Inventory control is the processes employed to maximize a company's use of inventory & Depreciation is the systematic reduction in the recorded cost of a fixed asset.

1. INVENTORY CONTROL
&
DEPRECIATION
o Subhashni Jaiswal
o Dhani Venkata Phanindra Reddy
o Hriday Pratim Bora
o Syed Junaid Ali
o Ayushi Gupta
o Chiranjeevi R.
GROUP-
10

2. INVENTORY
CONTROL

3. INTRODUCTION
INVENTORY
The term inventory means the value or amount of materials
or resources on hand. It includes raw material, work in
progress, finished goods & stores & spares.
INVENTORY CONTROL
It is the process by which inventory is measured & regulated
according to predetermined norms such as economic lot
size for order or production, safety stock, minimum level,
maximum level, order level etc.

4. TYPES OF INVENTORY REASONS FOR HOLDING THE
INVENTORY
Raw Materials To reap the price available on
seasonal raw materials.
Work in progress To balance the production
flow.
Ready made components When the components are
brought rather than made.
Scraps They are disposal of ink bulk.
Finished Goods Lying in stock rooms &
waiting dispatches.

5. INVENTORY CALCULATION
It is used to calculate how much inventory a
company has on hand
INVENTORY=BEGINNING INVENTORY +NEW
INVENTORY PURCHASES – COST OF
INVENTORY SOLD

6. SYSTEM OF ACCOUNTING FOR
INVENTORY SYSTEMS
 PERIODIC INVENTORY SYSYTEM
1. Involves physical count of materials on hand at
periodical intervals to arrive at the ending inventory
2. This system is typically used by small businesses that
can't afford or don't need an electronic tracking
system (i.e. the bar code system)
 PERPETUAL INVENTORY SYSTEM
1. Updates inventory and cost of goods sold after every
purchase and sales transaction.
2. It shows both the cost of materials issued and ending
materials inventory directly.

7. OBJECTIVES OF INVENTORY
CONTROL
 To meet the unforeseen future demand due to variation
in forecast figures and actual figures.
 To meet the customer requirement timely, effectively ,
efficiently, smoothly and satisfactorily.
 To balance various costs of inventory such as order cost or
setup cost and inventory carrying cost.
 To smoothen the production process.
 To gain economy production or purchase in lots.

8. BENEFITS OF INVENTORY CONTROL
 Ensures an adequate supply of materials
 Minimizes inventory costs
 Facilitates purchasing economies
 Better utilization of available stocks
 Provides a check against the loss of materials
 Enables management in cost comparison
 Consistant & reliable basis for financial statements

9. INVENTORY CONTROL TECHNIQUES
 ABC analysis
 Economic order quantity (EOQ)
 Reorder-point
 Safety stock

10. ABC ANALYSIS (ALWAYS BETTER CONTROL)
 This technique divides inventory into three categories A,B &
C based on their annual consumption value.
 It is also known as Selective Inventory Control Method.
 This method is a means of categorizing inventory items
according to the potential amount to be controlled.
 ABC analysis has universal application for fields requiring
selective control.

11. PROCEDURE FOR ABC ANALYSIS
 Make the list of all items of inventory.
 Determine the annual volume of usage & money value of
each item.
 Multiply each item’s annual volume by its rupee value.
Compute each item’s percentage of the total inventory in
terms of annual usage in rupees.
 Select the top 10% of all items which have the highest
rupee percentages & classify them as “A” items.
 Select the next 20% of all items with the next highest
rupee percentages & designate them “B” items.
 The next 70% of all items with the lowest rupee
percentages are “C” items.

12. RE-ORDER LEVEL
It is the inventory level at which a company would place a new
order or start a new manufacturing run.
Example :
ABC Ltd. is a retailer of footwear. It sells 500 units of one of a
famous brand daily. Its supplier takes a week to deliver the
order.
The inventory manager should place an order before the
inventories drop below 3,500 units (500 units of daily usage
multiplied with 7 days of lead time) in order to avoid a stock-
out.
REORDER LEVEL = LEAD TIME IN DAYS × DAILY
AVERAGE USAGE

13. ECONOMIC ORDER QUANTITY (EOQ)
 Economic order quality deals when the cost of
procurement and handling of inventory are at optimum
level and total cost is minimum.
 In this technique, the order quantity is larger than a single
period’s ne requirement so that ordering costs & holding
costs balance out.
 EOQ or Fixed Order Quantity system is the technique of
ordering materials whenever stock reaches the reorder
point.

