monuments is relatively competitive.

The company offers a wide variety of Stone Products to all the customers – “Quality Stones at Quantity rates”. They have a team of experienced professionals working throughout their locations looking after processing, dressing, inspecting and shipment of natural stones.

The usage of stone has been an integral part of human civilization and has played a pivotal role in shaping establishments. Continuing this tradition, The Company, excel as a supplier & exporter of varieties of natural stones. They have earned a respectable position in setting new heights in quality products, customer satisfaction and on-schedule delivery of the products.

They supply and export a comprehensive range of high quality natural stones such as sandstone, limestone,slate,granite and other construction and building stones for discerning buyers around the globe.

The major advantages of dealing is, as appreciated by their customers include faster inventory, less capital tied up in inventory & low total life cycle cost. All these result in increased profitability on the part of their customers.

They export of widely-acclaimed quality of different kinds of natural stones, such as:

Slate Stones Sandstone Limestone Granite

PRODUCT EXPORTED:

SAND STONE:

Sandstone is a Sedimentary Stone consisting usually of quartz, silica, iron oxide and calcium carbonate. These stones are durable, weather, acid and thermal resistant and have crushing strength. They come in many colors, shades. Cobbles of Sandstones are also very popular.

Products available in Slabs, Tiles Blocks : Dholpur Beige, Agra Red, Bansi Pink, Fossil, Panther, Tint Mint, Rainbow, Chanderi Pink, Lalitpur Grey, Lalitpur Yellow (Camel Yellow), Teakwood, Kandla Grey, Modak, Mandana, Raveena, Raj Green, Autumn Brown.

General Sizes available Undersize (In cms):Undersize :28 x 28, 42x42, 28 x 56, 56x56, 56x84, 56 x 112

Oversize : 30 x 30, 45x45, 30 x 60, 60x60, 60x90, 60 x 120 Thickness: 10-20 mm, 20-35 mm

Finish:

Natural Cleft both faces , One side Honed, Both sides Honed, Hand Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated, Bullnosed, Rivetted.

LIMESTONE:

It is a sedimentary stone and mainly consists of Calcite. It has a smooth granular surface, does not show much graining or crystalline structure and varies in hardness. Some dense limestones can be polished. There are a number of varieties of lime stone and besides flooring has many other applications. The common colors are blue, grey, black, brown, and green.

Products Available:

Kota Blue, Kota Brown, Cuddapah Black, Lime pink, Lime Green, Shahbad Yellow.

Sizes available (In cms):30x30, 40x40, 30x60, 40x60, 60x60, 50 x50, 55x55,60x90 Flag stones.Thickness: 10-22mm, 20-30 mm, Calibration in 12 mm.

Finish:Natural Cleft both faces , One side Honed, Both sides Honed, Hand

Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated.Cobbles of limestones are very popular.

SLATE:

Slate is a fine grained metamorphic stone that is formed from clay, sedimentary rock shell, and sometimes quartz. Characteristically the rock may slit into relatively thinner slabs. Slates find application in interiors and exteriors. It is extremely beautiful and more cost effective than most other wall and floor coverings. It renders a very graceful, natural finish to any building or home. The usual colours of slate are copper, gold, multicolor, black, dark grey, greenish grey, copper and purplish grey. Sometimes colour changes do occur due to weathering. The harder varieties of slate are used for flooring. Slate mines are found in North and Southern part of India. They look beautiful when used as a roofing slate.Products Available

*North Indian Slates:

Himachal White,Himachal Green, Himachal Black, Kund Peacock, Mau Multy, Khundrot,Jack Multy, Copper, Silver Grey, Zeera Green, Deoli Green, Golden, Oceanic, Silver Shine, Shimla White Mica, Jack Black, Multicolured, etc.

*South Indian Slates:

Sanjani, Indian Autumn, Vijay Gold, M Green , N Green, Taj Rose, Black Rustic, Indian Autumn Rustic, Chocolate, Multi Grey, Multi Pink etc.

Sizes available (In cms): 30x30, 40x40, 60x30 due to characteristics of product large sized slabs are not possible

GRANITE:

Granite is an Igneous Stone. It is primarily made of Quartz (35%), Feldspar (45%) and Potassium. Usually has darker colors. Contains very little calcite, if any. Provides a heavy crystalline and granular appearance with mineral grains. It is very hard material and easier to maintain. There are different types of granite depending on the percentage mix of quartz, mica and felspar.

Products Available :Over 34 different products in Slabs and Tiles . Tiles in Square size,

free lengths, odd sizes and foot strips. They can offer you Granite Vanity Tops,Bar Tops,etc., in prefabricated, precut, ready to install. They have CNC (Contouring) machine to do these jobs with perfection, which very few processors have in India.

*Sizes available Slabs :

Min. Size 260x140 cmsMax Size 300x170 cmsTiles: All sizes are available common being 305x305; 406x406; 457x457; 610x610.Thickness Slabs : 20 mm, 30mm Tiles: 10 mm, 12 mm, 15 mm 20 mm.

COMPANY TURNOVER :( SALES) 

YEARS TURNOVER (Lakhs)

2004 5514

2005 6980

2006 6986

2007 10688

2008 11580

LIMITATIONS:

1.Longer delivery and payment time frames

2.Exchange rate risk and exchange controls.

3.Limited and costly dispute settlement and legal recourse options.

4.Lack of information. 5.Integrity (the quality of honest ) of Exporter.

6.Abolition of interest rate subsidy.

7.Huge foreign indebtness.

8.Unstable government.

9.Limited time durations.

10. Lack of access with the customers.

11. Limited Availability of information due to security problem.

INVENTORY MANAGEMENT @ PROJECT ANALYSIS IN

KAKATIYA OVERSEAS:

Before, an analysis is attempted for assessing for inventory control

measures at kakatiya overseas; it is proposed to present a summary on

material documentation and procedure. The main objectives of inventory

accounting and valuation of inventories are:

1. Accurate and regular recording of all transactions in the books.

2. Proper valuation of material receipts, issues returns and books.

SYSTEMS OVERVIEW:

The following systems are being followed in kakatiya overseas and the

main features of the systems are as follows:

1. Receipt vouchers are prepared on receipt of material.

2. Issue vouchers are prepared for all issues of out of stores.

3. All receipts, issue and returns are recorded in priced stores ledger.

4. Stock transfer voucher (STV) are used for recording transfer of raw

materials from one division/group to another. Transfers are made at

weighted average prices.

5. Finished goods delivery notes (FGDN) are used for transferring

finished production in shop floor to finished goods (FG) stores.

6. Physical verification is carried out at 6 regular internals and

discrepancies are and reconciled and recorded.

7. Work-In-Progress (WIP) valuation is as per the accounting policy of

the company.

8. Finished goods valuation is as per the accounting policy of the

company.

MATERIAL DOCUMENTATION AND COST CONTROL:

The material accounting and cost accounting system have been

designed within frame work of account codes and accounting policies, which

would facilitate identifying direct elements of costs, such as direct material,

direct labour and directly allocable expenses (such as expenses of

subcontracting)

Which are booked manually to the direct material? The following

documentation and system is being followed in kakatiya overseas

RECEIPT DOCUMENTS:

In this similar fashion, some other receipt documents and issued

documents are operated like:

1. CPRV (Cash purchase receipt voucher) for cash purchases receipt.

2.FGIN(finished goods issue note)the finished products particularly of

CG like hybrids , Networks and PCBs are consumed as raw materials in

other group for which a credit is given in the expenses of CG and stock of

that group is debited.

3. STV (Rs) stock transfer voucher: any stores useful for any group is

taken from other group from STV for which only stock accounts of the

divisions are operated.

4. MRNs (Material Return Note): The items lying unused at shop

floor after production activity is over are returned to stores under this

document.

Based on the documentation EDP generates the following printouts for

materials viz.

Priced stores ledger is brought out on monthly basis consisting on that

month’s receipts issues, balance stocks available values for raw materials,

stores and spares, consumable tools and packing materials.

Inventory is brought out on monthly basis comprising of material

codes is seriatim along with material , total value and also cumulative

receipts and cumulative consumption are indicated.

which are not moved for more than six months, are reported regularly

to the management for identification and necessary action. Further A, B, C,

D classified inventory report is also being submitted to group management

for their study and controlling purpose.

3.1 INTRODUCTION:

Inventory management is concerned with keeping enough products on

hand to avoid running out while at the same time maintaining a small

enough inventory balance at allow for a reasonable return on investment,

proper inventory management is important to the financial health of the

corporation, being out of stock forces customers to turn to competitors or

results in a loss of sales excessive level of inventory, however results in

large inventory carrying costs, including the cost of the capital tied up in

inventory where house fees insurance etc. The objective of the chapter is to

examine the impact of inventory on the financial decision making.

Inventories constitute the most significant part of current asserts of a

large majorities of companies in INDIA. On an average inventories are

approximately 60% of current asserts in public limited companies in INDIA.

