Tools commonly used for inventory control, basically accounting tools

1. 9/25/2018
Tools Commonly
Used for Inventory
Control
Accounting Tools
Submitted to:
Md. Asiqur Rahman
Lecturer,
Accounting & Information Systems
University of Barisal
Submitted by:
Group 1
Accounting & Information Systems
University of Barisal

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ACCOUNTING TOOLS COMMONLY USED
FOR INVENTORY CONTROL
Group No-01
University of Barisal, Barisal
Abstract: The purpose of the study is to know about the various accounting tools that are most
commonly used for controlling an organization inventory. Inventory is the most important part of
a company. This study took into consideration the relationship between effective system of
inventory management and organization performance. In this paper we discuss the various tools
for inventory controlling, relevance of using the tools and procedure of implementing the tools.
We have put some example regarding to use the tools so that the reader can easily know about
implementation of the tools. We discuss the inventory control tools that are using in our country
as well as in different country. We discuss JIT, Minimum inventory level, FIFO, LIFO, HIFO
method, EOQ, Stock review, Batch control etc.
Keywords: Inventory control, Effective system, EOQ, JIT, FIFO.
OBJECTIVES OF THE STUDY
1) To know about various inventory controlling tools.
2) To investigate on various mechanisms that will lead to the total reduction of inventory in
organizations.
3) To create value and interest to develop the culture of proper inventory implementation in
organizations.
4) To maximize profit and achieve customers satisfaction and retention despite low inventory
level.
5) Analyze the present challenges in inventory control with a view to suggesting possible
remedies for future benefits.

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Limitation of the Study
There are some certain limitations of this study. It can be listed as:
All the data used in this paper are secondary data which has been taken from different published
journals, books and financial data are from the internet. And this paper is related with the
financial variables so there may be some variations.
Methodology
This article work employs the use of secondary data which provides repository records and
accounts in a workable format. The instrument used for this article is secondary in nature as
quantifiable Inventory data were obtained from the internet and from our reference books. The
reason for the use of internet and reference books are because it captures all information’s
regarding inventory control tools.
1. Introduction
Since inventory represents one of the biggest numbers in a company’s balance sheet, the
effective inventory and control is a critical function to help indemnify the persistent and
continued success of operational, distribution and manufacturing of modern business entities.
However, the effectiveness of inventory management and control is generally measured by how
well a company is able to reduce its investment in inventory, achieve maximum throughput and
meeting its customer service goals while containing its operational costs. On paper, however, the
concept of inventory management appears to be relatively simple, it can be defined as a process
that determines what inventory items needs to be stocked, how much of the stock needs to be
held on hand and when should it be reordered and at what levels. On the contrary, it is very
complex in practice and its implementation within companies. The factors that cause this
complexity fall into two broad classifications. Firstly, there are conflict objectives across several
distinct segments within a single company and the second factor lies in the uncertainty in the
nature of its supply and demand. In light of this subject and baring these concepts in mind, the
aim of this paper is to critically analyze the factors involved in inventory control decision-
making process and its implementation within companies.

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2. Inventory Control
Every company, whether in service sector or manufacturing, involves decision making of various
kinds. At this point in time, we will discuss decision making related to inventory control and the
factors involved in it. Inventory control is also known as Stock control and the purpose of this is
to monitor the stock at any given point in time. Not only this, but it also deals with the
maintenance of the stock and keeping track of any excess or deficit. Inventory Control can be
performed employing one of the many methods that are used by companies. All methods are
efficient in their own right; a company must choose the one that suits it the most. It is not
necessary for a company to go for just one method at a time, but instead it can be a mixture of
two or more methods. Some of the methods that are popular among companies are as follows:
2.1. Minimum Stock Level
When a company chooses this inventory control method it basically fixes a minimum quantity
reaching which, the company has to reorder and restock. As the minimum stock level signifies
the minimum quantity at which the company has to reorder, this method is also known as Re-
Order Level.
2.2. Stock Review
This involves the review of stock regularly. The company keeps a check of the stock at regular
intervals and at every review an order is placed for more stock to a pre-set level. This kind of
method doesn’t take into account the possibility of a sudden quick sale which is unforeseen and
assumes the sales and the use up of stock to be in a monotonous pattern and hence the intervals
are kept regular as nothing unpredicted is expected.
2.3. Just in Time
When a company decides to cut its costs by keeping the stock at a minimum, it arranges for the
stock to be delivered as soon as and whenever the stock reaches its minimum point. This method
involves running out of stock and a lot of dependency on the supplier as when the stock is at its
minimum rate the company would need the stock immediately and so the supplier has to be such
that he is always ready to deliver the stock whenever needed .There is a lot of risk involved.
However, it is important to note that the above mentioned methods can be mixed with other
types of processes to further improve the quality of stock control system’s performance. These
are briefly discussed below:

