Inventory Control and Valuation Management Methods

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InventoryControl and Valuation Management Methods

Inthe context of inventory management, there are issues that needs tobe addressed in order to understand how best to ensure effectivenessand efficiency in production process. Most successful companiesusually have a profound inventory management system. The control ofstock in any firm is very vital since it helps control various costthat might be incurred unnecessarily in the firm. it should be notedthat most companies have a stratified method of controlling theirstock and ensure that documentation procedures are put in place tosupport the same (Chen,&amp Shi, 2016).The proposition that most companies go for the optimal managementsystem for their inventory is very true. This research paper looksinto three sets of issues about inventory management and control.Notably, it gives an incisive analysis into the methods of inventorycontrol and gives conditions and industry under which each method isbest. Additionally, the paper looks into the whole context ofinventory control process where it provides come of the means and wayin which one can create an advent of accountability, ensure employeetraining and provide a concise documentation procedure for theinventory management process. Lastly, the paper analyzes some of thewidely used inventory methods. In this prospect, the paper looks intoFIFO, LIFO and weighed average cost methods of inventory valuations.The advantages and demerits of valuation methods are also discussedto give a limelight of what is expected of a firm which opts to useany of these inventory valuation methods.

InventoryControl Methods

Thereare four sets of inventory control methods. These control methodsentail the just in time order inventory control, the use of economicorder quantity, the safety stocks-additional inventory control methodand the minimum stock level control method. These control methods areas discussed below.

MinimumStock Level Control

Inthis control method, the firm would set a standard of stock levelbelow which it should order some more stock. The firm therefore willcarry out the order upon the realization that this minimum level ofinventory is reached. The reaching of this minimum stock level isdependent upon the productivity of the company with keen attention tothe rate of stock turnover. In the event that the rate of tock turnis high, then the firm would be obliged to raise this minimum level.One of the main reasons why this minimum level of stock is requiredis to reduce the advent of stock out costs. Stock out costs occurs atthe point where the firm is deemed not to meet the market demandbecause of less stock that would be used to produce the finishedgoods (Chen,&amp Shi, 2016).Additionally, the stock out cost occurs at the point where there is alag between the procurement of the new stock and the actual deliveryof the same. This phenomenon usually occurs at the point where thecompany do not have a proper coordination between the procurement,the purchase and the storage of the inventory. One of the advantageof maintaining the minimum stock level is because, the inventory willonly be ordered as and when required. There is therefore, some senseof predictability in the ordering of the inventory that would help inthe reduction of the stock out cost within the company. Onedisadvantage that this method of control has is that there is nopredictability on the when the stock will last before another jets in(Gray,&amp Ehoff Jr, 2014).

Justin Time Control Method

Thisstrategy of inventory control assumes order of the inventory only asand when needed. This notion entails proper prediction of the demandand sales of the company in the most accurate manner. in thisprospect, the company should understand the seasonality of the marketwith keen attention to brining the notion of inventory control onboard. These provisions are based on the fact that the firm needs toreduce the inventory costs. The inventory costs that needs to bereduced are the cost of holding stock, the carrying costs and storagecost. The fact that stocks are ordered as a when needed makes it easyto predict the cost of storage facility which could then minimizedowing to the easy projection of the sales demand in the market. onthe account of proposition brought forward here, it should be notedthat the company would be disadvantaged when there is a disruption inthe supply of the materials in time. In this case, the producer mightsuffer a huge stock out costs and could even be faced out of themarket for not delivery enough goods into the market in time (Chen,&amp Shi, 2016).

EconomicOrder Quantity Control Method

Inthis control methods various factors come into play in order tounderstand the whole context of minimum amount needed for the controlthe inventory. Three sets of cost are put to scrutiny the holdingcost, the carrying costs and the cost of purchase. Additionally, theannual demand is also used in getting the optimal order quantity thatwould ensure that the company orders, keeps and utilizes theinventory at the lowest cost possible (Bookbinder,&amp Locke, 2013).A mathematical formula is used that encompasses these three sets ofcosts and the annual demand for the raw materials. The formula usedhere is as shown below.