Because of the large size of inventories maintained by firms, a considerable

amount of funds is required to be committed to them.

The investment in inventory is very high in most of the undertaking

engaged in manufacturing wholesale and retail trade. The amount of

investment is sometimes more in Inventory rather than in other assets.

In India a study of 29 major industries has revealed that the average

cost of materials is 64 paisa and the cost of labor and overheads is 36 paisa

of a rupee. About 90% of working capital is invested in inventories. The

main reason attributed for loss making is financial indiscipline in managing

the resources particularly in inventory management for an organization, the

product profitability considering standards and budgets is of paramount

importance needless to say that in this context, inventory management

assumes lot of significances.

The investment in inventory is very high in most of the undertaking

engaged in manufacturing wholesale and retail trade. The amount of

investment is sometimes more in Inventory rather than in other assets.

In India a study of 29 major industries has revealed that the average

cost of materials is 64 paisa and the cost of labor and overheads is 36 paisa

of a rupee. About 90% of working capital is invested in inventories. The

main reason attributed for loss making is financial indiscipline in managing

the resources particularly in inventory management for an organization, the

product profitability considering standards and budgets is of paramount

importance needless to say that in this context, inventory management

assumes lot of significances.

Hence, the inventory management determines and portrays the

following factors like what to purchase, how to purchase, from where to

purchase, where to store etc., will be critical factors. Hence forth it becomes

a crucial factor to undergo a detailed analysis to find an efficient system of

the inventory. As an attempt has been made to study the inventory

management with reference to KAKATIYA OVERSEAS.

DEFINITION:

The American production and inventory society defines:

“Inventory management as the branch of business management

concerned with planning and controlling inventories. The role inventory

management is to maintain a desired stock level of specific products or

items”.

.

Types of study:

RAW MATERIALS:

An inventory of raw materials allows separation of production scheduling

from arrival of basic inputs to the production process. Factories affecting the

amount the raw materials inventory include proximately to the suppliers

relationship with the suppliers, predictability of the production process, lead

time required to place on order, and transportability and perishability of raw

materials.

WORK IN PROCESS:

An inventory of partially completed units allows the separation of

different phases of the production process, the amount of work in process

inventory is in past a function of the type of product, the measurement

period and the nature of the product process.

FINISHED GOODS:

An inventory of finished allows separation of production from

selling , with a stock of finished merchandised on hand a firm can fill order

as they are received rather than depend upon the completion of production to

satisfy customer demands.

FUNCTIONS OF INVENTORY:

The functions of the firm such as purchase of raw

materials ,processing, and having a finished goods available for sales, have a

sequential physical dependence maintenance of inventories allows the firm

to decouple those functions so that each can be planned, scheduled ,and

operated independently. For retail firms inventory provides customers with

selection choice and decouple the purchasing functions from the selling

functions.

3.2 NEEDS FOR THE STUDY:

To facilitate smooth production and sales operation (Transaction motive).

To guard against the risk of unpredictable changes in usage rate and

delivery time “(Precautionary motive )

To guard against the risk of unpredictable changes in usage rate and

delivery time “(Precautionary motive )

To take advantages of price fluctuations(Speculative motive)

3.3 BENEFITS OF THE STUDY:

To ensure a continues supply of raw material to facilitate

uninterrupted production.

To maintain sufficient stock of raw material in periods of short supply

and anticipate price changes.

To maintain sufficient finished goods inventory for smooth sales

operations and efficient customer service.

LIMITATIONS:

First there is a cost of information problem in keeping track of the

physical inventories of some goods

Second because of number of variables involved it is very difficult to

develop on accurate measure of inventory turnover.

The very nature of the organization places limitations on the

collection of the data and analysis thereof.

The accounting procedure and other accounting principles are limited

by the company changes in them may vary the inventory performance.

The study is limited up to the date and information provided by

KAKATIYA OVERSEAS and annual reports.

3.4 METHODOLOGY AND DATABASE:

For this project the collection of data is by various sources. mainly

primary

secondary

PRIMARY DATA:

The information collected directly without any reference in primary data in

the study it is mainly through concerned offers or staff member either

individually or collectively data includes

®Conducting personal interview with officers of the company.

®Individual observation inference.

®From the people who are directly involved with the transaction of the firm.

SECONDARY DATA:

Study has been taken from secondary sources that is published annual

report of the editing, classifying and tabulation of the financial data for their.

PERIOD OF THE STUDY:

This study is confined for the period of approximately Three months

that is from January 2, 2009 to March 10, 2009.

REVIEW OF LITERATURE:

For this purpose, previous abstracts on inventory management,

periodicals, academic journals. Articles will be reviewed in this section.

STATISTICAL TOOL TO BE APPLIED:

Sampling statistical techniques like percentages, bar graphs, averages,

chi-squares, and z-test may be applied based on the data collected for the

study.

3.5 OBJECTIVES:

To maintain a large size of inventory of raw material and work in

progress for efficient and smooth production and of finished goods

for uninterrupted sales operations.

To maintain a minimum investment in inventory to minimize

profitability.

Study of maintain optimum level of inventory investment.

The primary goal is to minimize inventory investment while still

meeting the functional requirements.

SCOPE OF THE STUDY:

Work in progress arising under construction contracts including directly

related service contract.

Work in progress arranging in ordinary course of business of services

provides.

INVENTORY MANAGEMENT

4.1. INTRODUCTION:

The investment in inventory is very high in most of the undertakings

engaged in manufacturing, whole-sale and retail trade. The amount of

investment is sometime more in inventory than in other assets. In India, a

study of 29 major industries has revealed that the average cost of materials is

64 paisa and the cost of labour and overheads is 36 paisa in rupee. In

Industries like sugar, the raw materials cost is a s high as 68.75 percent of

the total of cost. About 90 percent part of working capital is invested in

inventories. It is necessary for every management to give proper attention to

inventory management. A proper planning of purchasing, handling, storing

and accounting should form a part of inventory management. An efficient

system of inventory management will determine (a) what to purchase (b)

how much to purchase (c) from where to purchase (d) where to store, etc.

There are conflicting interests of different departmental heads over the

issue of inventory. The finance manager will try to invest less in inventory

because for him it is an idle investment, whereas production manager will

emphasize to acquire more and more inventory as he does not want any

interruption in production due to shortage of inventory. The purpose of

inventory management is to keep the stocks in such a way that neither there

is over-stocking nor under-stocking. The over-stocking will mean a

reduction of liquidity and staring of other production processes; under-

stocking, on the other hand, will result in stoppage of work. The investments

in inventory should be kept in reasonable limits.

Every enterprises needs inventory for smooth running its activities. It

serves as a link between production and distribution processes. There

is, generally, at a time lag between the recognition of a need and its

fulfillment. The greater the time-lag, the higher the requirement for

inventory, the unforeseen fluctuations in demand and supply of goods

also necessitate the need for inventory. It also provides a cushion for

future price fluctuations.

The investment in inventories constitutes the most significant part of

current assets/working capital in most of the undertakings. Thus it is

very essentials to have proper control and management of inventories.

The purpose of inventory management is to ensure a variability of

materials in confident quantity as and when required and also to

minimize Investment in inventories.

Meaning and Nature of Inventory:

Supply of goods or materials on hand. In manufacturing, inventory

consists of raw materials, work-in-process, and finished goods. In

wholesaling and retailing, inventory is the stock of merchandise on hand. In

direct marketing, inventory may refer to direct-mail package components

that are available for mailing when needed. In the broadcast and print media

industry, inventory is the time or space available for mailing when needed.

In the broadcast and print media industry, inventory is the time or space

available for sale to advertisers. In magazine publishing, inventory is the

number of copies of each issue available for distribution.

An ample inventory ensures that sales will not be lost or deadlines

missed but can require a substantial cash investment in both material and

storage space. There are also risks associated excessive inventory, such as a

change in circumstances that reduces or eliminates demand for an item in

inventory or that renders the item obsolete or illegal, or the risk of loss due

to theft, fire, aging, and so forth. The costs and risks must be weighed

against the cost of lost sales and missed deadlines to determine the optimal

inventory level.

4.2 INVENTORY CONTROL AND ITS IMPACT ON COSTS:

Value wise inventory and consumption analysis are brought out on

quarterly basis indicating RM; SS, CT, PM are value at cost. A class items

which are 70%, B class items which are valuing 20% and C class items

which are valuing 10%. Of the total inventory are brought for verification of

internal audit. The stores verified C class items and to that extent certificate

4 is issued at the year end regarding the correctness. Physical balances are

verified with kardex and the difference is intimated to stores FAW of the

group by the internal audit.

FAW of the group verifies and gives the rectification in entries that is

shortage items values are charged of to physical inventory variation and the

excess quantities are adjusted in the inventory ledger after obtaining the

competent authorities approval.

This system enables control on the inventories and at the same time

costs on some are checked.

Materials issued to subcontractors are booked to consumptions as and

when issued through MIRS. A record is being maintained at subcontracts

section, park wise, job wise and description of materials and quantities

issued.

