INTRODUCTION Inventory Management INTRODUCTION: Every enterprise needs inventory for smooth running of it’s activities. It serves as a link between production and distribution process. There is generally, a time lag between the recognition of a need and its fulfillment. The greater the time lag, the higher the requirements 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 undertaking. Thus, it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also- to minimize investment in inventories.
MEANING AND NATURE OF INVENTORY: In accounting language, inventory may mean the stock of finished goods only. In a manufacturing concern, it may include raw materials, work- in- process and stores etc.
INVENTORY INCLUDES THE FOLLOWING THINGS: a)
Raw Material: Raw material form a major input into the organisation. They are required carry out production activities uninterruptedly. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies. The factors like the availability of raw materials and government regulations etc. Too affect the stock of raw materials.
b)
Work in Progress : The Work in progress is that stage of stocks which are in between raw materials and finished goods. The quantum of work in progress depends upon the time taken in the manufacturing process.The greater the time taken in manufacturing the more will be the amount of work in progress.
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c)
Consumables : These are the materials which are needed to smother the process of production . These materials do not directly enter production but they act as catalysts. Consumables may be classified according to their consumption and criticality. Generally consumable stores do not create any supply problem and firm a small part of production cost. There can be instances where these materials may account for much value than the raw materials. The fuel oil may form a substantial part of cost.
d)
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 purpose of maintaining inventory is to ensure proper supply of goods to customers.
e)
Spares: The stocking policies of spares differ from industry to industry Some industries 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 further use.
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BENEFITS OF HOLDING INVENTORIES: Although holding inventories involves blocking of a firms funds and the costs of storage and handling, every business enterprise has to be maintain certain level of inventories of facilitate un- interrupted production and smooth running of business. In the absence of inventories a firm will have to make purchases as soon as it receives order. It will mean loss of time and delays in execution of orders which sometimes may causes loss of customers and business. A firm also needs to maintain inventories to reduce ordering cost and avail quantity discounts etc., There are three main purposes of holding inventories. i)
The transaction motive: Which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials.
ii)
The precautionary motive :Which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials.
iii)
The speculative motive: which induces to keep inventories for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts.
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RISK AND COSTS OF HOLDING INVENTORIES: The holding of inventories involves blocking of a firm’s funds and incurrence of a capital and other costs. The various costs and risks involved in holding inventories are: 1. i)
Capital Costs: Maintaining of inventories results in blocking of the firms
financial resources. The firm has therefore to arrange for additional funds to meet the cost of inventories. 2. The funds may be arranged from own resources of form outsiders. But in both the case, the firm incures a cost. In the former case, there is an opportunity cost of investment while in the later case, the firm has to pay interest to the outsiders. ii)
Storage and handing costs: Holding of inventories also involves costs on storage as well as handling of materials. The storage of costs include the rental of the godown, insurance changes etc.
iii)
Risk of price decline: There is always a risk of reduction in the prices of inventories by the suppliers in holding inventoruies. This may be due to increased market supply, competition or general depression in the market.
iv)
Risk of obsolescence : The inventors may become obsolete due to improved technology, changes in requirements, change in customer tastes etc.
v)
Risk determination in quality : The quality of materials also deteriorate while the inventories are kept.
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Need for the study: Every company, on average spend 70% on raw materials (inventory) Therefore, there is a need to know the raw material cost and also there is a great importance to understand the inventory management system of this company. The study helps a lot to the stores department to take remedial steps to control the inventory process.
Objectives of the study: 1. To examine the organization structure of inventory management in the stores of the SCCL. 2. To discuss pattern, levels and trends of inventories in SCCL. 3. To understand the various inventory control techniques followed by stores in SCCL 4. To access the performance of inventory management of the SCCL by selected accounting ratios. 5. To know the inventory control techniques of SCCL
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Methodology of the study: The study is based on secondary data The secondary data has been collected annual reports, manuals, purchase registers, storage records of the organization. But it was supplemented by with interaction with the concerned personal with regard to some primary data.
Limitations of the study: The study has the following limitations 1. The study is limited only For a period of 6 years I.e from 2003-2004 to.2008-09 2. The limitations of ratio analysis can be applicable to the study. 3. There may be approximations 4. The study is purely based on secondary data.
Period covered: The study was carried in Singareni collieries company limited Ramagundam for a period of five weeks.
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HISTORY OF THE COMPANY ORGANISATION PROFILE: The Singareni collieries history goes back to 1886 when the Hyderabad Deccan Company was in corporated in England with mining rights to exploit coal in the Yellandu Area initially. Such is a 112 Year old mining company harving started its mining operators in the year 1889. The operations were under the management of British (1886to 1945) Nizam (1945-1949) and the state government of Andhra Pradesh thereafter since 1959 the government of India has been maintaining an equity share of 49%. The Singareni Colleries company was in corporate in 1920 and in 1921 the company was converted in to a public limited company and listed on the London stock exchange. It acquired the assets and liabilities of Hyderabad (Deccan) Co. Ltd. In 1945 the Nizam of Hyderabad state purchased the shares of the company and brought it under government control. This earned SCCL the distinction of being the 1 st government managed coal Company in India. The Company became a government company under the company’s Act in 1956 when the state government of Andhra Pradesh acquired the majority of share holding the company. Government of India participated in the development activity of the company from 2nd June 1959.Government of India preferred to maintain 49% equity as contribution under the tripartite agreement.SCCL is governed by a tripartite agreement between SCCL, Government of AP and Govt. of India. Balance funding has been in the form of long term loans to the company by Govt. of India.Such operator about 58 miner (47U.G mines to 11 open cast mines) with a manpower of 82.527 as on 31.3.2005 in four district of A.P i.e Khammam, Karimnagrar, Adilabad and Warangal. It is the only coal mining company in south India and caters to the needs of power sector, cement and II other coal based industries spread over 4 southern states. Such contributor 10% country’s coal production, owning about 6% of national reserves.
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STRATEGIC LOCATION IN SOUTH INDIA: Such is the only coal producing company in South India. By virtue of its strategic location the company is able to cater to coal requirements in this region.With the location advantage the company has been able to market its entire production even in the face of competition from imported coal and moderate recession.Reduced pressure on vail net work if coal is to be supplied from Mch or Wch it requires long hauls on vail and blocking of wagons.Availability of freight cost advantage to such consumer. Due to its location in a backward region of AP, many under privileged depend on such either for direct employment or for indirect economic activity in colliery areas.
MISSION OF SCCL: 01.
To emerge as a premier coal producing company operating in the competitive business environment.
02.
To strive for self-reliance by optimum utilization of existing resources and to earn adequate return on capital employed.
03.
To exploit the available mining blocks with maximum conservation & utmost safety; through improved technologies.
04.
To make coal available in large quantities through sharing experience and expertise with other organizations and to provide reliable and qualitative supplies to consumers.
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PERFORMANCE OF LAST5YEARS Year
Production
Dispatches
O.M.S
Profit / Loss
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
(Lakh) 332.36 338.54 353.03 361.38 377.04
(Lakh) 334.79 339.41 348.25 354.47 376.29
(Tons) 1.55 1.47 1.62 1.74 1.91
(Rs. Crass) 411.72 503.99 576.01 332.49 117.20
TECHNOLOGY WISE PRODUCTION (IN MILION TONES) Dispatches during
2007-2008
Sector wise 9
Dispatches
Power
267.9
Cement
47.9
HW. Plant
4.20
Others
27.00
Colliery consumption
0.12
Total
348.2
IX PLAN INVESTMENT AND PRODUCTION AS PER RESTRUCTURING PACKAGE 200420052005 2006
20062007
20072008
20082009
Total
ACTUAL Contribution form State of Central Govt. Production Anticipated Demand
361.17
388.29
478
584.14
779.00
2952.14
32.54 33.12
33.01 33.42
33.47 33.50
33.95 33.60
34.83 35.00
198.85 201.25
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PRODUCTION PROJECTIONS: Operating
PRODUCTION (MT) IN THE TERMINAL YEAR OF
Region
1X Plan 2001
X Plan 2006-
Xi Plan 2011-
Xii Plan 2016-
Bellampalli
505
07 605
12 8.0
17 8.7
Ramagundam Kothagudem
16.1 12.4
17.6 12.5
13.3 13.8
11.4 15.1
Total
34.0
36.6
35.1
35.3
Open cast 0%
52%
48%
44%
29%
Underground
48%
52%
56%
71%
SCCL BALANCE IXTRACTABLE RESERVES (PRESENTLY PROVED) Mine
Reserves
Production/Annum
Balance life
Product Rate
(MT)
Years
(MT/YR)
Open Cost
725
17.8
40
15
Underground
1503
16.2
75
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RESTRUCTURING PACKAGE- JULY 2009 1. Goap equity investment is Rs. 268 cores in the IX plan. 2. Goi equity investment in SCCL is Rs. 257.51 crores in IX plan 3. Goi shall allow amoratorium on payment of outstand interest of Rs. 663.34 crores during VIII plan period up to 3 1-3-2007 4. From 2007- 08 SCCL shall sturt paying Rs. 663.34 corores in to equal installments. 5.Goi shall waive the payment of Rs. 66.11 cores of penal interest and intest during the period form 31-3-2006 to 1-4-2007.
