Inventory Part1

ACCA F2 - Management Accounting

Inventory is all the money that the system has invested in purchasing things, which it intends to sell. "The Goal" Page 66

Inventories are current assets held by business for sale (with/without processing to finished goods). I.e. inventories includes raw material, semi-processed, finished products and transit inventory (consignment). Semi-processed and finished goods absorb labor and overhead during processing. Inventory hold the cost incurred for production and handling until the product is sold in the market and the cost is released with return. But does all products produced are sold? What about losses(damage, theft, fire)? What about obsolete products? What if cost is greater than the sales price? Ok say all product have potential to earn reasonable profit. But, what if it takes years to convert to cash(e.g. brewers' inventory - bear and wine)? Money invested elsewhere in liquid market (shares and securities) are easily converted into cash when needed. Inventory raises all these risk, return and uncertainty related questions.

Excess inventory of raw material, finished goods, over processing and defective goods are different types of inventory waste. Inventory conceals waste arising from unreliable suppliers, poor quality of raw materials or production, absenteeism, machine breakdowns, long setup times or lead times and idle time and idle capacity from unbalanced process. This increases the need for effective inventory management.

Inventory management starts before any purchase take place and does not ends once product is sold. The inventory cycle consist of purchase requisition, purchase order, receive order, process/tag product, sales, analyse stock, reconcile and raise requisition for new order. Therefore, managers face challenge to manage every phase of this cycle. Globalization has increased complexity in inventory management. International purchase creates the need to know excise and import tariffs, financial documentation and understanding international trade terms (Check Inco Terms link). The movement of multinational in search of cheep resources, their cost advantage through economic of scale and development of new technology and information system has made market turbulent and vulnerable.

Inco Terms