Impact of inventory on working capital

Inventories are a component of the firm’s working capital and, as

such, represent a current accounting cycle, which is normally one year.

1. A CURRENT ASSET: It as assumed that inventories

will be converted to cash in the current accounting cycle, with is

normally one year.

2. LEVEL OF LIQUIDITY: inventories are viewed a

source of near all cash. For most products, this description is accurate, at

the same time most firms hold some slow moving items that may not be

sold for a long time. With economic slows down or changes in the

markets for goods the prospects for sale of entire product lines

diminished. In these cases, the liquidity aspects of inventories become

highly important to the manager of working capital. At the minimum the

analyst must recognize that inventories are the least liquid of the current

assets.

3. LIQUIDIRY LAGS: inventories are tied to the firm’s

pool of the working capital in a process that involves three specific lags.

Creation lags: It most cases, inventories are purchased on credit,

creating an account payable. When the raw materials are processed in the

factory, the case to pay production expenses is transferred at future times.

Whether manufactured or purchases, the firms will hold inventories for

some period before payment is made. This liquidity lag offers a benefit to

the firm.

Storage lags: once goods are available for resale, they will not be

immediately converted into cash. First the items must be sold. Evenly

when sale are moving briskly, affirm will hold inventory as a backup.

Thus the firm will usually pay suppliers, workers and overhead expenses

before the goods actually sold.

This lag represents a cost to the firm.

Sale lag: once goods have been sold, they normally do not create cash

immediately. Most sales occur on credit and become accounts receivable.

This lag also represents a cost to the firm.

4. CIRUCLATING ACTIVITY: inventories are in rotating pattern with

other current asset. They get converted into receivables which generate cash

is invested again in inventory to continue the operate cycle.

NEED TO HOLD INVENTORY

Maintaining inventories involves tying up of the company’s funds and

incurrence of storage and handling costs. There are three are general motives

for holding inventories.

1. Transactionary motive: every firm has to maintain some level of

inventory to meet the day-to-day requirements of sale, production

process, customer demand etc. transact nary motive makes the firm to

keep the inventory will provide smoothness to the operation of the firm.

A business firm exists for business transaction that requires stock of

goods and raw materials.

2. Precautionary motive: a firm should keep some inventory for

unforeseen circumstances also. The firm must have inventory of raw

materials as will as finished goods for meeting any emergencies.

3. Speculative motive: the firm may be empted to keep some

inventory in order to capitalize an opportunity to make profit e.g.,

sufficient level of inventory may help the firm to earn extra profit in case

expected shortage in the market.

MAIN PURPOSE OF INVENTORY

The purpose of holding inventories is to allow the firm to operate the

processes of purchasing, manufacturing and marking in its primary products.

The goal is to achieve efficient in are where costs are involved and to

achieve sales at competitive prices in the marking place.

1. Avoiding loss sales: without goods on hand that are ready to be sold

most firms would lose business. Some clusters are ready to wait,

particularly when an item must be made on order or is not widely

available from competitors. Affirm must be prepared to deliver goods

on demand. Shelf stock refers to items that are stored by the firm and

sold with little or no modification to the customers.

2. Gaining quantity discounts: inurn for making bulk purchases many

suppliers will reduce the of supplies and component parts. This

discount will reduce cost of goods sold and increase the profits

earned.

3. Reducing order cost: each time a firm place an order it incur certain

good that arrive must be accepted, inspected and counted. Later an

invoice must be processed and payment made. Each of these costs will

vary with the order placed. By placing fewer orders the firm will pay

less to process each order.

4. Achieving efficient production runs: each time a firm sets up

workers and machines produce an item startup cost are incurred.

These are the absorbed as production begins. The longer the run the

smaller the costs to begin producing the goods.

5. Reducing risk of production shortages: manufacturing firm

frequently produce goods with blunders or thousands of components.

If any these are missing entire production operation can be halted with

heavy expenses. To avoid starting a production run and then

discovering the shortage of vital raw material or other component, the

firm can maintain larger than inventories. Basically, inventory

management is concern of stores management, production

management is concerned. In case of raw material, the stores

management and production management is concerned. In case of

finished goods, production and sales management is concerned.

4.3 INVENTORY-CORPORATE FINANCE:

Value of a firm’s raw materials, work in process, supplies used in

operations, and finished goods. Since inventory value changes with price

fluctuations, it is important to know the method of valuation. There are a

number of inventory valuation methods; the most widely used are First In,

First out (FIFO) and Last In, First out (LIFO). Financial statements normally

indicate the basis of inventory valuation, generally the lower figure of either

cost price or current market price, which precludes potentially overstated

earnings and assets as the result of sharp increases in the price of raw

materials.

Personal finance;

List of all assets owned by an individual and the value of each, based on

cost, market value, or both. Such inventories are usually required for

property insurance purpose and are sometimes required with applications for

credit.

Securities:

Net long or short position of a dealer or specialist. Also, securities

bought and held by a dealer for later resale.

Inventory:

An inventory is a detailed, itemized list or record of goods and

materials in a company’s possession. “The main components of inventory,

“wrote Transportation and Distribution contributors David Waller and

Barbara Rosenbaum, “are cycle stock: the order quantity or lot size received

from the plant or vendor; in-transit stock: inventory in shipment from the

plant or vendor or between distribution centers; [and] safety stock: each

distribution center’s inventory buffer against forecast error and lead time

variability.”

Writing in production and Operations Management, Howard J. Weiss

and Mark E. Gershon observed that, historically, there have been two basic

inventory systems and the periodic review system. With continuous review

systems, the level of a company’s inventory is monitored at all times. Under

these arrangements, business typically track inventory until it reaches a

predetermined point of “low” holdings, whereupon the company makes an

order (also of a generally predetermined level) to push its holdings back up

to a desirable level. Since the same amount is ordered on each occasion,

continuous review systems are sometimes also referred to as event-triggered

systems, fixed order size systems (FOSS), or economic order quantity

systems (EOQ) .Periodic review systems, on the other hand, check inventory

levels at fixed intervals rather than through continuous monitoring. These

periodic reviews (weekly, biweekly, or monthly checks are common) are

also known as time triggered systems, fixed order interval systems (FOIS),

or economic order interval systems (EOI).

The dictionary meaning of inventory is stock of goods, or a list of

goods. The word Inventory is understood differently by various authors. In

accounting language it may mean stock of finished goods only. In a

manufacturing concern, it may include raw material, work in process, etc. to

understand the exact meaning of the word, ‘inventory’ we may study it from

usage side or from the ‘side of point entry’ in the operations. Inventory

includes the following things:

Raw Material:

Unfinished goods used in the manufacture of a product. For example, a

steelmaker uses iron ore and other metals in producing steel. A publishing

company uses paper and ink to create books, newspapers, and magazines.

Raw materials are carried on a company’s balance sheet as inventory in the

current assets section.

WIP (Work In-Progress):

Three-letter abbreviation with several meanings, as Described below:

Work in Progress- generally signifies a project that will not be settled

in one attempt, or even several. Sometimes as WIP List, synonymous

with a To-Do list.

“WIP” as an asset means the portion of work that is complete but not

yet billed. WIP is a good or goods in various stages of completion

throughout the plant, including all material from raw material that has

been released for initial processing up to completely processed

material awaiting final inspection and acceptance as finished good

inventory.

Finished Goods:

These are the goods which are ready for the consumers. The stock of

finished goods provides a buffer between production and market. The

propose of maintaining inventory is to ensure proper supply of goods to

customers. In some concerns the production is undertaken on order basis, in

these concerns there will not be a need for finished goods. The need for

finished goods. The need for finished goods inventory will be more when

production is undertaken in general without waiting for specific orders.

Spares:

Spares also form a part of inventory. The consumption pattern of raw

materials. The stocking policies of spares are different from industry to

industry. Some industry like transport will require more spares than the other

concerns. The costly spare parts like engines, maintenance spares etc. are not

discarded after use, rather they are kept in ready position for furtherer use.

All decisions about spares are based on the financial cost of inventory on

such spares and the costs that may arise due to their non-availability.

Consumables:

These are the materials, which are needed to smoothen the process of

production. These materials do not enter directly into production but they act

as catalysts. Consumables may be classified according to their consumption

and critically. Generally, consumables stores do not create any supply

problem and form a small part of production cost. There can be instances

where these materials may account for much value than the materials. The

fuel oil may from a substantial part of the cost.

Cycle Inventory:

The portion of total inventory that varies directly with lot size is

called inventory. Determining how frequently to order, and in what quantity,

is called lot sizing. Two principles apply.

1. The lot size, Q, varies directly with the elapsed time (or cycle)

2. Between orders. If a lot is ordered every five weeks, the average

lot size must equal five week’s demand.

3. The longer the time between orders for a given item, the greater the

cycle inventory must be at the beginning of the interval, the cycle

inventory is at its maximum or Q. At the end of the interval, just

before a new lot arrives, cycle inventory drops to its minimum, or 0.