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SCCL strengths and weaknesses: Strengths Quick and smooth adoption of new technologies. SCCL is a pioneer in adopting blasting galley (BG) technology (French) inpit crushing & conveying technology (Germany) and longwall (UK & China) performance is very encouraging.
Weaknesses. 1. Limited financially viable reserves, amenable for open cast mining. High striping rations in ocprojects. 2. Difficult geo- mining conditions like steepness, existence of clay bands Incompatible roof and low grade of coal. 3. Advice lows and order conditions arising out of radical activities.
PROFILE OF SCCL IN BRIEF AS ON 3 1.3.2007 2008-2009 1. Production m.t.s
:
377.04
2. Manpower nos.
:
82,224
Rs.Crs :
3790.55
3.Turnover 4. Share capital
-Govt of APRs Crs :
885.60
-GOI
Rs Crs :
847.56
-Other
Rs Crs :
0.04
Rs Crs :
1733.20
Total
5. Reserves and surplus Rs Crs :
400.00
6. Cumulative loss Rs Crs
:
19.00
7 Networth(4+5-6) RsCrs
:
2114.00
8. Term Loans—OQI RsCrs :
3372
9 Debt equity ration Rs Crs :
0.38:1
10. Contribution to exchequea GOAP Rs.Crs Gol
Rs
:
584.86
:
205.22
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DETAILS OF LOCATION OF VARIOUS UNITS: SCCL operates 71 mines including 12 open cast mines in 12 operating areas in the state of Andhra Pradesh. Area U.G Mines OC mines Total District Area Kothagudeim Yellandu Manuguru Bellampalli Mandamarri Ramakrishnapuram Srirampur
U.G. Mines 5 3 2 7 7 7 10
OC Mines 1 3 3 1
Total 6 6 5 8 7 7 10
District Kammam Kammam Kammam Adilabad Adilabad Adilabad Adilabad
During 2007-20089as against the target 3405 of this production from open cast mines was 16.49 million tones which decreased marginally by 1.67% over the previous year. Production and sales during the past 3 years are as follows. Year
Production (LT)
Turn - Over
Value (Rs. Crores)
2004-05
332.36
334.79
3141.83
2005-06
338.54
339.41
3178.65
2006-07
353.03
348.25
3413.73
2007-08
361.38
354.47
3629.10
2008-2009
377.04
376.29
3790.55
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PERFORMANCE DURING 2008-2009 WORKING RESULTS: During the year 2008-09 the company has earned a profit of Rs. 11720 crores after setting a loss of Rs. 19 crores incurred by the coal chemical complex (ccc) being managed by the company as against a profit of Rs. 377.04 crores in the previous year. Despite earning profit during the year 2007-08 the accumulated losses stood at Rs. 190.60 crores at the end of 2008-2009 and such continued to be termed as a “potentially sick” within the meaning of sec 23 of the sick industrial companies (special provision) Act. 1985. After making necessary dustmen for prior period expenditure, the carry forward loss at the end of the year under report was Rs. 190.60 crores as against Rs. 281.5 crores at the end of the previous year. In view of accumulated losses no dividend was declared to the shareholders.
THE APPROVED PACKAGE INVISAGES: Infusion of additional equity of Rs. 198.04 crores by both the governments during the remaining period of IX plan over Rs. 327.47 Crores already committed. Waival of outstanding interest of Rs. 663.00 crores. Waival of payment of Rs. 24 crores representing penal interest and interest on interest accured on the loans from 1.4.97 to 3 1.3.99 Re shedulement of VII plan loan installments due up to 1.3.1998 to 1999 —2000 and 2000-2001 to repay during 2000-2001 and 200 1-2002 in two installments.
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PROJECTS PENDING WITH GOVT. OF INDIA FOR SANCTION:The following projects approved by Board of Directors of the company are pending with GOI for sanction. Sl. No.
Name of Project
Capital (m.t/pa) -
Capital Rs. crores 8.09
Date of Approved 11-6-04
1
Drivage of inter-seam tunnels &
2
GDK-10 & 10A inclines. Introduction of continuous miner in
0.400
48.30
11-06-04
3
PVK-5 incline. Introduction of 10 man riding systems
-
24.27
11-06-04
4
under phase-III Introduction of continuous miners in
0.240
63.63
11-06-04
5
GDK-8, 10&11A inclines. Introductionof semi-mechanisation
each -
29.84
11-06-04
6
with SDLs in 13 UG mines. Introduction of semi-mechanisation
-
22.68
11-06-04
7
with LHDs in 3 UG mines. Drivage of inter-seam tunnels in
-
1.52
11-06-04
8
KTK-1&1A inclines Introduction of manriding systems in
-
15.02
20-10-04
9 10 11
6 UG mines under phase-IV. Srirampur OC project-II Abbapur OCP Marginal scheme for provision of 5
1.500 0.600 -
49.08 39.48 0.88
20-10-04 20-10-04 20-10-04
-
1.71
20-10-04
sinking of air shaft for intehration of
cum electrical hydraulic excavators 12
for RG OC-II Drivage of inter-seam tunnels at RK-5 incline
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Projects / Schemes under implementation :As on 31-3-2009 there were 62 mining projects (14 open cast and 30 underground) in various stages of implementation with an ultimate aggregate capacity of 21.14 million tones per annum with a sanctioned capital outlay of Rs. 1384.52 crores. Out of 44 projects, 34 projects are on schedule. The implementation of the remaining 10 projects viz, was delayed due to adverse geo- mining conditions, delay in awarding the contract, and order problems during the initial stages of construction. Category wise employment position as on 31-3-09
EXHIBIT-1 IMPORTANT EVENTS IN THE LIFE OP S.C.C.L YEAR
MILESTONES
1889
Commencement of Mining operations
1948
Introduction of Machine Mining (Shuttle Cars, Ls)
1951
Introduction of Incentive schemes.
1951
Introduction of Electrical coal Drills.
1952
Introduction of Electrical Cap lamps
1953
Introduction flame proof mining machinery.
1975
Commencement of open cast mining projects.
1981
Introduction of latest under ground machine.
1983
Introduction Long wall Face Machinery,
1984
Installation of First 132/33 KVA substation
1985
Singareni Coal work graded from “C” to “G” grade
1986
Introduction of walking dragline in CC Mines.
1989
Introduction of French Blasting Gallery Technique
1991
Computerized information systems.
1994
Introduction of In-Pit crushing in ocmines
1995
Open casting of developed pillars and go ap aran
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INVENTORY MANAGAMENT Rs. In Crores Particulars
2004-05
2005-06
2006-07
2007-08
2008-09
total Stores
67
48
13
11
55
Revenue Stores
210
188
194
170
165
Total Stores
277
236
207
181
220
Revenue Stores
199
209
213
257
302
16.58
17.41
17.75
21.41
25.46
5.7
4.7
4.8
3.6
3.9
Man Power / Month Closing Stock in Number of months Consumption
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III. INVENTORY MANAGEMENT OF SCCL In order to know inventory management system of SCCL a questionnaire analysis has been served to the company and got it filled upon by stores Manager of the company. The questionnaire data has been presented below the organization structure of inventory and stores department are as follows.