15. ASSUMPTIONS OF EOQ
 Demand for the product is constant
 Lead time is constant
 Price per unit is constant
 Inventory carrying cost is based on average inventory
 Ordering costs are constant per order
 All demands for the product will be satisfied (no back
orders)

16. EOQ=√2AB/C
A=Usage unit for inventory Planning Period (total inventory
requirements)
B=Ordering cost per buying order
C=Carrying Cost per unit
EXAMPLE
Annual requirement quantity (A)=10,000 units
Cost per order (B)= $2
Cost per unit = $8
Carrying cost percentage = 0.02
EOQ=√2*10,000*2/8*0.02
= 500 units

17. SAFETY STOCK
 Safety stock is the stock held by a company in excess of its
requirement for the lead time. Companies hold safety
stock to guard against stock-out.
Safety stock is calculated using the following formula:
 Lead time is the time which supplier takes in ordering the
items
Safety Stock = (Maximum Daily Usage − Average Daily
Usage) × Lead Time

18. FIRST-IN-FIRST-OUT (FIFO)
FIFO Method assumes that the inventory is consumed in
chronological order that is those received first are issued /
consumed first and value fixed accordingly.
WHERE FIFO CAN BE USED
 FIFO is just like a queue . Where first come will be first
served.
 Distributors use this method in moving first product
they acquired.

19. LAST IN FIRST OUT(LIFO)
LIFO stands for last-in, first-out, meaning that the most
recently produced items are recorded as sold first.
Since the 1970s, some U.S. companies shifted towards the
use of LIFO, which reduces their income taxes in times
of inflation , but with International Financial Reporting
Standards banning the use of LIFO

20. WHERE LIFO CAN BE USED
LIFO is like stack. Where the last product
received will be first send out.

21. SIMPLE AVERAGE METHOD
 Under this method, simple average rate at cost is obtained by
adding the rate of purchases represented by stock at the time of
issue & then dividing the same by the number of such rates.
 The rate needs to be revised at the time of any new purchase or
exhaustion of any existing stock. For the purpose of ascertaining
the average rate, the quantity by which each purchase is made
has to be ignored.
 To dampen the severity of the effect of rises & falls in the
purchase price, use of any kind of average rate is made. Thus, in
case of fluctuating rates of purchase, average cost is used.

22. QUESTION:
From the details prepare stores ledger under simple average
method.
2010 Dec 1 Opening Balance 400 kg @ $ 1.25
5 Received 200 kg @ $ 1.30
8 Issued 480 kg
10 Issued 40 kg
15 Received 320 kg @ $ 1.35
18 Issued 200 kg
20 Received 400 kg @ $ 1.40
25 Issued 160 kg
28 Issued 240 kg
Shortage of 40 kg on 16.12.2010 & another shortage of 40 kg on
26.12.2010 is found by the stock verifier.

23. Workings: Calculation of simple average price:
For Issue on 8th Dec = (1.25+1.30)/2 = $ 1.275
For Issue on 10th Dec = $ 1.30
For Shortage on 16th Dec = (1.30+1.35)/2 = $ 1.325
For Issue on 18th Dec = $ 1.325
For Issue on 25th Dec = (1.35+1.40)/2 = $ 1.375
For Shortage on 26th Dec = $ 1.40
For Issue on 28th Dec =$ 1.40

24. WEIGHTED AVERAGE METHOD
 The weighted average cost under this method is obtained
by dividing the total value (at cost) of materials in stock at
the time of issue by the total quantity of materials in stock.
 Only the rates are taken into consideration in case of
simple average, on the other hand, the rates &
corresponding quantities are considered in case of
weighted average because by multiplying the quantity by
the rate, the value at cost is obtained.
If q, q1, q2, & q3 are the quantities in stocks on a day with p,
p1, p2 & p3 as the corresponding purchases, the weighted
average rate will be worked out as below:
Weighted average rate = pq + p1q1+p2q2+p3q3
q + q1 + q2 + q3

25. DEPRECIATIO
N

26. DEPRECIATION
ACCOUNTING STANDARD
(AS-6)
DEFINITION
Depreciation is a measure of the wearing out,
consumption or other loss of value of a depreciable asset
arising from use, effluxion of time or obsolescence
through technology and market changes.

27. DEPRECIABLE ASSET
 Are assets expected to be used during more than one
accounting period.
 Have a limited useful life.
 Are held by an enterprise for use in the production or
supply of good and services, for rentals to others, or for
administrative purposes & NOT for sale in the ordinary
course of business.
 e.g. buildings , machines ,plants, trucks, vans land
improvements such as tunnels, underpasses, parking lots
etc.