The average of these two extremes:

Average cycle inventory = Q + o = Q

2 2

This formula is exact only when the demand rate is constant and uniform.

However, it does provide reasonably good estimate even when demand rates

are not constant. Factors other than the demand rate (e.g., scrap losses) also

may cause estimating errors when this simple formula is used.

Safety Stock Inventory:

To avoid customer service problems and the hidden cost of

unavailable components, companies hold safety stock. Safety stock

inventory protects against uncertainties in demand, lead time, and supply.

Safety stocks are desirable when suppliers fail to deliver the desired quantity

on the specified date with acceptable quality or when manufactured items

have significant amounts of scrap or rework. Safety stock inventory ensures

that operations are not disrupted when such problems occur, allowing

subsequent operations to continue.

To create safety stock, a firm places an order foe delivery earlier than

when the item is typically needed. The replenishment order therefore arrives

ahead of time, giving a cushion against uncertainty.

Purpose and Benefit of Holding Inventory:

Although holding inventories involves blocking of a firm’s fund and the

cost of storage and handling every business enterprises has to maintain a

certain level of inventories to facilitate uninterrupted production and smooth

running of business. In the absence of inventories a firm will have to make

purchases as soon as it receives orders. It will mean loss of time and delay in

execution of orders which sometimes may cause loss of customers and

business. Firms also need to maintain inventories to reduce ordering cost and

avail quantity discount, etc. generally speaking there are three main purpose

or motives of holding inventories:

I. The transaction motive which facilitates continuous production and timely

execution of sales orders.

II. The precautionary Motive which necessitates the holding of inventories

for meeting the unpredictable changes in demand and supplies of materials.

III. Speculative motive which induces to keep inventories for taking

advantages of price fluctuations, saving in re-ordering costs and quantity

discounts, etc.

4.4 RISKS AND COSTS OF HOLDING INVENTORIES:

The holding of inventories involves blocking of a firm’s funds and

incurrence of capital and other costs. It also exposes the firm to certain risks.

The various costs and risks involved in holding inventories are as below:

1. Capital costs: Maintaining of inventories results in blocking of the

firm’s financial resources. The firm has, therefore, to arrange for

additional funds to meet the cost of inventories. The funds may be

arranged from own resources or from outsiders. But in both the

arranged from own resources or from outsiders. But in both the cases,

the firm incurs a cost. In the former case, there is an opportunity cost

of investment while in the later case, the firm has to pay inters tot the

outsider.

2. Storage and Handling costs: Holding of inventories also involves

costs on storage as well as handling of materials. The storage costs

include the rental of the go down, insurance charges, etc.

3. Risk of price decline: There is always a risk of reduction in the prices

of inventories by the suppliers in holding inventories. This may be due

to increased market supplies, competition or general depression in the

market.

4. Risk of Obsolescence: The inventories may become obsolete due to

improved technology, changes in requirements, change in customer’s

tastes, etc.

5. Risk Deterioration in Quality: The quality of the materials may also

deteriorate while the inventories are kept in stores.

Inventory and the Growing Company:

Most successful small companies find that as their economic fortunes

rise, so too do the complexity of inventory logistics. The increase in

inventory management is primarily due to two factors: 1) greater volume

and variety of product, and 2) increased allocation of company resources

(such as physical space and financial capital) to accommodate that growth

in inventory “The transaction from seat-of –the –pants ordering policies and

little or no record keeping to a formal inventory system that includes specific

ordering policies and a formalized inventory record file is a difficult one for

most companies to make, ” stated Weiss and Gershon.” It is but one of the

many sources of growing pains that emerging company’s experience,

especially those in the fast-growing industries, such as fast food or high

technology. This transition requires the creation of new job functions to

identify the costs (holding, shortage) associated with inventory and to

implement the inventory analysis.

The inventory record file also must be maintained by someone, and,

on a periodic basis, it must be audited by someone. In addition, the transition

requires more coordination between different company functions.” This

transition, they note, often leads into computerization of inventory

management. This can be a daunting prospect, particularly for companies

lacking employees with appropriate data management backgrounds.

Just In Time Inventory Control System:

“Just-in-time production is a simple idea that may be difficult to

implement, “wrote Gershon and Weiss.” The basic concept is that finished

goods should be produced just in time for delivery, and raw materials should

be delivered just in time for production. When this occurs, materials or

goods never sit idle, which means that a minimum amount of money is tied

up in raw materials, semi finished goods ……. The just-in-time approach

calls for slashing production and purchase lot sizes and also buffer stocks-bit

incrementally, a little at a time, month after month, year after year. The

result is sustained productivity and quality improvement with greater

flexibility and delivery responsiveness.” This production concept, which

originated in Japan and became immensely popular in American industries

in the early and mid-1990s, continues to be hailed by proponents as a viable

alternative for business looking for a competitive edge.

Setting an Inventory Strategy:

No single inventory strategy is equally effective for all businesses.

Indeed, there are many different factors that can impact the Usefulness of a

given inventory strategy, including positioning of inventory, rationalization,

segmentation, and continuous improvement efforts. Moreover, small

business in particular often faces financial and logistical limitations when

erecting their inventory systems. And of course, different industries have

different inventory needs. Consumer goods producers, for instance, need to

have well-balance inventories at the point of sale, while producers of

industrial and commercial products typically do not have clients that require

the same degree of delivery lead time.

When a company is faced with a need to establish or reevaluate its

inventory control systems, business experts often counsel their corporate

clients to engage in a practice commonly known as “inventory segmenting”

or “inventory partitioning.” The practice is in essence a breakdown and

review of total inventory by classifications, inventory stages (raw materials,

intermediate inventories, and finished products) sales and operations

groupings, and excess inventories. Proponents of this method of study say

that such segmentation break the company’s total inventory into much more

manageable parts for analysis.

Key Considerations:

According to business experts, perhaps no factor is more important in

ensuring successful inventory management than regular analysis of policies,

practices, and results. Companies that hope to establish or maintain an

effective inventory system should make sure that they do the following on a

regular basis:

Regularly review product offerings, including the breadth of the

product line and the impact that peripheral products have on invent.

Ensure that inventory strategies are in place for each product and

reviewed on a regular basis.

Review transportation alternatives and their impact on inventory /

warehouse capacities.

Undertake periodic reviews to ensure that inventory is held at the

levels that best meets customer needs; this applies to all levels of

business, including raw materials, intermediate assembly, and finished

products.

Regularly canvas key employees for information that can inform

future inventory control plans.

Determine what level of service (lead time, etc.) is necessary to meet

the demands of customers.

Establish and regularly review a system for effectively identifying and

managing excess or obsolete inventory, and determining why these

goods reached such status.

Devise a workable system wherein “safety” inventory stocks can be

reached and distributed on a timely basis when the company sees an

unexpected rise in product demand.

Calculate the impact of seasonal inventory fluctuations and

incorporate them into inventory fluctuations and incorporate them into

inventory management strategies.

Review the company’s forecasting mechanisms and the volatility of

the marketplace, both of which can (and do) have a big impact on

inventory decisions.

Institute “continuous improvement” philosophy in inventory in

inventory management.

Make inventory management decisions that reflect a recognition that

inventory is deeply interrelated with many other areas of business

operation.

To summarize, inventory management system should be regularly

reviewed from top to bottom as an essential part of the annual strategic and

business and business planning processes. Indeed, even cursory

examinations of inventory statistics can sometimes provide business owners

with valuable insights into the company’s foundations. business consultants

and managers alike note that if an individual business has an inventory

turnover ratio that is low in relation to the average for the industry in which

it operates, or if it is low in comparison with the average ratio for the

business, it is pretty likely that the business is carrying a surplus of obsolete

or otherwise unsalable stock inventory. Conversely, they note that if a

business is experiencing unusually high inventory turnover when compared

with industry or business averages, then the company may be losing out on

sales because of a lack of adequate stock on hand.” it will be helpful to

determine the turnover rate of each stock item so that you can evaluate how

will each is moving, “noted the entrepreneur magazine small business

advisor.” You may even want to base your inventory turnover on more

frequent periods than a year. For perishable items, calculating turnover

periods based on daily weekly or monthly periods may be necessary to

ensure the freshness of the product. This is especially important for food-

service operations.”

4.5 INVENTORY ACCOUNTING:

The way in which a company accounts for its inventory can have a

dramatic affect on its financial statements. Inventory is a current asset on the

balance sheet. Therefore, the valuation of inventory directly affects the

inventory, total current asset, and total asset balances. Companies intend to

sell their inventory, and when they do, it increases the cost of goods sold,

which is often a significant expense on the income statement. Therefore,

how a company values its inventory will determine the cost of goods sold

amount, which in turn affects gross profit (margin), net income before

taxes, taxes owned, and ultimately net income. It is clear, then, that a

company’s inventory valuation approach can cause a ripple effect

throughout its financial picture.