ORGANISATION STRUCTURE OF SCCL, STORES Director Chief of Stores AddL. Chief Engineer Dv. Chief Engineer Sr. D.E Executive Engineer Junior Engineer ORGANISATION STRUCTURE OF AREA STORES General Manager Dy. Chief Engineer Executive Engineer Store Keeper Staff
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The executive responsibilities to manage the inventory is to maintain inventory is to maintain inventory without stock or hampering of production. The company classifies inventory in to FM’s WIP, FG’s Stores and Spares & Consumables. The company purchase inventory from local, non- local and some times imports. The objective purchase inventory management of this company are i)
Maintaining minimum inventory.
ii)
Not to hamper the production
iii)
Avoid stock out situation.
iv)
Proper planning of materials.
The company plans for inventory requirements using ABC analysis technique. Items costing 70% arc denoted as high level and grouped in to ‘A’ type medium level items value 20% will be grouped in to ‘B’ type and the low level items valuing 10% will be taken in to ‘C’ type. The Company plans for inventory consumption on monthly basis. The company values the materials applying FIFO and weighted average methods. In order to control the inventory the company is through tenders. The specific problems of this company with regard to inventory are computerization, inter stores transitioning. The method adopted by the company for stock verification is done once in an year physically with the help internal audit department. In general this physical affection is done in the month of January. Verified balance will be certified on the bin card by internal audit the bin card and ledger balance should be tallied with verified balance. The methods adopted for controlling the storage loss are checking with the stores ledger. The company is not maintaining any inventory norms, ratios.
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Stores Management:In Singareni, We have total 19 stores. Area
KGM G.K YD MNG RGM BHPL BPA MM RKP SRP TOTAL
Main
Long
Open
Central
Area
Stores
Wall
Cast
Stores
Stores
1 Nil 1
Stores 1 1 1 3
Stores Nil 1 1 1 3 6
1 1
Nil 1 1 1 1 1 1 1 1 8
Total
3 1 3 2 5 1 1 1 1 1 19
A calendar Programme for purchase of various items in different months is prepared, but this may not be strictly followed. Main stores sends blank want sheets to respective stores. They send their requisition to main stores. Consolidation of various want sheets in done here and forwarded to purchase department for placing order. Calculation of net stock to be ordered (at area level) Projected Requirement (PR) Average monthly consumption X 15 (12 months requirement + 3 mon. safety stock) = A Net Requirement (Actual) P.R - Stock - B.O (Balance in order)=3 Example last two years consumption 2007-08/08-09or Any months consumption / No of months After processing purchase order When actually order is placed before selected supplier- A reviewed requirement is sent to purchase department by main stores.
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Reviewed wan sheet requirements report :User Actual Consumption Requirement Projected Stock Balance Net as per the
req. during on
want sheet
Remarks
on order Requirement
hand
2006-07 07-08 08-09
Codification:Advances of codification 1. Eliminates stocking of same item under different item function or by use. 2. Eliminate unnecessary varieties for example - sizes. 3. Enables proper storage and prompt issue of materials. 4. Enable proper procurement and accounting. 5. Facilitates introduction of modern inventory control. 6. Facilitates introduction of computerization for accounts and reporting. Codification in to class of material is done taking in to consideration the characteristic and use etc. Code Structure :1
2
34
56
Main Clause Sub-Clause Detailed classification or Special Features Or Subassembly Sequential Number Check Digit Stores Accounting System Spares parts information system
20
789
10
Example :Number :- t)140011863 Check
digit
Calculation
6
X
10
=
60
1
X
9
=
9
4
X
8
=
32
0
X
7
=
0
0
X
6
=
0
1
X
5
=
5
1
X
4
=
4
8
X
3
=
24
6
X
2
=
12
Proof:- 11)146(13 11 36 33 3
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DIFFERENT TYPES OF TENDERS :1. Open tender or Global tender :- If item is to be imported, then global tender is given. = If value of tender> 5 lakshs. = If refillable source of supplier not known = Advt. May bring better response. =To avoid connivance of tenders.
2. Limited Enquiry. Value of tender < 5 lakhs. Reliable source of supply is known with previous record. For value of tender> 5 lakshs in urgent matters.
3. Single tender :If purchase is form original equipment manufacturer (or)sub assembly manufacturer, single tender is floated. If purchase is from authorised dealer-list of those peal and to be obtained. For Property items and items procured regularly, long tern contract (may be one year) is entered to supply the material at particular rate.
4. Report order: The original order is undertaken in normal course. Not more than 2 years gap in original order and repeat order. There should not be declining price trend. Not more than two repeat orders to be placed. Sanction of competent authority to be taken. # Tender documents are purchased alter paying requisite fees. Tenders are put in a buy. Normally they are opened on Wednesdays and Saturdays.
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5. CIL order basis :- For explosives and other heavy equipment like dumpeas, dozes rate paid by CIL is adopted.
6. Emergency Purchases :- They can be produced at Hyderabad/ Corporate / Are level.
Tenders submission Period:For limited quotation 3 to 4 weeks. Open advertisement 4 to 6 weeks. Imports 12 weeks.
Place of submission : Corporate office — Kothagudem. Hyderabad Office Godavarikhani Tender is closed at 5-OOPM on tender closing date. Only EMD part and technical part are opened price part opened only after technical acceptance.
Members for technical evaluation committee E.D(E&M) G.M (Project Planning) Concerned Area General Manager Addl. Chief (Corporate) Chief Survey Officer After obtaining permission of competent authority, price quotations are opened Date of opening intimated to technically accepted parties. Cancellation of tender Parameters like lead, lift, bench- wise quarries due to geological reasons, after approval form appropriate authority. Curtail the price increase ring formation. No response or Poor response. 23
Termination of Contract :If work is not up to specifications, then contract can terminated. In case of legal problems too. Then payment is done only up to portion of work completed.
Disposal Section:Under this mainly non- moving items are disposed For assessing the value of disposal item there is a committee called disposal committee. Other disposal items are machineay and non- machinery items. The disposal committee disposes these items basing on survey off report through form” A” .These items are entered in financial books (B). These are sold of as scrap according to format B. Mode of Payment : 73.5% of material value along with applicable taxes and duties on 100% material value should be drawn in favour of the SCCL Payable at Kothagudem. 1.5% of material value in favour Payable at Visakhapatnam. The above Payments have to be manic within the following target dates. i) Material value for each lot below 5
With in 20 days from the date of auction
lakkhs ii) Material value for each lot between 5-
With in 25 days from the date of auction
15 lakhs iii) Material value for each lot be Aviv 15
With in 30 days from the date of auction
lakhs iv) CST @ 4% against fro ‘C’ will be accepted from registered central sales tax
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C & MD
DIR (PAE)
FUNCTION ARIES HAVE OVERLAPPIN
FUNCTIONARIES HAVE OVERLAPPIN MINING & NON MINING
NONMINING DEPTS.
NONMINING EDEPTS.
FUNCTION ARIES HAVE OVERLAPPING & NON MINING ACTIVITIES
ED (P&tm
HFM &M
GM (W)
CIE CHF (TRG) CMO
ACPA - IA
SCHOOL & COLLEGE
HOSPITAL
25
SO
ED= Executive Director E & M = elec. & rnech. CE = Chief Engineer OCP Open Cost Project P & W = under ground mines SFTY = safety CIE= Chief industrial engineer QM= Quality Management OF & A = Chief finance & a accountant PERS = Personal CVO= Chief Vigilance officer EMC= Environment Monitoring cell M & M = Marketing & Movement PAW= Personal admin & welfare EDP= Electronic Data RO=Resident Officer CMO= Chief Medical Officer P &T = Plantation & Timber ACFA = Additional chief finance asst. IA = Internal Audit. SECY= Security T= Training.
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REVIEW OF LITERATURE Definition of inventory Management: Inventory management is concerned with the determination of optimum level of investment for each components of inventory and the efficient use of components and the operation of components and the operation of an effective control and review of mechanism. The main objective of inventory management are operational and financial. The operational objective mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The following are the objective means that investments in inventory should not remain idle and minimum working capital be locked in it.
The following are the objectives of inventory management: 1) To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any tie and the customers demand should also be met. 2) To avoid both over-stocking and under-stocking of inventory. 3) To maintain investment in inventories at the optimum level as required by the operational ad sales activities. 4) To keep material cost under control so that they contribute in reducing the cost of production and overall costs. 5) To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. 6) To minimize loses through deterioration pilferage wastages and damages. 7) To ensure perpetual inventory control so that materials show in stock ledgers should be actually lying in the stores. 8) To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price analysis, the costanalysis and value analysis will ensure payment of proper prices. 9) To facilitate furnishing of date for short-term and long-term planning and control of inventory. 27
TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT: 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.
