INVENTORY MANAGEMENT

Entrepreneurship-and-Communication-Skills-notes

In many businesses, the cost of purchasing merchandise for resale (retailing) or the costs of purchasing and converting materials into finished products (manufacturing) represent the business’s most significant expenditures. Keeping track of merchandise and materials, known as inventory, is important because of the considerable costs involved. This can be accomplished through a good inventory record keeping system.

Inventory Record Keeping Inventory record keeping establishes and maintains information on current inventory, the additions and withdrawals to inventory and inventory balances at the end of specified periods (week, month, etc.). These records identify the products/materials, the quantities and the value (cost) of these products/materials. A simple inventory record could look like the one shown in Table 1.

Table 1 – Sample inventory

Table 1.                   Table 1 – Sample inventory record——————————————————————                        Product code: 3010            Product description: 1 litre Coconut  Oil——————————————————————Period                           Inventory activityMonth: May             Beginning     Sales     Production     End——————————————————————Quantity (units)          600        (200)        300         700Value/cost (KES)       300        (100)        150         350——————————————————————

The value is the cost of the product. This would be what a retailer paid for the product or what a manufacturer paid for materials plus labor and other charges applied in converting the materials into the finished product. In Table 10, the cost of goods sold would be KES100 for this product for the month of May. There are two different methods used in inventory record keeping: perpetual and periodic.

Perpetual Inventory The perpetual inventory method starts with a physical inventory (actual count) and then adjusts this inventory for additions and withdrawals. The inventory at the end of the period is calculated subtracting the number of units sold from the total of the beginning inventory plus the additional units produced. An example is furnished in

Table 2.  ______________________________________________________              Table 2 – Sample perpetual inventory         ———————————————-            Activity                 Value in units         ———————————————-         Beginning inventory                  100         Sales                                  (75)         Production                                   95         Ending inventory (calculated)    120     _______________________________________________________

The perpetual inventory method is used when reliable sales and production information is readily available and the frequent taking of physical inventories would be burdensome. However, physical inventories must be periodically taken (e.g., quarterly or annually) to check the calculated inventories. The inventory records are then adjusted to agree with the physical inventories. The financial effect of these adjustments is reflected in the balance sheet and the profit/loss statement of the business.

Periodic Inventory The periodic inventory starts with the physical inventory taken at the end of each period. Sales or production amounts are then calculated based on the beginning and ending physical inventories. This method is used when reliable sales or production data are not readily available. Consider the examples in

Tables 3 and4.     _______________________________________________________         Table 3 – Sample periodic inventory (retailing)        ————————————————             Activity                  Value in KES        ————————————————         Beginning inventory             12,000         Purchases                        6,000         Cost of sales (calculated)      (8,000)         Ending inventory                10,000     _______________________________________________________

 

_______________________________________________________        Table 4 – Sample periodic inventory (manufacturing)       —————————————————-             Activity                  Value in units       —————————————————-         Beginning inventory                   1,500         Sales                                  (800)         Production (calculated)                 900         Ending inventory                        1,600     ______________________________________________________

In Table3, the cost of sales equals the beginning inventory plus the purchases minus the ending inventory.

In Table 4, the number of units produced equals the ending inventory plus sales minus the beginning inventory.

Inventory record keeping is primarily used to determine the cost of goods sold as well as to provide information for financial statements.



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