One may think that inventory valuation is relatively simple. For a

retailer, inventory should be valued for what it cost to acquire that inventory.

When an inventory item is sold, the inventory account should be reduced

(credited) and cost of goods sold should be increased (debited) for each

inventory item. This works if a company is operating under the specific

identification method. That is, a company knows the cost of every individual

item that is sold. This method works well when the amount of inventory a

company has is limited and each inventory item is unique. Examples would

car dealerships, jewelers, and art galleries.

The specific identification method, however, is cumbersome in

situations where a company owns a great deal of inventory and each specific

inventory item is relatively indistinguishable from each other. As a result,

other inventory valuation methods have been developed. The best known of

these are the FIFO (first-in, first out) and LIFO (last-in, first-out) methods.

First in, first out (FIFO):

Method of accounting for inventory whereby, quite literally, the

inventory is assumed to be sold in the chronological order in which it was

purchased. For example, the following formula is used in computing the cost

of goods sold:

Under the FIFO method, inventory costs flow from the oldest purchases

forward, with beginning inventory as the starting point and ending inventory

representing the most recent purchases. The FIFO method contrasts with the

LIFO or last in, first out method, which is FIFO in reverse. The significance

of the difference becomes apparent when inflation or deflation affects

inventory prices. In an inflationary period, the FIFO method produces a

higher ending inventory, a lower cost of goods soled figure, and a higher

gross profit. LIFO, on the other hand, produces a lower ending inventory, a

higher cost of goods sold figure, and a lower reported profit.

In accounting for the purchase and sale of securities for tax purposes,

FIFO is assumed by the IRS unless it is advised of the use of an alternative

method.

First in, first out (FIFO):

Method of inventory valuation that assumes merchandise is sold in the

order of its receipt. The first-price in is the first-price out. Hence cost of

sales is based on older dollars. Ending inventory is reflected at the most

recent prices. Assume the following data regarding inventory during the

year:

(LIFO) last-in, first-out:

On the other hand, is an accounting approach that assumes that the

most recently acquired items are the first one sold? Therefore, the inventory

that remains is always the oldest inventory. During economic periods in

which prices are rising, this inventory accounting method yields a lower

ending inventory, a higher cost of goods sold, a lower gross profit, and a

lower taxable income. The LIFO Method is preferred by many companies

because it has the effect of reducing a company’s taxes, thus increasing cash

flow. However, these attributes of LIFO are only present in an inflationary

environment.

The other major advantage of LIFO is that it can have an income

smoothing effect. Again, assuming inflation and a company that is doing

well, one would expect inventory levels to expand. Therefore, a company is

purchasing inventory, but under LIFO, the majority of the cost of these

purchases will be on the income statement as part of cost of goods sold.

Thus, the most recent and most expensive purchases will increase cost of

goods sold, thus lowering net income before taxes, and hence net income.

Net income is still high, but it does not reach the levels that it would if the

company used the FIFO method.

Given the importance differences that exist between the various

inventory accounting methodologies, it is imperative that the inventory

footnote be read carefully in financial statements, for this part of the

document will inform the reader of the method of inventory valuation

chosen by a company. Assuming inflation, FIFO will result in higher net

income during growth periods and a higher and more realistic inventory

balance. In periods of growth, LIFO will result in lower net income and

lower income tax payments, thus enhancing a company’s cash flow. During

periods of contraction, LIFO will result in higher income levels, but will also

undervalue inventory over time.

Small business owners weighing a switch to a LIFO inventory

valuation method should note that while making the change is a relatively

simple process (the company files IRS Form 970 with its tax return),

switching away from LIFO is not so easy. Once a company adopts the LIFO

method, it can not switch to FIFO without securing IRS approval.

Donating Excess Inventory:

In recent years, many small (and large) business have gained valuable

tax deductions by donating obsolete or excess inventory to charitable

organizations, churches, and disaster relief efforts. The type of deduction

that can be claimed depends on the business structure of the donating

company. “If you’re organized as an S corporation (S Corporation with a

limited number of stockholders (35 or fewer) that elects not to be taxed as a

regular (C) corporation and meets certain other requirements Shareholders

include in their personal tax returns their pro Rata share of capital gains,

ordinary income, tax preference items, and so on. This form avoids

corporate Double Taxation while providing limited liability protection to

shareholders of a corporation.)

4.6 OBJECTIVES OF INVENTORY MANAGEMENT:

The main objective so inventory management are operation and

financial. The operational objective mean that the material and spares should

be available in sufficient quantity so that work is not disrupted for want of

inventory. The financial objective means that investments in inventories

should not remain idle and minimum working capital should be locked in it.

The objectives of inventory management are as follows:

To ensure continuous supply of materials, spares and finished goods

so that production should not suffer at any time and the customers

demand should also be met.

To avoid both over-stocking and under-stocking of inventory.

To maintain investment in inventories at the optimum level as

required by the operational and sales activities.

To keep material cost under control so that they contribute in reducing

cost of production and overall cost.

To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralizing purchases.

To minimize losses through deterioration, pilferage, wastages and

damages.

To design proper organization for inventory management. Clear cut

accountability should be fixed at various levels of the organization.

To ensure perpetual inventory control so that materials shown in stock

ledgers should be fixed actually lying in the stores.

To ensure right quality goods at reasonable prices. Suitable quality

standard will ensure proper quality of stocks. The price analysis, the

cost analysis and value analysis will ensure payment of proper prices.

To facilitate furnishing of data for short term and long term planning

and control of inventory.

Material Control:

Most of the manufacturing concerns. The cost of raw materials

represents a major part of the total cost of production. Hence proper control

over material is necessary from the time the order is place with the supplier

till they are actually consumed. An efficient system of material control will

lead to significant reduction in production cost.

Material control may be defined as the “Systematic control over the

procurement, storage and usage of materials so as to maintain an even flow

of materials and avoiding at the same time excessive investment in

inventories”. Material control covers three stages namely.

Purchases of material

Storing of material

Issue of material

Objectives:

The objectives of material controls as follows:

1) To ensure regular and uninterrupted supply of materials i.e., to make

materials available as and when they are needed.

2) To keep investment in stock at a reasonable levels, so that there is no

loss of interest on capital.

3) To purchase the materials at a reasonable price without sacrificing the

quality of such materials.

4) To avoid abnormal wastage by exercising direct control.

5) To avoid the risk of spoilage and obsolescence of the materials by

fixing the maximum stock level.

Issue of Material Management:

As per major activity groups involved in material management in any

manufacturing organization.

Issue related to materials planning.

Issues related to purchase

Issues related to stores or inventory.

Issue related to material handling & display.

Issue Related to Material Planning:

Material Identification

Standardization

Make or Buy

Coding & Classification

Quality specification

By providing samples or prototype.

By providing manufacturing operation specification.

By brand or trade name.

By specifying well accepted market grades.

By specifying testing producer’s relevant standards.

By specifying/ providing engineering drawing/blue prints.

4.7 TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

Effective inventory management requires an effective control system

for inventories. A proper inventory control not only helps in solving the

acute problem of liquidity but also increases profits and causes substantial

reduction in the working capital of the concern. The following are the

important tools and techniques of inventory management and control:

Determination of stock levels.

Determination of Safety Stocks.

Selecting a proper system of Ordering for Inventory.

Determination of Economic Order Quantity.

A.B.C. Analysis.

Inventory Turnover Ratios (Conversion period)

Classification and Codification of Inventories.

Preparation of Inventory Reports.

Determination of stock levels.

Determination of safety stock levels.

Selecting a proper system of ordering for inventory.

Determination of economic order quantity (EOQ)

A.B.C. Analysis.

Determination of Stock Levels:

Carrying of too much and too little of inventories is determinate to the

firm. If the inventory level is too little, the firm will face frequent stock-outs

involving heavy ordering cost and if the inventory level is too high it will be

unnecessary tie-up of capital. Therefore, an optimum level of inventory

where cost is the minimum and at the same time their Id. No. stock-out,

which may result is loss of sale or stoppage of production. Various stock

levels are discussed as such.

Minimum Level:

This presents the quantity, which must be maintained in hands at all

times. If stock is less than the minimum level then the work will stop due to

shortages of materials.

Lead time:

A purchasing firm requires some time to process the order and time is

also required by the supplying firm to execute the order. The time taken in

processing the order and then executing it is known as lead-time. It is

essential some inventory during this period.

Rate of consumption:

It is the average consumption of materials in the factory. The rate of

consumption will be decided on the basis of past experience and production.

Nature of material:

The nature of materials also affects the minimum level. If material is

required only against special orders of the consumers then minimum stock

will not be required for such materials minimum stock level can be

calculated using the formula:

Minimum stock level = Re-order level –(normal consumption*

normal re-order period).