1. Determination of Stock Levels: Carrying of too much and too little of inventory is detrimental to the film. 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. An efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock out which may result in loss or sale of shortage of production.
2 Minimum Stock Level: It represents the quantity below its stock of any item should not be allowed to fall. Lead Time: A purchasin firm requires sometime to process the order and time is also required by the supplying firm to execute the order. The time taken in processing the order ad then executing it is known as lead time.Read 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 plans. Nature of material: The nature of material also affects the minimum level if a material is required only against the special order of the customer then minimum stock will not be required for such material. Minimum stock level can be calculated with the help of following formula. Minimum stock level = Reordering level - (normal consumption x normal reorder period)
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b) Re-ordering 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 is fixed between minimum level and maximum level. Re-ordering level = Maximum consumption x Maximum re-order period.
C) Maximum Level: It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit the it will be over-stocking. Overstocking will mean 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 = Reordering level + Reorder quantity (Minimum Consumption x Minimum reorder period).
d) Danger Stock Level: It is fixed below minimum stock level. The danger stock level indicates emergency of stock position and urgency of obtaining fresh supply at any cost.
e) Average Stock Level: This stock level indicates the averages stock held by the concern. Average stock level = Minimum Stock level + 1/2 x reorder quantity.
2. Determination of Safety Stocks: Safety stock is a buffer to meet some unanticipated increase in usage. 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. In order to protect against the stock out arising out of usage fluctuations, firms usually maintain some margin of safety stocks.
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Two costs are involved in the determination of this stock that is opportunity cost of stock outs and the carrying costs.If a firm maintains low level of safety frequent stock outs will occur resulting into the larger opportunity costs. On the other hand, the larger quantity of safety stocks involves carruing costs.
3. Economic Order Quantity (EQQ): The quantity of material to be ordered at one time is known as economic ordering quantity. The quantity is fixed in such a manner as to minimize the cost of ordering quantity. The quantity is fixed in such a manner as to minimise the cost of ordering and carrying costs. Total cost of material = Acquisition Cost + Carrying Costs + Ordering Cost.
Carrying Cost: It is the cost of holding the materials in the store.
Ordering Cost: It is cost of placing order for the purchase of materials EOQ can be calculated with the help of the following formula. EOQ = √2 CO/I Where C = consumption of the material in units during a year O = Ordering Cost I = Carrying Cost or interest payment on the capital. EOQ
I
CO
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A - B C Analysis: (Always better control analysis) Under A-B-C Analysis the materials are divided into 3 categories viz. A,B and C. Almost 10% of the items contribute to 70% of value of consumption and this category is called ‘A’ category. About 20% of the items contribute about 20% of value of consumption and this is known as category ‘B’ materials. Category ‘C’ covers about 70% of items of materials which contribute only 10% of value of consumption.
5. VED Analysis : (Vital, Essential, Desire) The VED analysis is used generally for spare parts. Spare parts classified as Vital (V), Essential (E)and Desirable(D) The vital spares are must for running the concern smoothly and these must be stored adequately. The ‘E’ type of spares are also necessary but their stocks may be kept at low figures. The stocking of ‘D’ type spares may be avoided at times. If the lead time of these spares is less then stocking if these spares can be avoided.
6. Inventory turnover ratio: Inventory turnover ratios are calculated to indicate whether inventories have been used efficiently or not. The inventory turnover ratio also known as stock velocity is normally calculated as sales / average inventory of cost of goods sold / average inventory. Inventory conversion period may also be calculated to find the average time taken for clearing t stocks. Symbolically, Cost of goods sold Inventory Turnover Ratio = ------------------------------Average inventory at cost. Or =
Net sales -------------------------(Average) Inventory.
(Cost of goods sold = opening stock + Net profit + Direct expenses – Closing Cost) Average inventory =( Opening inventory + Closing Inventory) /2
And Inventory conversion period =
Days is a year ----------------------------------Inventory Turnover Ratio
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7. Classification and Codification of inventories: The inventories should first be classified and then code numbers should be assigned for their identification. The identification of short names are useful for inventory management not only for large concerns but also for small concerns. Lack of proper classification may also lead to reduction in production. Generally, materials are classified accordingly to their nature such as construction materials consumable stocks spares lubricants etc. After classification the materials are given code numbers. The coding may be done alphabetically or numerically. The later method is generally used for coding. The class of materials is assigned two digits and then tow or three digits are assigned to the categories of items divided into 15 groups. Two numbers will be category of materials in that class. The third distinction is needed for the quality of goods and decimals are used to note this factor.
8. Valuation of inventories — Method of valuation: FIFO method LIFO method Base Stock method Weighted average price method
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CRITERIA FOR JUDGING THE INVENTORY SYSTEM: While the overall objective of the inventory system is to minimize the cost to the firm at the risk level acceptable to management the more proximate criteria for judging the inventory system are o Comprehensibility o Adaptability o Timeliness
Areas of improvement: Inventory management in India can be improved in various ways improvements could be affected through.
Effective computerization : Computers should not be used merely for accounting purposes but also for improving decision making.
Review of classifications : ABC classification must be periodically reviewed. Improved Co- ordination: Better co- ordination among put chase production marketing, and finance department will help in achieving greater efficiency in inventory management.
Development of long term relationships: Procedures for disposing obsolete / surplus inventories must be simplified.
Adoption of challenging norms: Companies should set benchmarks with global competitors and use ideals like JIT to improve inventory management.
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Inventory cost-an overall view Introduction: In financial parlance inventory is defined as the sum of the value of the raw materials fuels and lubricants spares parts maintenance consumable semi processed materials and finished goods stock at any giving point of time. The operational definition of inventory would be amount of raw materials fuel and lubricants spare parts and sempprocessed materials to be stocked for the smooth running of the plant/industry.
Need of inventory: About 10% of the total cost of production in SCC Limited represents inventory cost. Inventories are maintained basically for the operational sooth ness which they can be affected by. uncoupling successive stages of production where as the monetary value of the inventory serves as a guide to indicate the size of the investment made to achieve this operational convenience. The materials management departments primary function is to provide this operational convenience with a minimum possible investment inventories. Materials departments is accused of both stock outs as well as large investments in inventories. The solution lies in exercising a selective inventory control and application of inventory control techniques. Inventories built to act as a cushion between supply and demand. It is sufficient to take care of the requirements of demand till the next supply arrives. It is sufficient to take care of probable delays in supply as well as probable variations in demand. The size of the inventory depends upon the factors such as size of industry internal lead time for purchase, supplier’s lead time, vendor relations, availability of the materials, annual consumption of the materials. Inventory cost can be controlled by applying Modern Techniques Viz., ABC analysis, SDE, FSN, HMC, VED etc., These techniques can be used effectively with the help of computerization.
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Who determines Inventory: Norm per inventory could be set by the area top management. In the SCCL corporate planning department will allocate this investment with the various items taking into consideration the requisitions given by the areas and requisition approved by the corporate planning department for smooth operation of the company. Purchase department will process the procurement action. What is meant by inventory cost:
Inventory Cost Represents: A. The total value of stores and spares and capital spares B . Stores in transit an under inspection and C. Stock of finished products. Normally, there are certain problems in maintaining optimum level of inventory Problems of inventory can be resolved by the cost implications. Costs which are relevant for consideration are discussed in the following lines; Basically there are four costs for consideration in developing an inventory model. 1) The Cost of placing a replenishment order. 2) The cost of carrying inventory. 3) The cost of overstocking. 4) The cost of overstocking. The cost of ordering and inventory carrying cost are viewed as the supply side costs and help in the determination of the quantity to be ordered for each replenishment. The under stocking and over stocking costs are viewed as the demand side costs and help I the determination of the amount of variations in demand and the delay in supplies which the inventory should withstand. Whenever an order placed for stock replenishment, certain costs are involved, and for most practical purpose it can be assumed that the cost per order is constant.
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The ordering cost may very depending upon the type of items, for example raw material like steel against production component like castings steel plants, support materials in the case of coal Industry.