28. DEPRECIATION NOT APPLICABLE TO
 Forests, Plantations and similar regenerative natural
resources Wasting Assets including- Mineral rights,
Expenditure on the Exploration for and Extraction of
Minerals, Oil, Natural Gas and similar non-regenerative
resources.
 Expenditure on Research & Development;
 Goodwill Livestock
 Land- unless it has limited life

29. FEATURES
 Depreciation is decline in the book value of fixed assets.
 Depreciation includes loss of value of assets due to
passage of time, usage etc.
 Depreciation is continuing process till the end of the
useful life of assets.
 Depreciation is an expired cost and hence must be
deducted before calculating taxable profits.
 Depreciation is a non cash expense. It doesnot involve
any cash flow.
 Depreciation is the process of writing off the capital
expenditure already incurred.

30. CAUSES OF DEPRECIATION
 Physical wear & tear
 Physical Deterioration
 Expiry of legal rights
 By obsolescence
 By depletion
 Permanent fall in price

31. CALCULATION OF DEPRECIATION
 Historical cost of the asset
 Estimated useful life of depreciable asset
 Estimated residual/scrap value of depreciable assets

32. HISTORICAL COST OF THE ASSET
 Historical cost of a depreciable asset represents its
money outlay or its equivalent in connection with its
acquisition, installation and commissioning as well as
for additions to or improvement thereof.
 The historical cost of a depreciable asset may undergo
subsequent changes arising as a result of increase or
decrease in long term liability on account of exchange
fluctuations, price adjustments, changes in duties or
similar factors.

33. ESTIMATED USEFUL LIFE OF DEPRECIABLE
ASSET
Determination of the useful life of a depreciable asset is a
matter of estimation and is normally based on various
factors including experience with similar types of assets.
Such estimation is more difficult for an asset using new
technology or used in the production of a new product or in
the provision of a new service but is nevertheless required
on some reasonable basis.

34. ESTIMATED RESIDUAL/SCRAP VALUE OF
DEPRECIABLE ASSETS
 Determination of residual value of an asset is normally a
difficult matter. If such value is considered as
insignificant, it is normally regarded as nil.
 On the contrary, if the residual value is likely to be
significant, it is estimated at the time of
acquisition/installation, or at the time of subsequent
revaluation of the asset.
 One of the bases for determining the residual value
would be the realisable value of similar assets which have
reached the end of their useful lives and have operated
under conditions similar to those in which the asset will
be used.

35. AMORTIZATION
 Spreading an INTANGIBLE ASSET cost over that asset’s
useful life.
 For example, a patent.
 The cost involved with creating the patent is spread out
over the life of the patent, with each portion being
recorded as an expense on the company’s income
statement.

36. DEPLETION
 It refers to the allocation of the cost of natural resources
over time. For example, an oil well
 A finite life before all of the oil is pumped out. Therefore
the oil well’s setup costs are spread-out over the
predicted life of the oil well.
 Depletion is the actual physical reduction of natural
resources by companies.
 For example, coal mines, oil fields and other natural
resources are depleted on company accounting
statements. This reduction in the quantity of resources is
meant to assist in accurately identifying the value of the
asset on the balance sheet.

37. METHODS OF DEPRECIATION
There are two methods of depreciation.
 STRAIGHT LINE METHOD (SLM) - Amount of
depreciation is fixed. Useful to assets whose service
remain uniform throughout the year. For eg: Furniture &
fixtures.
 WRITTEN DOWN VALUE METHOD (WDV) -Depreciation
is charged at fixed rate on the reducing balance every
year.

38. STRAIGHT LINE METHOD
Advantages :
 Simple, easy to understand and to apply
 It provides uniform charge every year
 It’s calculated on original cost over the life time
Disadvantages:
 Depreciation is not related to the usage factor
 It ignores the fact that in the later years of the life of the
asset, efficiency of the asset declines.
 Loss of interest on investment in the asset is not
accounted

39. WRITTEN DOWN VALUE METHOD
Advantages:
 it’s a simple method of providing depreciation as a fixed
rate is applied on book-value or written down value of
assets.
 This method is quite popular
 It provides uniform charge for charge for services of the
asset through out the life
 INCOMETAX accepts this method for tax purpose
Disadvantages:
 The method is slightly complicated
 If the asset has no residual value, it is very difficult to
calculate the rate.

40. EXAMPLE ON SLM AND WDV
1.Cost of fixed asset $100,000
2.Residual Value Nil
3.Useful Life 4 Years
4.Rate of depreciation 40% (for calculating
depreciation using reducing balance method)

41. Graphical representation