Re-order level:

When the quantity of materials reaches at a certain figures then fresh

order is sent to get materials again. The order is sent before the materials

reach minimum stock level. Re-ordering level or ordering level is fixed

between minimum stock level and maximum stock level. The rate of

consumption, number of days required on any day is taken into account

while fixing reordering level. Re-ordering level is fixed with the following

formula;

Re- order level = maximum consumption * maximum re-order

period

Maximum level:

It is the quantity of materials beyond which a firm should not exceed

its stock. If the quantity exceeds maximum level limit then it will be over-

stocking. A firm should avoid over-stocking because it will result in high

materials costs. Over stocking will more blocking of more working capital,

more space for storing the materials, more wastage of materials and more

chances of losses from obsolescence. Maximum stock level will depend

upon following factors:

The maximum requirement of materials at any point of time.

The availability of space for storing the materials.

The rate of consumption of materials during lead-time.

The cost of maintaining the stores.

The possibility of fluctuation in prices.

Availability of materials. If the materials are available only during

seasons then they have to store for the rest of the period.

The possibility of change in fashion and production process will also

affect the maximum stock level.

The following formula may be used for calculating maximum stock level:

Maximum stock level = re-order level + re-ordering quantity –

(minimum consumption * minimum re-ordering period).

Danger level:

It is the level beyond which material should not fall in any case. If

level arises then immediately steps should be taken to replenish the stock

even if more cost is incurred in arranging the materials. If materials. If

material is not arranged immediately then there is a possibility of stoppage

of work. Danger level is determined with the formula:

Danger level = consumption * maximum re- order period for emergency

purchases.

Average stock level:

The average stock level is calculated as such:

Average stock = minimum stock level + ½ of re-order

quantity.

Determination of safety stock

The safety stock is a buffer to meet unanticipated increase in usage.

The usage of inventory cannot be perfectly forecasted. Ft fluctuates over a

period of time. The demand for materials may fluctuate and delivery of

inventory may also be delayed and in such a situation the firm can face a

problem of stock-out. The stock-out can prove costly by affecting the

smooth working of the concern. In order to protect against out of usage

fluctuations, firms usually some margin of safety stocks. The basic problem

is to determine the level of safety stocks. Two costs are involved in

determination of this stock. I.e. opportunity cost of stock outs and the

carrying costs. The stock-outs of raw material cause production as the firm

cannot provide stock-outs will occur resulting into the large opportunity

costs. On the other hand, the larger quantity of safety stocks involves higher

carrying costs.

Ordering system of inventory:

The basic problem of inventory is ton decide the re-order point. The

point indicates when an order should be placed. The re-order point is

determined with the help of these things

A.) Average consumption rate.

B.) Duration of lead time.

Economic order quantity, when the inventory is depicted to lead time

consumption, the order should be placed.

There are three prevalent system of ordering and a concern may use any one

of these;

Fixed order quantity system generally known as economic order

quantity (EOQ) systems.

Fixed period order system of periodic re-ordering system or periodic

review system;

Single order and schedule part delivery system.

Economic order quantity (EOQ):

The quantity of material to be ordered at one time is known as

economic ordering quantity. This quantity is fixed in such a manner as to

minimize the cost of ordering and carrying the stock. Carrying cost is the

cost of holding the materials. The quantity to be ordered should be such

which minimizes the carrying and ordering costs. The order for the material

to be purchased should be large to earn more trade discount and to take

advantage of bulk transport, but at the same time it should not be tool large

to incur too heavy a payment on account of interest, storage and insurance

cost. If the price to be paid is stable, quantity to be ordered each time can be

ascertained by following formula:

Q = √2CO\I.

Where: q = quantity to be ordered.

C = consumption of the material concerned in units during a year

O = cost of placing and order including the cost of receving the goods i.e.

cost of getting an item into the firm’s inventory.

I = interest payment including variable cost of storing per unit per year i.e.,

holding costs of inventory.

Economic order quantity is determined keeping in view the ordering costs

and carrying costs. With the interaction of these two costs, the economic

ordering costs

During a particular period are equal to carrying costs during that period and

total cost to order and carry is lowest.

There are many variations on the basic EOQ model. I have listed most

useful once below,

Quantity discount logic can programmed to work in conjunction with

the EOQ formula to determined optimum order quantity. Most systems will

require this additional programming.

Additional logic can be programmed to determine max quantities for

subject to spoilage or to prevent obsolescence on items reaching end of their

product life cycle.

When use in manufacturing to determine lost size where production

runs are very long and finished product is being released to stock and

consumed /sold through out the production run you may need to take into

account the ratio of production consumption to more accurately represent the

average inventory level.

Assumptions:

There are a number of assumptions that must be made with the EOQ.

These include:

Only one product is involved

Deterministic demand(demand is known with certainty)

Constant demand (demand is stable throughout the year)

No quantity discounts.

Constant costs (no price increase or inflating)

While these assumptions would seem to make EOQ irrelevant for use

in a realistic situation, it is relevant for items that have independent

demand .this means that the demand for the items is not derived from

the demand for something else. For example, the demand for steering

wheels would be derived from the demand for automobiles but the

demand for purses is not derived from anything else; purses have

independent demand.

Inventory Turnover Ratio:

Every firm has to maintain a certain level of inventory of finished

goods so as to be able to meet the requirements of the business. But the level

of inventory should neither be too high nor too low. It is harmful to hold

more inventories for the following reasons.

It unnecessarily blocks capital which can otherwise be profitably

used somewhere else.

Over-stocking will require more go down space, so more rent will

be paid.

There are chances of obsolescence of stocks. Consumers will

prefer goods of latest design, etc.

Slow disposal of stacks will mean slow recovery of cash also

which will adversely affect liquidity.

There are chances of deterioration in quality if the stocks are held

for more periods.

It wills there fore, be advisable to dispose off inventory as early as

possible. On the other hand, too low inventory may mean loss of

business opportunities. Thus, it is very essential to keep sufficient

stocks in business.

Inventory turnover ratio also known as stock velocity is normally

calculated as sales/ average inventory or cost of goods sold/ average

inventory. It would indicate whether inventory has been efficiently used or

not. The purpose is to see whether only the required minimum funds have

been locked up in inventory. Inventory turnover ratio indicates the number

of times the stock has been turned over during the period and evaluates the

efficiency with which a firm is able mange its inventory

Inventory turnover ratio is calculated to indicate whether inventories

have required minimum funds in inventory. The inventory turnover ratio

also known as stock velocity is normally calculated as sales/average

inventory or cost goods sold/ average inventory cost. Inventory conversion

period may also be calculated to find the average time taken for clearing the

stock.

Inventory turnover ratio = cost of goods sold/ average inventory at cost

Inventory turnover ratio = net sales / average inventory.

And

Inventory conversion period = days in year / inventory turnover ratio.

Generally, the cost of goods sold may not be known from the

published financial statements. In such circumstances, the inventory

turnover ratio may be calculated by dividing net sales by average inventory

at cost. If average inventory at cost is not known then inventory at selling

price may be taken as denominator and where the opening inventory is not

known the closing inventory figure may be taken as the average inventory.

Inventory turnover ratio = net sales / average inventory at cost

Inventory Turnover ratio = Net sales/ Average inventory at selling cost.

Inventory Turnover ratio = Net sales / Inventory.

Inventory Conversion Period:

It may also be of interest to see average time taken for clearing the

stocks. This can be possible by calculating inventory conversion period. This

period is calculated by dividing the number of days by inventory turnover.

Inventory Reports:

From effective inventory control, the management should be kept

informed with the latest stock position of different items. This usually done

by information necessary for managerial action. On the basis of these reports

management takes corrective action wherever necessary.

Valuation of Inventory:

The value of materials has a direct bearing on the income of a

concern, so it is necessary that a method of pricing of materials should be

such that it gives a realistic value of stock the traditional method of valuing

materials cost price or market price which ever is less is no longer the only

method. If management is interested to show more profits then it can choose

such methods which will more stock of vice versa. To safe guard public

interest the government of India has instituted statutory controls to prevent

frequent change of material valuation methods. A concern will have to use a

particular valuation method for least three years and any changes there from

must be approved by the board.

The following methods of pricing material issues or generally used:

First in First out method (FIFO method)

Last in First out method(LIFO method)

Average price method

Weighted Average price method

Simple Average price method

Base stock method

Standard price method

Market price method

Average Cost Method:

In average cost method of pricing all materials in stock or so mixed

that a price based on all costs are formed. Average cost may be of two types.

Simple Average Method:

In this method the prices of all lots in stock are averaged and the

materials are issued on that average price. Though this is simple method of

pricing materials but particularly this method does not give good results. The

total cost of materials is not observed in this method.

Weighted Average Method:

In this method that the total cost of all materials is divided by the total

number of items in stock. The price calculated in this way has not been for

issue of materials up to the time a fresh purchase has not been made. After a

fresh purchase, the quantity will be added to earlier balance quantity and

material cost will be changed total cost. A fresh price is calculated by

dividing the changed total cost by the number of units in stock after the

purchase. A new price list calculated where even a fresh purchase is made.