The cost of ordering includes: 1) Paper work costs, typing and dispatching an order: 2) Follow up costs — the follow up required to ensure timely supplies includes the travel cost for purchase follow up, the telephones, telex and postal bills etc., 3) Costs involved in receiving of the order, inspection, checking and handling in the stores. 4) Any set up cost of machines charged by the supplier, either directly indicated in quotations or assessed through quotations for various quantities. 5) The salaries and wages of the purchase department.,
Cost of inventory carrying: This cost is measured as % of the unit cost of the item. This measure gives basis for estimating what is actually costs a company to carry stock. This cost includes: 1) Interest on capital 2) Insurance and Tax Charges 3)
Storage costs — labour costs, provision of storages area and facilities like bins, racks etc.,
4) Transport bills and hamali charges. 5) Allowance for deterioration or spoilages. 6) Salaries of stores staff.; 7) obscene. The inventory carrying cost varies and a major portion of this is accounted for by the interest on capital. SCCL is paying 20% interest on back loans.
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Under stocking Cost: This cost is the incurred when an item is out of stock. It includes cost of lost production during the period of stock out and the extra cost per unit which might have to be paid for an emergency purchase.
Overstocking Cost: This cost is the inventory carrying cost (which is calculated per year) for a specific period of time. The time varies in different contexts it could be the lead time of procurement of entire life time of machine. In the case of time purchases, over stocking cost would be = purchase price -- scrap price.
Inventory cost In relation to SCCL shall be classified as follows: Inventory can be classified as capital and revenue. Certain items though titled as capital in nature. Example coal tubs, cap lamps etc., 100% of the depreciation shall be charged in the year they are drawn. Hence, due care is to be taken by used mine while drawing the material. Materials which are to be imported from other countries have to be planned well in advance nearly about 24 months and to initiate the proposals for procurement. Similarly some of the items do not require any lead time since they are available I the local market. For example sand, dolomite power, automobile spares etc., Sand transportation could be done with minimum lead time in Manuguru, Kothagudem areas and Godavarikhani region since abundant sand is available in nearby areas of operations. Similarly some of the inventories are to be procured during particular seasons For example timber. General experience in SCCL reveals that the production during the moths of November to March is on high side as such the requirement of spares and stores will be on high side. As such we must be in a position to keep the material with better economics far these five months taking lead time into account for procurement of material to get optimum production. In the current financial year production trend reveals that the production is improving and 37
showing good performance through out the year unlike earlier years in underground mines. Inventory cost of any organisation also adversely affects by retaining obsolete / scrap and inventory costs can be reduced by the- management with an advance planning of procurement of materials, periodical review of existing spares with reference to the fast consumption, ascertaining the information regarding the availability of spares in other areas Holding of extra inventory will be an additional financial burden to the company due to payment of interest charges on the materials purchased, diminishing value of materials by keeping them in stores for a long time handling charges, space rent etc., inventory in SCCL during 2004-05 to 2008-09. Rs. In Lakhs 1) Stores and spares and capital items. 2) Stores in transit Under inspection 3) Stock of Coal, Coke and Coal for
2004-05
2005-06
2006-07
2007-08
2008-09
23738.70
20794.40
18184.29
22115.37
20126.41
2677.11
2452.64
3538.64
2659.71
4160.00
4181.58
2522.84
1656.22
4994.40
8225.15
fuel In general 3 months consumption of stores and spares and one month sales of coal stock, will represent idle inventory. The stock of consumable spares at Godavarikhani projects area during 1997-98 were in the order of Rs. 867.94 lakhs against the consumable spares of Rs.404.96 lakh as on 31-12-2002 showing a reduction of Rs.462.98 lakhs. Expenditure incurred during November 1999 in SCCL on stores inventory in Rs. 1138.46 lakhs reflecting the inventory of stores spares cost at Rs.43.77 per tonne exclusive of explosives.
Area — wise details are as follows:
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AREA Kothagudem Yellandu Manuguru Bellampalli Mandamarri Srirampur Ramagundam-I Ramagundam-II Ramagundam-III Bellampalli SCCL
Output
Stores Cost (Rs. In Lakhs)
2.72 2.21 4.59 0.71 1.60 2.12 2.31 2.47 5.41 0.37 26.01
161.49 2.21 165.38 48.00 58.82 86.39 125.31 192.31 148.50 6.44 1138.46
Cost / tonne (In Rs.) 59.37 40.56 36.03 67.61 36.76 40.75 54.25 77.86 27.45 17.40 43.77
Upto Nov,. 2008 Cost / Tonne 100.19 50.16 38.99 77.78 40.48 42.25 47.31 156.97 43.96 41.97 57.75
CONCLUSION: In order to reduce the inventory cost the following steps may be considered. 1) Accurate assessment of materials requirement from area level to corporate office. 2) Communicating proper delivery schedule to suppliers based on our requirements. 3) Better planning at mine level before installation of equipment viz., gravitation fans, haulage and pumping etc., 4) After careful study the norms should be fixed regarding consumption of various spares / items. 5) Standardization of equipment will facilitate inter changeability in the event of breakdowns and also reduce the downtime of machines / equipment. 6) Preventive maintenance of equipment as per the schedules. 7) Periodical spot checks at work spots for tracing the availability of spares and the consumables. 8) Accountability and responsibilities are to be fixed. 9) Introduction of technical audit calls and 10) Updating of technology from time to time. 11) Re-utilization of materials. Accounting for materials:
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Accounting for materials: The accounting for direct material begins with the issuance of the purchase requisition and ends only when the finished product has been shipped to the customer. In the course of this cycle the other two elements of cost, direct labour and factory over heads become part of material cost to the extent that they are applied to production and included in inventory values.
Acquiring raw materials from vendors: Four basic documents are involved in acquiring materials from vendors. They are: purchase requisition, the purchase order, the receiving report an the vendors invoice. After due consideration of purchase requisition, a vendor is selected and a purchase order is sent to the vendor by the purchasing agent. Ultimately the merchandise ad the vendors invoice are received and the receipt of merchandise is recorded on a receiving report. If the vendors invoice, the purchase order, and the receiving report are found to be in agreement, a voucher for payment is approved. At this time the receipt of the merchandise is recovered in the General ledger as follows: Debit Raw materials inventory Credit Accounts Payable When payment is made, the blowing general ledger entry is made: Debit Accounts Payable Credit Cash
Purchase Requisition: This is used to request the purchasing agent to order materials. Timing of the requisition and the amount to be requisitioned depend on the kind of material and the circumstances. For control purposes it is import ant that the individuals authorised to issue purchase requisitions be limited to such personnel as foremen, store keepers and deptmenta1 heads.
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The purchase requisition originates a substantial percentage of the total costs of a company, and one of the surest ways to control costs is to control them before they are incurred. Purchase requisitions may be dispensed with in those instances where agreements are made with a supplier to meet specified requirements over a period of time. Such agreements arc blanket purchase requisitions. In many companies, a copy of the requisition is sent to the accounting department for checking of the propriety of the code. The origination also inserts the quantity to be ordered the description of the material, the amount on hand, the monthly consumption and any special rotation as to the purpose for which the material is ordered. Vendor selection upon such things as quality and availability of desired quantities when needed as well as price. Purchase Orders: A purchase order is prepared from the purchase requisition, with sufficient copies to meet the requirements of the company organization structure. Usually at least four are prepared, the original for the vendor and copies for the purchasing department files, the accounts payable department and the receiving department. The copy for the latter department may have the quantity ordered blocked out so that the count of material at receiving will not be influenced by the quantities shown on the purchase order. The purchase order is a vital document in the materials accounting process for when it is accepted by the vendor, it becomes a contract. As a contract it must be complete and specific. Therefore, following the listing of items ordered would be stated the required delivery date, packing and shipping instruction, billing instruction, and terms of payment. It is customary to include clauses and conditions as to warranty, patent infringement, contractor’s liability when services are to be performed etc., Such clauses may be inserted as required or be printed on the face or back of the order with a definite and well marked statement that they are a part of the contract. These clause are very useful controlled devices from the point of view of preventing costly legal entanglements.
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Receiving Reports: When material is received, the quantity is determined by counting, weighting or other measurement by the receiving department. This is done to assure that payment is made only for goods actually received. The receiving department prepares receiving reports, either on a special form or on a receiving copy or copies of the purchase order.
Payment of Invoices: Vendor’s invoices are sent to the accounts payable department. Approved vendor’s invoices are filled by vendor according to date of payment. On the date a voucher is prepared on which are listed the invoices of the vendor covered by the voucher. The cheque is draw for the net amount indicated by the voucher. A combination cheque and voucher dorm is frequently used. The Reordering in the invoice register may be done when the invoice are received or after they are attached to the voucher for payment.