WhereQ* is the economic order quantity

Dis the annual demand

Kis the fixed costs per order

His the holding cost per unit

Inthe calculation of the economic order quantity the following graph isused to represent the whole context of inventory control at minimumcosts. The graph below shows how these costs have been minimized toarrive at the EOQ.

Fromthe above graph, the economic order quantity is set at the pointwhere the curve for holding cost is set at minimum and the annualcost and the order cost curve intersect. This point connotes theordering of these inventories at bare minimum. One of thedisadvantage of this method of inventory control is the fact that theformula is quite complex and would require a high level of expertiseto maintain it (Reineking,Chamberlain, Rudolph, &amp Smith, 2013).

SafetyStock-Addition Control

Inthis control method, the producer sets a minimum level of safetystock. This safety stock level is therefore maintained by making surethat the firm’s stock does not go below this level. This level isnot the bare minimum but is only set to ensure that the company doesnot plunge into loss of customers due to high levels of demand whilethere is no stock at that moment (Heizer,Render, &amp Munson, 2016).The company therefore would be obliged to make sure that this levelof safety stock is refilled every time it goes below par. The mainadvantage of method of control is that it tends to safeguard thecompany against any unforeseen circumstances of stock demand. In anyfirm, there is need to make sure that there is stock at every pointin time. the maintenance of the high level of stock helps streamlinethe production process. However, in maintaining these stocks, highstorage costs would be incurred and this is the main disadvantage ofthis this method of controlling cost (Bookbinder,&amp Locke, 2013).

InventoryControl Issues

Inthe management and control of any inventory within the firm, the isneed to understand certain aspects of control that needs to beaddressed to ensure its efficiency and effectiveness. These issuesare as discussed below.

ProcedureDocumentation

Ininventory control, there is need to outline a clear procedure to befollowed while handling these raw materials. the inventory requiresvarious types of handling. Furthermore, there is need to understandhow best to treat them such that they meet the expectations ofproduction at every point in time. It is therefore quite important tounderstand some of the procedures of handling these goods to ensurethe efficiency in management (Heizer,Render, &amp Munson, 2016).documentation of these procedures of handling these stocks is veryimportant as they give a proper outline on the best approach to dealwith any problem that emanates from them. Documentation is also veryvital in providing the work schedules needed to carefully handle thegoods and how to store them. For example, it is from thedocumentation that one would be at position to understand thetemperature needed to store the raw materials and the kind of safetygear to wear while handling these goods plus the how fragile they areto accentuate the care to be taken while handling them (Chen,&amp Shi, 2016).

EmployeeTraining/Testing

Inorder to ensure proper control of the costs, it is important to trainemployee on how to handle the stock. Proper handling of inventory isvery vital as it helps in making sure that the company controls theinventory at the lowest cost possible. here the employees should betaken through the proper procedures to be followed while handling thegoods (Bookbinder,&amp Locke, 2013).Additionally, the management should take then through the safetygeared to put on while handling the raw materials to ensure that noone is hurt in the process. Employee safety is very important sinceit given much attention to the notion of giving priority to employeewelfare by the labor organizations. The training will help theemployees gains the skills on how to treat, transport, store andreport anything concerning the goods that is suspicious. It is alsoimportant to undertake the employees on a testing on all theinventory processes which would help them understand every detail ofinventory management and expertly control the cost within the firmpertaining to inventory control (Gray,&amp Ehoff Jr, 2014).

Accountability

Accountabilityentails making every employee responsible for handling any inventoryin the firm. The policy of the firm should therefore be made in sucha way that every employee has the obligation to be perfect at everypoint of handling these goods. For example, there is need for properstorage which entails setting the appropriate temperature, using therequired safety gear and ensuring only the stipulated guidelines forvaluation and control of inventory is used (Heizer,Render, &amp Munson, 2016).Check and balance are important here as they help to keep theseemployees on track and ensure that they are at the right point ofinventory control with the right skills. The main objective ofaccountability of every employee in the inventory control is toassist in reducing any advents of mistakes that might occur duringthe handling of these goods. Additionally, it helps reduce theincidence of fraud within the firm such as theft andmisrepresentation of facts within the firm (Reineking,Chamberlain, Rudolph, &amp Smith, 2013).

InventoryValuation Methods

Asmentioned earlier, there are three sets of stock valuation methods.These methods are as discussed below.