Base Stock Method:

In this method some quantity of materials is assumed to be necessary

for keeping the concern going. The quantity is not issued unless otherwise

there is an emergency. This material which is not issued as is kept in stock is

known as base stock.

Standard Price Method:

The issue price of the materials is pre determined or estimated in this

method. The standard price is based on market conditions, usage rare,

handling facilities, storage facilities, etc. The materials are priced at standard

price irrespective of price for various purchases

Market Price Method:

In this method the prices charged to production are not costs incurred

on the materials but latest market prices. The market prices may either be

replacement prices or realizable prices. The replacement prices are used for

the materials which are kept in stock for use in production and realizable

prices are used for the goods kept for resale. The prices of issue for materials

are always the replacement prices.

4.8 SYSTEM OVERVIEW

Before analysis is attempted, it is proposed to present material

accounting practices along with documentation at kakatiya overseas.

The main objective of inventory accounting and valuation of

inventories are:

Accurate and regular recording of all transactions in the books.

Proper valuation of material receipts, issues, return and balances.

System Overview:

The following system is being followed in Kakatiya overseas, and the

main features of the system are as follows:

1. Receipt vouchers are prepared on receipt of materials.

2. Issues voucher are prepared for all issues of out of stores.

3. All receipts, issues and returns are recorded in priced stores ledger

(PSL).

4. Stock transfer voucher (STV) is used for recording transferring raw

materials from one division/ group to another. Transfers are made at

weighted average prices.

5. Finished goods delivery notes (FGDN) are used for transferring

finished production in shop floor to finished stores.

6. Physical verification is carried out at regular interval and

discrepancies and reconciles and recorded.

7. Finished goods, work in progress valuation is as per the accounting

policy of company.

Materials Documentation and Cost Controls:

The materials accounting and cost accounting system have been

designed the frame work of accounts codes and accounting policies which

would facilitate identifying direct elements of cost, such as direct material,

direct labour and directly allocable expenses (such as expenses of sub

contracting) which are booked manually to the direct material.

The following documentation and system is being followed in kakatiya

overseas:

Receipt documents:

Certified Stores Receipt Voucher (CSRV) : This is issued by stores

personnel to bills section to F&A wing in order to classify the material into

raw material stores and spares, consumable tools, packing materials, sub

contractors services, and other operational expenses. Based on the purchase

order, the bill section does the provisional valuation by using fixed

percentage for freight, insurance, and other incidental and regard to customs

duty the percentages as per tariff is adopted and purposed the following

entry:

Stock A/c Dr

To

Sundry Creditors A/c

Material code, quantity etc which is fed to EDP which calculates the value

based on monthly weight average method.

Based on MIR data the WIP is brought out by collating material analysis.

The direct material is booked job wise in WIP ledger and the same is

reconciled with financial records. Thus, the direct materials job wise may be

traced from WIP ledger.

In the similar fashion, some other receipt document and issue document are

operated like;

1. Cash purchases receipt voucher for cash purchases.

2. Finished goods issue note for the finished products

3. Stock transfer voucher for any stock transfer transactions.

4. Material return note for any materials being returned.

Based on the above documentations EDP generates the following prints

outs for material viz.

Priced stores ledger is brought out on monthly basis consisting of that

months receipts, issues, balance stock available with value and with

summary and cumulative receipts, issues and consumption values for

materials like raw materials, stores and spares, consumable tools and

packing materials.

Inventory is brought on monthly basis comprising of materials codes

in seriatim along with material description unit code. Quantity available as at

the end of the month rate of the material and total value and also indicating

cumulative receipts and cumulative consumption.

Job wise material analysis is brought out on monthly basis for those

jobs, for which materials have been consumed along with value and

description of the material in order to have monthly record of material used

for each job.

Inventory Control and its Impact on Cost:

Value wise inventory and consumption analysis are brought out on

quarterly basis indicating RM; SS, CT, PM are valued at cost. A class items

which are 70%, B class items which are valuing 20%, C class items are

verified by the stores and to the extent certificate are issued at the year end

regarding the correctness. Physical balance is verified with kardex and the

difference is intimated to stores. FAW(Farm workers) of the group verifies

and gives the rectification entries i.e., shortage items value are charges off to

physical inventory variation and the excess quantities are adjusted in the

inventory ledger after obtaining the component authority’s approval.

The system enables to control the inventories and at the same time

costs on some are controlled.

CHAPTER-V

DATA ANALYSIS AND

INTERPRETATION

ABC analysis:

The material is divided into a number of categories for adopting a

selective approach for material control. It is generally seen that in

manufacturing concern, a small percentage of items contribute a large

percentage of value of consumption and a large percentage of items of

materials contribute a small percentage of value. In between these two limits

there are some items which have almost equal percentage of value of

material. Under ABC analysis, all the materials are divided in to three

categories viz. A, B&C. past experience has shown that almost 10% of items

contribute to 70% of value of consumption and this category is called

category A. about 20% of the items contribute about 20% of value of

consumption and this is known as category B. category C covers about 70%

of items of material which contribute only 10% of value of consumption.

There may be some variation in different organizations and an adjustment

can be made in these percentages.

5.0 MAKING OF ABC ANALYSIS:

The entire procedure for making ABC analysis can be summarized in the

following steps:

Determine the number of units sold or used in the past 12-months

period.

Determine the unit-cot standard for each item.

Compute the annual consumption value (in rupees) of each consumed

item by multiplying annual consumption (of units) with the unit price.

Arrange these items in descending order of the usage value compute

above.

S.NO DESCRIPTION RATE VALUE RANKS

1

1Desert Black Limestone600x600x2cm,Calibrated:Natural and Vibration Surface:150sqms.      

    60x60x2cm ,honed,qty 700sqms. 50 850 13

2

Granite:black galaxy,800x800x2cmQuantity:850sqm.

         50 850 14

3Slate:Peacock Slate,600x600x2cm Natural/Calibrated:870sqm. 15 945 12

4 Black lime hand cut:900x900.25-35mm 30 3,150 10

5

Tandur yellow Natural and Calibrated:400x600cms,2.5cm gauged-roman pattern:edges:hand cut. 119 77,376 5

6

Kadapa Black Natural:400cmx500cm,free lengthx2cm gauged;hand cut.850qty.

101.90 1,366,784.70 1

7

Limestone:Crème White Honed,280x280x2cm gauged,qty:500cms and tandur grey naturals:400cmx500cm,hand cut.      

    8.8 250140 2

8Tandur yellow Natural and Vibration Machine:390x590cms:190x390cm.      

    5cm gauged-roman pattern;edges:handcut. 21.31 24,868.77 7

9 Limepink,320x140x4cm bullnose,qty:1750.      

    Lime green 400x600x25-35cm,qty:1000sqm. 18.53 36,744.99 6

10 Cudappah Natural Surface:200x200x4cm      

    Edges Machine Cut,qty:600cms. 13.90 16,763.40 8

11

Premium Quality Kashmir White:505x505x20mm,qty:360tilesx8pallets and belved and calibrated.      

    16.21 203,224.77 3

12Absolute Black:505x505x20mm, qty:360tilesx8pallets and belved and calibrated.      

    8.80 194,427.20 4

13Cuddapah Black Limestone:half+tumbled in vibration M/C;500X600X4cm,hand cut.      

    15.20 8,299.20 9

14Green roofing stone:50x70x8-2.cm,edges hand cut,70cm side,round corner on one 50 cm side.q      

    56 2,912 11

15

Sandstone Gurden items:rainbow sphere,50cm,40cm,30cm.teak sphere:50cm,40cm,30cm,qty450.      

    18.53 630.02 15

Rank 

Description 

CONSUMPTION VALUE

 CLASS

 

CONSUMPTION VALUE

VALUE IN EACH PERCENTAGE        CLASS

1Kadapa Black Natural:400cmx500cm,free lengthx2cm gauged;hand cut.850qty 1,366,784.70      

2

Limestone:Crème White Honed,280x280x2cm gauged,qty:500cms and tandur grey naturals:400cmx500cm,hand cut.

250,140.00     

       

3

Premium Quality Kashmir White:505x505x20mm,qty:360tilesx8pallets and belved and calibrated.

203,224.77A 2014576.67 91

       

4Absolute Black:505x505x20mm, qty:360tilesx8pallets and belved and calibrated

194,427.20     

       

5

Tandur yellow Natural and Calibrated:400x600cms,2.5cm gauged-roman pattern:edges:hand cut. 77,376.00      

6 Limepink,320x140x4cm bullnose,qty:1750.36,744.99

       Lime green 400x600x25-35cm,qty:1000sqm.      

7Tandur yellow Natural and Vibration Machine:390x590cms:190x390cm.   B 1,55,753.16 6

  5cm gauged-roman pattern;edges:handcut. 24,868.77      8 Cudappah Natural Surface:200x200x4cm

16,763.40     

  Edges Machine Cut,qty:600cms.      