Internal Control: The purchasing, receiving and payment procedures for goods are services are a vital part of system of internal control. The matching of purchase orders, receiving records, and vendor’s invoices assures that payments are not made for goods and services not received and that the items of the invoice are in agreement with those specified in the purchase order. The entire process aids in the control of costs, for any payment for goods and services must ultimately be reflected in the accounts as a cost of the current period or of a future period.
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ACQUIRING RAW MATERIALS FROM THE STORE ROOM Recognise need for Stores materials in
Materials are sent to work place
requisition
production Notifies
Requisition is recorded in
Storeroom Clerk Of Needs
1. Requisition summary used to record general ledger entry transferring R.M’s to WIP. 2. Perpetual inventory records. 3. Departmental cost records used to accumulate materials costs by responsibility centres ad to determine costs for individual production process. 4. Job cost sheets used when manufacturing is of a job shop variety and costs must be kept by individual jobs.
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JOURNAL ENTRY: To record total of requisition summary Debit Work in process Credit Raw materials inventory. The first step is the recognition of the fact that materials are needed for production. Workers, foreman and production control personnel are usually the people that recognize the need for material. The store requisition is prepared in order to obtain materials from the store rooms that materials are to be released for production. For control purposes it is best to have the foreman and / or specified production control personnel requisition the materials. In some plants the production control department may issue stores requisition at the same time that production schedules are issued. The foreman in such cases might be restricted only to the issuance of the requisition for materials required in excess of estimated or standard quantities. This excess stores requisition is usually a distinct form which might require a supervisor’s signature as well as foreman’s signature. Waste of material cannot be hidden for long when excess stores requisitions are used.
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REORDERING THE STORES REQUISITION - THE GENERAL LEDGER The stores requisition is recorded in the general ledger and in various subsidiary ledgers. Among the usual subsidiary leaders are the perpetual inventory cards, departmental cost records, and job cost sheets.
STORES REQUISITION SUMMARY Date
Req. No.
Dept. I Direct
Dept-II
Indirect
Direct
Indirect
Total Direct
Indirect
Total In the general ledger, stores requisitions are recorded by a transfer from raw materials inventory (a credit) to work in process ( a debit). Each stores requisition is not the subject of a general ledger entry. The stores requisitions for a month are totaled, and this total is the subject of the above general ledger entry. Ordinarily each stores requisition is recorded in a requisition summary which is totaled each month to determine the dollar amount of the general ledger entry. A requisition summary show above provides departmental distinctions as well as distinctions between direct and indirect materials. When the general ledger contains only one work in process account and one factory overhead account the monthly entry from the requisition summary would be: Debit Work in process (for direct materials)
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Debit Factory overhead (for indirect materials) Credit Raw materials inventory When the general ledger contains departmental account the monthly entry from the requisition summary would be: Debit Work in Process — I Debit Factory Overhead — I Debit Work in Process — 11 Debit Factory Overhead — II Credit Raw materials inventory
Reordering the stores requisition - a subsidiary ledger: The three basic subsidiary ledgers in which stores requisitions might be recorded are the perpetual inventory cards, departmental cost records, and job cost sheets. Perpetual inventory are very useful for inventory control purposes, whereas departmental cost records are valuable aids in a accounting for each area of responsibility” In addition, departmental cost records are indispensable aids in calculating unit costs when production is of a continuous process nature for example a canning factory. Stores requisitions can be recorded individually in subsidiary ledgers, or if summarizations are possible requisitions can be recorded in summary form. The perpetual inventory cards are to be useful aids in controlling inventories, the stores . requisitions must be recorded therein at least once each week or ever daily for critical major materials. Departmental cost records can take many different forms. However, if they are to be complete, direct materials, direct labor, and factory overhead must be a part of such records. The job cost sheet contains complete information on the costs pertaining to a job. Direct labourm direct material, other direct charges, and factory overhead are all included on a job cost sheet. Other direct charges include such items as special tools and dies which can be and are worthwhile tracing to individual jobs. Factory overhead per job is usually estimated in terms of direct labour costs or direct labour hours. This estimate is called the applied factory overhead” per i he job.
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PHYSICAL COUNTS - TESTING THE PERPETUAL INVENTORY RECORDS: Perpetual inventory records must be verified by periodic physical counts. These counts are a necessary part of testing the accuracy of records used in inventory control and of testing the extent to which established inventory procedures are followed. The counting may be done on a rotating basis with some items counted each day or week or a complete count may be made at the end of a year.
INVENTORY VALUATION AND COST FLOWS What is the cost of inventory? One can readily visualize the determination of inventory quantities by physical count or by use of perpetual inventory records. When the quantity is determined, it must be multiplied by a unit cost in order to determine the inventory value that is used on financial statements. Trade and quantity discounts arc to be excluded from unit cost since these discounts exist for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the other hand, have been considered as a reward for early payment and as a penalty for late payment. The “reward” has often been interpreted as a loss of income, whereas the “Penalty” has often been interpreted as a loss rather than as a part of unit cost. Thus it would not be difficult to find difference of opinion as to whether invoice cost includes or excludes cash discount. When the “current replacement cost” of material on hand on the close of a year is less than the actual cost, the inventory value is reduced to replacement cost (current market price). Thus the acceptable basis inventory valuation is the “lower of cost or market” or more properly the “lower of actual cost or replacement cost”. The determination of inventory values is very important from the point of view of the balance sheet and the income statement since costs not included in the inventory (the balance sheet) are considered to be expensive and are thus included in the income statement.
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Valuation of Inventories — Methods of Determination: Although the prime consideration in the valuation of inventories is cost, there are a number of generally accepted methods of determining the cost of inventories at the close of an accounting period. The most commonly used methods are first – in first – our (FIFO) average, and last.in.first.out (LIFO). The selection of the method of determining cost for inventory valuation is important for it has a direct bearing on the cost of goods sold and consequently on profit. When a method is selected, it must be used consistently and cannot be changed from year to year in order to secure the most favourable profit for each year.
THE FIFO METHOD (FIRST.IN.FIRST.OUT METHOD) Under this method it is assumed that the materials or goods first received arc the first to be issued or sold. Thus according to this method, the inventory on a particular date is presumed to be composed of the items which were acquired most recently. Advantages: The FIFO method has the following advantages: 1) It values stock nearer to current market prices since stock is presumed to be consisting or 2) The most recent purchases 3) It is based on cost and therefore, no unrealized profit enters into the financial accounts of the company. 4) The method is realistic since it takes into account the normal procedure of utilizing or selling those materials or goods which have been longest in stock. Disadvantages: The method suffers from the following disadvantages: 1) It involves complicated calculations ad hence increase the possibility of clerical errors. 2) Comparison between different jobs using the same type of materials become sometimes difficult. A job commenced a few minutes after another job may have to been an entirely different charge for material because the first job may have to bean a entirely different charge for materials because the first job completely exhausted the supply of materials of the particular lot.
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The FIFO method of valuation of inventories is particularly Suitable in the following circumstances i)
The materials or goods are of a perishable nature.
ii)
He frequency of purchases is not large
iii)
There arc only moderate fluctuation in the prices of materials or goods purchased.
iv)
Materials are easily identifiable as belonging to a particular purchase lot.
THE LIFO METHOD (LAST IN FIRST -OUT METHOD) This method is based on the assumption that last item of materials or goods purchased are the first to be issued or sold. Thus, according to this method, inventory consists of items purchased at the earliest cost.
Advantages: This method has the following advantages. 1) It takes into account the current market conditions while valuing materials issued to different jobs or calculating the cost of goods sold 2) The method is based on cost and, therefore, no unrealized profit or loss is made on account of use of this method. The method is most suitable for materials which are of a bulky and non perishable type.
BASE STOCK METHOD: The method is based on the contention that each enterprise maintains at all times a minimum quantity of materials or finished goods in its stock .This quantity is termed as base stock. The base stock is deemed to have been created out of the first lost purchased, therefore, it is always valued at this price and is carried forward as a fixed asset. Any quantity over and above the base stock is value in accordance with any other appropriate method. As this method aims at matching current costs to current sales, the LIFO method will be most suitable for valuing stock of materials or finished good other than base stock. The base stock method has the advantage of charging out materials/ goods at actual cost. Its other merits or demerits will depend on the method which is used for valuing materials other than the base stock.