Firstin First Out Method (FIFO)

FIFOmethod of inventory valuation, the first goods stock to be purchasedare the ones to be the first to be utilized in the productionprocess. It means that that the new stock that have been be purchasedwould be the last to leave the storage for production. Therefore, theinventory manager would value these stocks at the historical pricefor which these goods were initially purchased (Reineking,Chamberlain, Rudolph, &amp Smith, 2013).The cost of goods sold therefore would be the initial purchase, thecost of ordering them plus the holding cost of the inventory. Thisvaluation assumes the historical concept of accounting where theassets are valued at their book value and not the market value. Themain advantage of this valuation method is that there is lowincidence of obsolescence of the stock since oldest stock would beused first. Its disadvantage is the it tends not to show the real netprofit or income since it depends on historical pricing (Bookbinder,&amp Locke, 2013).

Lastin Last Out Method

Thismethod is instituted under the proposition that the last stock to bepurchased would the first to be utilized. In this prospect, thevaluation price that is used for the goods is based on the last rawmaterial to be purchased. The first stocks to purchased therefore areleft out until the first one are over. This postulation is on theaccount that there is need to inculcate the notion of current pricingtechnique which values the inventory in real time (Reineking,Chamberlain, Rudolph, &amp Smith, 2013).The main advantage of this method is that it represents an almostaccurate information about the inventory. The fact that the pricesoutlined here are the current prices makes it easy to predict thecost of goods sold accurately and give the accurate profit at everypoint in time. This valuation method has bigger disadvantage that theold goods would seemingly become obsolete and hence making thecompany to go at a loss. This demerit makes this method not to beused in many occasions. It is therefore important to blend it withthe FIFO method to reduce the advents of obsolescence of inventory(Heizer,Render, &amp Munson, 2016).

WeightedAverage Method

Inthis method, the prices of all the inventory are ascertained bylooking at the price logs for which they were bought. An average forall these prices is then calculated to arrive at the correct pricecost of inventory. This method is widely used in instances wherethere is little fluctuation of the stock prices. The fact that thevalue used touches on all the values of the inventory makes it quiteauthentic for usage as a valuation technique. It is quitedisadvantageous to use this valuation model when there are highlevels of fluctuations in the prices of inventory since it wouldaffect the representation of the profits and therefore the income aswell (Gray,&amp Ehoff Jr, 2014).

Inconclusion, inventory management entails a lot. A firm needs tounderstand the inventory control management methods like EOQ, safetystock control just in time control and the minimum stock levelcontrol. Additionally, it needs to address issues lie employeetraining, procedure documentation and accountability. Lastly, thefirm must at a position to device the best inventory valuation methodto use which entails, LIFO, FIFO and the weighted average methods.

References

Bookbinder,J. H., &amp Locke, T. D. (2013). Simulation analysis of just‐in‐timedistribution. InternationalJournal of Physical Distribution &amp Materials Management.

Chen,Y., &amp Shi, C. (2016). Joint Pricing and Inventory Management withStrategic Customers. Availableat SSRN 2770242.

DRURY,C. M. (2013). Managementand cost accounting.Springer.

Gray,D., &amp Ehoff Jr, C. (2014). Lower Of Cost Or Market InventoryValuation: IFRS Versus US GAAP. Journalof Business &amp Economics Research (Online),12(1),19.

Heizer,J., Render, B., &amp Munson, C. (2016). Principlesof operations management: sustainability and supply chain management.Pearson Higher Ed.

Horngren,C. T., Sundem, G. L., Schatzberg, J. O., &amp Burgstahler, D.(2013). Introductionto management accounting.Pearson Higher Ed.

Kaplan,R. S., &amp Atkinson, A. A. (2015). Advancedmanagement accounting.PHI Learning.

Reineking,C., Chamberlain, D. H., Rudolph, H. R., &amp Smith, L. M. (2013). Anexamination of inventory costing convergence under generally acceptedaccounting principles and International Financial ReportingStandards. Journalof International Business Research,12(2),17.

Shusheng,G. (2014). The Choices of Issued Inventory Valuation Methods Based onDifferent Accounting Standards at Home and Abroad. In Advancesin Computer Science and its Applications(pp. 973-979). Springer Berlin Heidelberg.

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