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2.4. Economic Order Quantity (EOQ)
This is basically a formula that works for minimizing the total cost of inventory management
overall, hence the title ‘economic order quantity’. When a company wants to use the EOQ
method to minimize the overall cost of inventory management, it uses the EOQ model which is:
Total inventory costs = Ordering costs + Holding costs The first derivative of the function is
taken to find out the equation for minimum cost: EOQ = SQRT (2 × Quantity × Cost per Order /
Carrying Cost per Order)
2.5. Example
XYZ Ltd. Sell footballs. Per order cost is $400 and carrying cost per unit is $10 annually. 20,000
units per year is the demand that the company has to cater to. Calculate the order size, total
orders required during a year, total carrying cost and total ordering cost for the year.
2.6. Solution
EOQ = SQRT (2 × 20,000 × 400/10) = 1,265 units as the demand is 20000 unites per annum, the
company will place exactly 16 orders i.e. 20,000/1,265. Thus the total ordering cost is $64,000
($400 multiplied by 16). Average inventory being held by the company is 632.5 ((0+1,265)/2)
meaning the total cost of carrying is $6,325 (i.e. 632.5 × $10)
2.7. Re-order Lead Time
This allows the company to keep some time margin between placing the order and receiving it.
2.8. Batch Control
This requires managing the production in batches form. One must make sure that the components
are right in number and will cover the needs until the initiation of the next batch (Hua et al.,
2011, pp. 179-182). When the company can predict its needs, it is possible for it to order a fixed
quantity of stock every time or even the order can be placed at fixed intervals which can be every
month or every week or whatever suits the company.
2.9. First in First out (FIFO)
It is a method that makes sure the perishable items are used most efficiently so that there are no
losses that incur. The stock is managed as per date received and identified date wise too and is
taken through every stage of production depending on the first in first out concept.

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2.10. Example
Use the following information to calculate the value of inventory on hand on Mar 31 and cost of
goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory
system.
Mar 1 Beginning Inventory 68 units @ $15.00 per unit
5 Purchase 140 units @ $15.50 per unit
9 Sale 94 units @ $19.00 per unit
11 Purchase 40 units @ $16.00 per unit
16 Purchase 78 units @ $16.50 per unit
20 Sale 116 units @ $19.50 per unit
29 Sale 62 units @ $21.00 per unit
Solution
FIFO Periodic
Units Available for Sale = 68 + 140 + 40 + 78 = 326
Units Sold = 94 + 116 + 62 = 272
Units in Ending Inventory = 326 – 272 = 54
Cost of Goods Sold Units Unit Cost Total
Sales From Mar 1 Inventory 68 $15.00 $1,020
Sales From Mar 5 Purchase 140 $15.50 $2,170
Sales From Mar 11 Purchase 40 $16.00 $640
Sales From Mar 16 Purchase 24 $16.50 $396
272 $4,226
Ending Inventory Units Unit Cost Total
Inventory From Mar 16 Purchase 54 $16.50 $891

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FIFO Perpetual
Date Purchases Sales Balance
Units Unit
Cost
Total Units Unit
Cost
Total Units Unit
Cost
Total
Mar
1
68 $15.00 $1,020
5 140 $15.50 $2,170 68 $15.00 $1,020
140 $15.50 $2,170
9 68 $15.00 $1,020 114 $15.50 $1,767
26 $15.50 $403
11 40 $16.00 $640 114 $15.50 $1,767
40 $16.00 $640
16 78 $16.50 $1,287 114 $15.50 $1,767
40 $16.00 $640
78 $16.50 $1,287
20 114 $15.50 $1,767 38 $16.00 $608
2 $16.00 $32 78 $16.50 $1,287
29 38 $16.00 $608 54 $16.50 $891
24 $16.50 $396
2.11. Last in First out (LIFO)
This method assumes that inventory purchased last is sold first. Therefore, inventory
cost under LIFO method will be the cost of earliest purchases. Consider the following
example:
2.12. Example
Use LIFO on the following information to calculate the value of ending inventory and the cost of
goods sold of March.
Mar 1 Beginning Inventory 60 units @ $15.00
5 Purchase 140 units @ $15.50
14 Sale 190 units @ $19.00
27 Purchase 70 units @ $16.00
29 Sale 30 units @ $19.50