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WEIGHTED AVERAGE PRICE METHOD: This method is based on the presumption that once the materials are put into a common bin, they lose identity. Hence, the inventory consists of no specific batch of goods. The inventory is thus priced on the basis of average prices paid for the goods, weighted according to the quantity purchased at each price. Weighted average price method is very popular on account of its being based on the total quantity and value of materials purchased besides reducing number of calculations. As a matter of fact the new average price is to be calculated only when a fresh purchases of materials is made in place of calculating it every now and then as is the case with [‘IPO, LIFO methods. However, in case f this method different prices of materials are charged from production particularly when the frequency of purchases and issues! sales is quite large and the concern is following perpetual inventory system.
VALUATION OF INVENTORIES IMPACT ON THE FLOW COSTS. As should be quite evident, the different methods of calculating inventory values will all have their impact on the flow of costs through the balance sheet into the income statement. The dollars that arc paid to acquire inventory are always divided between the balance sheet inventories) and the income statement (cost of goods sold), there is no other place to put them. Thus if the different methods of calculating inventory produce differing inventory values, they will also produce differing cost of goods sold figures, .and the differing cost of goods sold figures will naturally produce differing profit figures. In order to show the impact of inventory valuation on cost flows, the preceding exhibits are summarized. Each method produces a different figure for the transfer of raw materials to work in process. These difference appear small, but the only reason for this is that the dollar amounts have been kept small to make the illustration workable.
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With the transfer of materials to work in process, the cost of flow or transfer will have its impact on the work in process inventory and the transfer of completed merchandise to finished goods. Ultimately when goods are sold, the varying methods of valuing inventories will have their impact on cost of goods sold and this profits. The effects of the cost flows on cost of goods sold and profits can be accentuated further if the differing methods of valuing inventories arc applied to work in process and finished goods.
Evaluation of methods — what causes the difference? The differences in inventory values and cost flows for each of the method illustrated result from only one factor, that is changing purchase prices or unit costs. If purchase prices had remained stable or unchanged, each method would have produces the same in inventory value and cost flow. Cost flows and inventory are exactly the same under stable prices. With a rising price level, the LIFO method produces the highest cost flow and the lowest inventory. With a falling price level, the LIFO method produces the lowest cost flow and the highest inventory. The cost flow under LIFO follows the price level LIFO produces larger cost flows when prices are rising and smaller cost flows when prices are falling. A final item to consider is that the average method produces results which fall between the extremes of LIFO and FIFO.
Evaluation of methods — can we justify the differences? The best method of inventory valuation might be “specific identification” that is the units in inventory should be identified with the specific invoices and thus specific unit costs to which they apply. Fortunately, the FIFO method constitutes a very useful approximation to the specific identification method if one can reasonably assume that the actual flow of materials is First. in First. Out. This assumption is not unreasonable and thus we have stated the main argument for the FIFO inventory scheme, that is the physical flow of materials would match the flow of costs under the first. in first.out method.
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When the units in inventory are identical, inter changeable and do not follow any specific pattern of physical flow, the average cost system would seem to appropriate. The primary difference between the FIFO and average methods is centered on the physical flow since both methods could involve identical and interchangeable units. The FIFO method fits a first. in first. out physical flow. The average method fits a system which has no specific pattern of physical flow should be quite difficult because of the fact that most inventory items are subject to deterioration and any reasonable person would attempt to reduce such deterioration by instituting a physical flow approximating first. in first. out. The major reason for the use of the average method is something other than the lack of specific physical flow. Ordinary the LIFO method cannot be justified on the basis of the physical flow of materials. Under conditions of changing prices, the advocates of LIFO method. The LIFO method assumes that the latest item is the first item out and thus the current costs of materials are matched with the current selling p4ces or current revenues. The FIFO method, on the other hand, assumes that the first item in is the first item out and thus the non current costs of materials are matched with current selling prices of current revenues. This matching current with current revenues is the essence of the argument for the LIFO method. As can be seen by the above comments there is no one best method of valuing inventories. The method chosen should fir the situation. A physical flow pattern comparable to FIFO would force one to consider the PIFO method. The lack of a discernible physical flow pattern would force one to consider the average method. Concentration on cost flows, as distinct from physical flows, would force one to consider the LIFO method especially where there appears to be a discernible trend towards rising prices (or falling prices) as has been the case in our economy during recent years.
Inventories valued at standard cost: A very useful method of valuing inventories is at a standard cost. With a standard cost system there is no need for spending a great deal of time and money tracing unit costs through perpetual inventory records.
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PERPETUAL INVENTORY CARD UNDER A STANDRD COST SYSTEM Peripheral Inventory Plant: Location Date Description
Standard cost……………….... Order Quantity ……………… Order Point …………………. On order
Received
Issued
Available On order On hand
As shown above there is need only for physical quantities since the inventory value is the physical quantity multiplied by the standard cost. With the cost and value columns disposed off, a perpetual inventory card can include additional data such as quantities on order, quantities reserved and quantities available These additional data are very useful for inventory and production control purposes. On the basis of a few calculations concerning actual units costs, inventories at a standard costs could easily be converted into inventories on a FIFO, a LIFO or an average cost basis.
Inventory of Obsolescence: Obsolent inventories cannot be used or disposed off at values carried on the books. Frequent reviews should be made of all inventories, and when obsolescence is indicated a request for revaluation should be prepared for approval by management. The difference between original and obsolete value should be recorded by a charge to an operating account. Inventory obsolescence and a credit to inventory. If the material is scrapped, this will be for the full inventory value of the material. If it is anticipated that the material can be sold at reduced value or used in areas where it will be worth less than its original value, the entry would be only for the amount of write down. Some companies carry a solvate inventory and transfer to its materials which may be sold or used at reduced values. Where this is done, the entry would be Debit Salvage inventory Debit Inventory obsolescence Credit Raw material inventory or Supplies inventory.
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ANALYSIS OF DATA & FINDINGS RATIO ANALYSIS The SCCL inventory consists of stores and spares stores in transit and under inspection, stock of coal, stock of finished products.The various components of inventory over a period of 5 years from 2004 to 2009 presented in the following table.
1. COMPONENTS OF INVENTORY Years 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Store &
Stores in
Stores of
Stock of
Total Stock
Spares 2388600 2373870 20794.40 1818429 2217537
transit 248511 257711 245264 353864 265971
coal 626992 418158 252284 165622 499440
FAS 369 369 202 150 123
Inventory 3264472 3050108 2577190 2338065 2977071
Table 1
Graph 1
INTERPRETATION: From the above table it can be understood that the inventory of SCCL was at 3,26,44,72,00 during the year 2004-2005 and it is declined to Rs 2,33,80,65,00 during 2006-07 and it is increased to Rs. 2,97,70,71,00 during 2008-09.
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2. COMPONENTIAL ANALLYSTS: The componential analysis of inventory of SCCL from the year 2004-05 to 2008-09 is shown in the following table. Years 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
Store & Spares 2388600
Stores in transit 248511
Stores of coal 626992
Stock of FAS 3264472
Total
2373870
257711
418158
3050108
6099
2079440
245264
252284
2577190
5154178
1818429
353864
165622
233806
5154178
2211537
265971
499440
2977071
5954019
6528575
Table 2
Graph 2
INTERPRETATION: a) The investment in stores and spares, stores in transit, stock of coal and stock of finished good were registered at 36.61%, 3.81%, 9.60%, 50% respectively during the year 2004-05. During the year 2008-2009 investment in stores & spiral stores I transit stock of coal, stock of finished goods were registered at 37.14%, 4.46% 8.38%, 50% respectively. On avg. the investment in stock of finished goods is more when compare with other components current assets.
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3 TREND ANALYSIS: Trend analysis technique is applied to know the growth rate in investment of inventory of SCCL over the review period which is shown in the following table. Years
Inventory (amount in crores)
Trend %
2004-2005 2005-2006
6528575 6099847
100 93
2006-2007
5154178
79
2007-2008
4675980
72
2008-2009
5954019
91
Table 3
Graph 3
INTERPRETATION: a) The investment on inventories shows that inventory is 100% during the year 200405. Ad then has shown a down ward trend after the year 2007-08 and the inventory was increased in the year 2008-2009. b) The investment in inventory is showing fluctuating trend.