9Cuddapah Black Limestone:half+tumbled in vibration M/C;500X600X4cm,hand cut.

8,299.20     

       

10 Black lime hand cut:900x900.25-35mm   3150.00      

11 Green roofing stone:50x70x8-2.cm,edges hand 2912.00      

cut,70cm side,round corner on one 50 cm side.         

12Slate:Peacock Slate,600x600x2cm Natural/Calibrated:870sqm.   945.00 C 17636.22 3

13

1Desert Black Limestone600x600x2cm,Calibrated:Natural and Vibration Surface:150sqms.   850.00      60x60x2cm ,honed,qty 700sqms.        

14

Granite:black galaxy,800x800x2cmQuantity:850sqm.

850.00             

15

Sandstone Gurden items:rainbow sphere,50cm,40cm,30cm.teak sphere:50cm,40cm,30cm,qty450.        

630.02      

TOTAL 21,87,966.05

CLASS NO.OF.ITEMSPERCENTAGE

OF ITEMSCONSUMPTION

VALUEVALUE

PERCENTAGE

         

A 4 27 2,014,576.67 91%

         

         

B 4 27 1,55,753.16 6%

         

         

C 4 27 17,636.22 3%

ABC Classification of Items:

Graphical presentation:

5.1 Inventory, Materials, Sales and Production at a Glance.

particulars

2002-2003

2003-2002

2004-2003

2005-2004

2006-2005

2007-2006

2008-2009

Raw materials 5307 4735 5630 5267 1645 1616 1616

Work progress

6193 8350 3877 4260 3372 3799 3233

Finished goods

1059 1446 651 1183 946 649 634

Total 12559 14531 10158 10710 6622 6064 5247

Sundry debtors

19865 16681 31344 42946 58073 79469 98870

Materials consumed

26248 32701 49307 47247 72229 38917 47446

Net sales 47002 57115 89218 84177 72230 65188 91790

Gross sales 56875 67412 100056 93455 77067 70029 100590

Cost of Production(-) profit

566711209

703151934

892188058

8693513055

727815071

680465204

7611219214

Total 55462 62381 81160 73880 67710 61842 56897

RAW MATERIAL

Particulars 20022003

20032004

20042005

20052006

20062007

20072008

20082009

Raw material 5307 4735 5630 5267 2304 1616 1878

Material Consumed(perMonth)

26248/12

32701/12

49307/12

47247/12

41979/12

38917/12

47447/12

MonthlyConsumption(2)

2187 2725 4108 3937 3939 3243 3954

No. of monthsRaw materialStock availablew.r.t. monthlyconsumption(3)=R.M/monthlyConsumption(1/2)

2.43 1.74 1.37 1.34 o.66 0.50 0.47

WORK IN PROGRESS:

Particulars 2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

Work progress

6193 8350 3877 4260 3372 3799 3233

Cost of production (per month)

55462/12

62381/12

81160/12

73880/12

67710/12

62842/12

56897/12

Monthly consumption(2)

4647 5298 6763 6157 5643 5237 4741

No .of months work in progress held in Inventory=W.I.P/MMonthlyConsumption

1.33 1.61 0.57 0.69 0.6o 0.73 0.68

Graph presentation for work in progress:

FINISHED GOODS:

Particulars 20002001

20012002

20022003

20032004

20042005

20052006

2006 2007

Finished goods

1059 1446 651 1183 946 945 649

Net sales 47002/12 57111/12 89218/12 84177/12 72231/12 65787/12 91791/12

MonthlyConsumption

3917 4760 7435 7015 6019 5482 7649

No. of Months F.GHeld ininventory

0.27 0.30 0.09 0.17 0.16 0.17 0.08

INTERPRETATION: the average F G stock held during the period of study is 0.17

SUNDRY DEBTORS:

particulars 20002001

20012002

20022003

20032004

20042005

20052006

20062007

Sundry debtors

19865 16681 31344 42946 36774 74468 98871

Gross sales 56875/12 67412/12 10056/12 93455/12 77067/12 70029/12 10059/12

Monthlyconsumption

4740 5618 8338 7788 6422 5836 8383

No of monthOf sales

4.19 2.97 3.76 5.51 5.73 12.76 11.79

INTERPRETATION: the credit of the corporation is one month credit.

However the study revealed the organization has never maintained one

month credit the study of the project

For arriving no.of months gross working capital and each components

including raw material, work in progress, finished goods are co-related as

follows:

a. Raw material stocks are co-related to material consumption

b. WIP is co-related to cost of production

Finished goods are co-related to net sales

INTERPRETATION ABC

The corporation held a maximum stock of Raw material in the year

2002-2003 and improved year by year and reached 0.73 months at the end of

2008-2009.

Work –in-progress:

The corporation held a peak WIP during the year 2006-2007 and

around 0.68 months on a average every year during the next 4 year

Finished goods:

The average finished goods stocks held during the period of study is

0.20 month with peak – finished goods stock of 0.30 months and lowest to

the turn of 0.16 months per month.

The ITR has increased from 6.70 in the year2003 to 2004 to 7.57 in

the year 2004 to 2005 which indicates that the inventory is managed in a

good manner.

The ITR (inventory turnover ratio) has increased from 4.09 to 6.07

from the year 2002-2003 to 2003-2004 which shows that the inventory is

efficiency managed.

In the similar ways thee ITR has increased from 7.57 in the year 2004-

2005to 8.09in the year 2004-2005 which indicates that the inventory has

been managed efficiency n the year 2006-2007 has increased from 8.9211

5.2 CALCULATION OF INVENTORY TURNOVER RATIOS:

Inventory turnover ratio=Cost of goods sold/average inventory

Cost of goods sold=sales/gross profit.

Average inventory = (Opening stock+ closing stock)/2.

Particulars 2002-

2003

2003-

2004

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

Sales(A) 56874.67 67411.65 100055.98 93455.40 77066.76 70029.03 100590

Gross

profit(B)

4564.18 9937.16 82683.22 78965.66 70139.75 6222.80 20702

Cost of

Goods

sold(C)(A-

52310.49 57474.49 82683.22 78965.66 70139.75 63806.23 79888

B=C)

Inventory

opening

stock(D)

13035.73 12559.82 14531.93 10158.94 10710.86 6622.64 7681

Closing

stock(E)

12559.85 14531.93 10158.94 10710.86 6622.64 7681.96 6855

Average

inventory(F

)

(D+E/2=F)

12797.78 13545.88 12345.44 10434.9 8666.75 7152.30 7268

Inventory

turnover

ratio(C/F)

4.009 4.24 6.7 7.57 8.09 8.92 10.99

INVENTORY TURNOVER RATIO:

INTERPRETATION:

From the above calculation it is found that the inventory turnover has

gradually increased from 4.09 to 8.92 from the year 2000-2001 to 2006-2007

which is indicative of good inventory management.

Inventory conversion period

Years Days in year/

Inventory turnover ratio

No of days

2002-2003 365/4.09 14.92

2003-2004 365/4.24 15.47

2004-2005 365/6.70 24.45

2005-2006 365/7.57 27.63

2006-2007 365/8.09 29.52

2007-2008 365/8.92 32.55

2008-2009 365/10.99 33.21

CHAPTER-VI

SUGGESTIONS,

CONCLUSIONS AND

BIBILIOGRAPHY

FINDINGS & SUGGESTIONS

A-category of products must be taken care of properly as it forms a

major part and appropriate method of valuing the product must be

used.

The credit policy of the corporation is one month credit. However

the study revealed that the organization has never maintained one

month credit during the study of the project so my request is to

check on credit period

Keep check on creditors as it effects the working capital, which

may even leads to losses

Organization has to pay attention on the amount of% of raw

material on cost of production, which is high when compared to

earlier and slightly low when compared to ideal percentage.

Suggestion must be taken form all department of the organization

for proper different department in the organization

Under-stocking will results in stoppage of work the investment in

inventory management should be kept in reasonable limits.

CONCLUSIONS

As KAKATIYA is a multi product organization catering to

different customers on divergent technologies the inventory

procurement for various ranges of product is quite high.

Inventory procurement is also based on and does not conform

to economic batch quantities leading to surplus inventories and

non moving inventories.

A preventive measure there should be a regular monitoring

mechanism at the stage of procurement, whether there is a

control exercised in purchasing materials in line with

estimates, to have a better control on the inventory levels.

A regular reporting system on inventory should be placed to

highlight on carrying cost and opportunity cost.

Organization needs to up grade of the technology, which in

turn increases effective utilization of material.

There is a regular physical verification for A and B class items

by internal audit department to highlight on non-moving inventories

BIBILIOGRAPHY

S.N.CHARY (2001), PRODUCTION AND OPERATION MANAGEMENT

CHUNAWALLA PATEL (2004), PRODUCTION AND OPERATION

MANAGEMENT

I.M.PANDEY (1999), FINANCIAL MANAGEMENT

Website Referenced

www.kakatiyayaoverseas.com

www.google.com