INVENTORY CONTROL

Inventory Control

Inventory Control

Q1: Explain why control of inventory levels in companies is important. Your discussion should identify the costs of holding inventory and the benefits the company can achieve by inventory reduction.

Cost of Inventory Level

Inventory control (also known as inventory management) refers to the systems and strategies businesses use to ensure that they have adequate supplies of raw materials for production and finished goods for shipment to customers, while also minimizing their inventory carrying costs. Storing excess inventory is costly, because the space and financial resources invested in the goods can often be put to better use elsewhere. At the same time, however, inadequate inventory stores can result in costly production shutdowns or delays in filling customer orders. Inventory control systems help companies to find the delicate balance between too little and too much inventory. The way through which we calculate balanced inventory levels is commonly known as Economic Order Quantity.

Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs.

Formula:

The basic Economic Order Quantity (EOQ) formula is as follows:  

Q2:A company produces medical devices. A key component of this product is a backlit LCD graphic display which include a microcontroller that costs £40 per device. The forward demand for this product is accurately established to be 20,000 units per annum. Given that the company's cost of ordering is £25 and the holding costs of the component is represented as 20% per annum of the cost of the component, calculate the EOQ (economic order quantity) for this company.

Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.

In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.

The quantity to order at a given time must be determined by balancing two factors:

(1) the cost of possessing or carrying materials and

(2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.

Therefore, the answer is EOQ = 354 units

Q3:What is meant by FIFO and LIFO in relation to stock (inventory) management? Explain where the consequences of the selection between LIFO and FIFO may be evident in a company's performance indicators (Note: This section requires independent research)

There are five generally used stock management systems. They are;

Standard : Under the Standard costing method approach, both inventory and the cost of goods sold are based on the standard fixed cost assigned to the items within the item manager at the time of reporting.

First-in, First-out (FIFO) : Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material ...