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4.INVENTORY TURNOVER RATIO :This 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 to manage its inventory. This ratio is calculated by applying the following formula. Inventory turnover ratio = net sales / average inventory at cost Years
Net Sales (Sales of Coal + Coke + Coal far fuel
Average Stock (Closing Stock)
Ratio
Change (0%) diff
2004-2005
27436267
626890
43.8
7.9
2005-2006
29490271
418158
70.5
26.7
2006-2007
31418375
252284
124.5
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2007-2008
31786580
165622
191.9
67.4
2008-2009
34137306
499440
68.3
-123.6
Table 4
Graph 4
INTERPRETATION 1) From the above table it can be observed that inventory turnover ratio times during the year 2005-06 and it gradually increased to 191.9 times in the year 2007-08. It indicates that the stock has been turned in to sales very quickly and it is decreased to 68.3 in the year 2008-09 .
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2) The lowest turnover ratio was at 43.8 times during the year 2004-05 and the highest inventory was recorded at 191.9 times during the year 2008-09.
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5. 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 calculating by dividing the number of days by inventory turnover this formula may be Inventory Conversion Period = Days In A Year( 360 )/ Inventory Ratio Years
Net Sales
Average Stock
Ratio
ICP (days)
2004-2005
27436267
626890
43.8
8
2005-2006
29490271
418158
70.5
5
2006-2007
31418375
252284
124.5
3
2007-2008
31786580
165622
191.9
2
2008-2009
34137306
499440
68.3
5
Table 5
Graph 5
INTERPRETATION: 1) The inventory conversion period was 8 days during the year 2004-05 and declined to 2 days during the year 2005-06. Which indicates that the stock has been very quickly converted in to sales. In 2006-07 it has been increased to 5 days during the year 2007-08 slowly converted in the sales. 2) The lowest inventory conversion period was recorded at 2 days in the year 2007-08 and the highest inventory conversion period was 8 days recorded in 2004-2005 59
6. PERFORMANCI OF INVENTORY OVER CURRENT ASSETS In order to know the percentage of inventory over current assets the ratio of inventory to current assets is calculated and which is presented in the following table. Inventory Inventory over current assets ratio = --------------------- X 100 Current Assets Years
Inventory
Current Assets
Ratio(%)
2004-2005
3264472
6690713
49
2005-2006
2575477
6516630
39
2006-2007
2291134
5781012
40
2007-2008
2095494
87787878
24
2008-2009
2667621 Table 6
10342620
26
Graph 6
INTERPRETATION: 1) During the year 2004-05 the ratio was 49% and it gradually declined to 24% and there is a net decrease to the extent of 33% and slowly increased in the year 2007-08. 2) The lowest inventory over current assets ratio was recorded at 24% during the year 2008-09 and the highest inventory over current assets ratio was at 49% during the year 2006-07. 3) The average inventory over current assets ratio was recorded at 42.5 %
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7. PERCENTAGE OF INVENTORY OVER TOTAL ASSETS;
CURRENT ASSETS + FIXED ASSETS Years
Invention
Total Assets
Current Ratio
2004-2005
3264472
264228842
12.35%
2005-2006
2575477
25999873
9.90%
2006-2007
2291134
24132888
9.49%
2007-2008
2095494
26347993
7.95%
2008-2009
2667621
28500692
9.36%
Table 7
Graph 7
INTERPRETATION : 1) During the year 2004-2005 the ratio was 12.35% and it was decreased to 7.95% in the year 2005-06 and then started increasing up to 9.36% during the year 2006-07 2) The lowest5 inventary over total assets ratio was at 7.95% during the year 2007-08 and the highest inventory ratio at 12.35% during the year 2004-05
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8. CURRENT RATIO:In order to know the current ratio the percentage of current assets to current liabilities to calculated and which is presented in the following table. Current Assets Current ratio = -------------------------------Current Liabilities Years
Current Assets
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
6690713 6516630 5781012 87787878 10342620
Current Liabilities 13047044 8549887 6865103 8009667 8075040
Current Ratio 0.513 0.762 0.842 1.096 1.280
Table 8
Graph 8
INTERPRETATION: 1) From the above table it can be understand that the % of current assets over current liabilities ratio i.e current ratio was showing a increasing trend till 2007-08. During the year 2004-05 the ratio was 0.513 and has increased to 1.280 till the year 2008-09. 2) The lowest current ratio was recorded at 0.513 during the year 2004-05 and the highest current ratio was recorded at 1.280 during the year 2008-09.
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9. QUICK RATIO: The quick ratio is the relation ship between quick assets to current liabilities quick rat LO is more rigorus test of liabilities. Quick ratio is more rigorous test of liability position of a firm. It computed by applying the following formula. Quick ratio
=
Quick Assets -------------------------Current Liabilities
Where Quick Asset = Current assets — Inventory Years 2004-2005
Quick Assets 3426241
Current Liabilities 13047044
Quick Ratio 0.263
2005-2006
3941153
8549887
0.460
2006-2007
3489878
6865103
0.508
2007-2008
6683284
8009667
0.834
2008-2009
7674999
8075040
0.950
Table 9
Graph 9
INTERPRETATION 1) From the above table it can be understand that the % of current assets over current liabilities ration i.e current was showing a increasing trend till 2008-09 2) During the year of 2004-05 the ratio was 0.263 and it gradually increased to 0.950 till the year 2008-09. 3) The Average ratio was recorded at 0.984 during the review period.
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10. PROPRIETARY RATIO Share holder funds Total Assets. This ratio establisher the relation ship between share holder funds and total Assets. Years
Share holders funds
Total Assets
Ratio
2004-2005
18546545
26428842
0.70%
2005-2006
19685760
25999873
0.76%
2006-2007
20650380
24132888
0.85%
2007-2008
21240369
26347993
0.81%
2008-2009
21237960 Table 10
28500692
0.74%
Graph 10
INTERPRETATION: 1) During the year 2004-05 the ratio was 70% and it was increasing in the year 200506 at ratio was 85% and was declining 74% during the year 2007-08. 2) The lowest inventory was recorded at 70% during the year and the highest ratio recorded at 85% during the year 2004-2005.
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CONCLUSIONS In this Chapter an attempt is made to give the conclusions at a glance on inventory Management of Singareni Collieries Company Ltd.,
The following conclusions have been drawn. 1. Overall, the inventory Management in SCCL is upto the Mark where by adequate supplies of materials and stores, minimization of stock outs and avoided costly interruptions in operations. 2. It has kept down the investments in inventories, inventory carrying cost and obsolescence losses to the minimum through purchasing economies by the measurement of requirements on the basis of recorded experience. 3. It also enable the management to make cost and consumption comparisons between operations and periods. 4. The total of the components of inventory recorded in the year 2004-05 is 32,64,472 (Rs. In ‘000) and has declined to 26,67,621 (Rs. In ‘000) by the year 2008-09. 5. The inventory conversion period has been 8 days during the year 2004-05 and presently it is 5 days i.e., 2008-09. 6. The Percentage of inventory over the Current Assets during the year 2004-05 is 49°/o and has decline to 26% during the year 2008-09.
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SUGGESTIONS a)
Provision of internet facility to all stores in SCCL to have effective on line communication.
b) Stock transfers from one stores to others stores have to be done effectively. c)
Disposal action for obsolete and non-moving items to be take up on priority. Identification of buyers to be done.
d) Implementation of buy back clause incorporated the earlier equipment purchase orders has to be taken up with the suppliers and returning of the unconsumed spare parts to be done. Such items are to be identified. e)
Orders are released mostly for all the items covered in the open order agreements. Rate contracts immediately on their receipt. This has to be controlled. Only the items required for consumption are to be procured otherwise the items procured will not get consumed and become non-moving.
f)
Utility of items costing more than 1.00 lakh has to be reviewed to take further action.
g) Linking up alternate part numbers and elimination of duplicate code numbers so that effective utilization of the available items could be done and unnecessary purchases could be avoided.
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BIBLIOGRAPHY
01. KHAN M.Y. & JAIN P.K
FINANCIAL MANAGEMENT 3rd Edition Tata MC Grawhills
02. Dr. S.N.MAHESWARI
FINANCIAL MANAGEMENT Principles and practice 6th Edition Sulthan chand publications
03. I.M PANDEY
FINANCIAL MANAGEMENT 8TH Edition Vikas Publications, 2004
04. PRASANNA CHANDRA
FINANCIAL MANAGEMENT 5TH Edition Tata MC Grawhills, 2001
Websites referred: www.scclmines.com www.google.com www.inventorymanagement.com www.iimm.org
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