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Solution
LIFO Periodic
Units Available for Sale = 60 + 140 + 70 = 270
Units Sold = 190 + 30 = 220
Units in Ending Inventory = 270 − 220 = 50
Cost of Goods Sold Units Unit Cost Total
Sales From Mar 27 Inventory 70 $16.00 $1,120
Sales From Mar 5 Purchase 140 $15.50 $2,170
Sales From Mar 1 Purchase 10 $15.00 $150
220 $3440
Ending Inventory Units Unit Cost Total
Inventory From Mar 27 Purchase 50 $15.00 $750
LIFO Perpetual
Date Purchases Sales Balance
Units Unit
Cost
Total Units Unit
Cost
Total Units Unit
Cost
Total
Mar
1
60 $15.00 $900ss
5 140 $15.50 $2,170 60 $15.00 $900
140 $15.50 $2,170
14 140 $15.50 $2,170 10 $15.00 $150
50 $15.00 $750
27 70 $16.00 $1,190 10 $15.00 $150
70 $16.00 $1,120
29 30 $16.00 $480 10 $15.00 $150
40 $16.00 $640
31 10 $15.00 $150
40 $16.00 $640

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2.13. Highest In, First out – HIFO
Highest in, first out (HIFO) is an inventory distribution method in which the inventory with the
highest cost of purchase is the first to be used or taken out of stock. This will impact the
company's books such that for any given period of time, the inventory expense will be the
highest possible for cost of goods sold (COGS) and ending inventory will be the lowest possible.
Companies would likely choose to use the highest in, first out (HIFO) inventory method if they
wanted to decrease their taxable income for a period of time. Because the inventory that is
recorded as used up is always the most expensive inventory the company has (regardless of when
the inventory was purchased), the company will always be recording maximum cost of goods
sold.
Findings and Data Analysis
This section presents the data analysis and findings of the study. The data were collected from
internet and reference books of different authors. By analyzing various accounting tools we find
that the Last in First out (LIFO) method is now obsolete and are not using for inventory
controlling nowadays. The trouble with the LIFO scenario ias that it is rarely encountered in
practice. If a company were to use the process flow embodied by LIFO, a significant part of its
inventory would be very old and likely obsolete. Nonetheless, a company does not actually have
to experience the LIFO process flow in order to use the method to calculate its inventory
valuation. LIFO method allocates cost on the basis of earliest purchases first and only after
inventory from earlier purchases are issued completely is cost from subsequent purchases
allocated. Therefore value of inventory using LIFO will be based on outdated prices. This is the
reason the use of LIFO method is not allowed for under IAS 2. Another newly introduced
method of inventory control is Highest In, First out – HIFO which is chosen by many company
to decrease their taxable income so that they can maximize their profit.
Recommendation
This article represents various accounting tools that are commonly used in various companies
and organizations. You have to aware about selecting the proper method for your firm because a
wrong method can decrease the profitability of your firm.
Finally, inventories are a vital part of business. Not only are they necessary for operations, but
also they contribute to customer satisfaction. To get a sense of the significance of inventories you
should know about using the inventory tools.

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Bibliography
1) Alfaro, J. A., & Rábade, L. A. (2009). Traceability as a strategic tool to improve inventory
management: a case study in the food industry. International Journal of Production Economics,
118(1), 104-110. Retrieved from: http://www.sciencedirect.com/science/article/pii/S0925527308
002533.
2) Agus, A & Noor, Z.M. (2006). Supply chain management and performance. An Empirical
Study. A working paper university of Malaysia.
3) Lewis, C. (2012). "Chapter 1: Demand forecasting and inventory control". Demand
Forecasting and Inventory Control. Routledge. p. 3–20. ISBN 9781136346835
4) https://accountingexplained.com/financial/inventories/fifo-method
5) https://accountingexplained.com/financial/inventories/lifo-method

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