A Research Report on “To study the impact of cost of inventory(raw material cost,holding cost,ordering cost) with reference to E.O.QModel on profitability and sales of roulunds braking (i)pvt ltd. For last 4 years(2009-2012)” Presented by: Rahul Chawla
CONTENTIntroductionTheoretical frameworkResearch objectivesResearch methodologyHypothesis development and testingSample and sampling designAnalytical toolsStatistical toolsLimitation of the studyFindings of the study
Company ProfileRoulunds braking (india)pvt ltd. Is a companyregistered under the companies act, 1956 having itswork at livaspur p.o bahalgarh disst. Sonipat.Roulunds Braking (India) is leading manufacture ofbrakes lining and brakes pads in India.
MAJOR CUSTOMER GM DELPHI LAND ROVER TATA AFFINA ACDELCO BAER-BRAKE SYSTEM SUZUKI SAAB FORD
INTRODUCTION OF INVENTORYINVENTORY SOFTWARE:There is very powerful software in Roulunds braking (i)pvt ltd for inventories ofthe various items. This software holds all the transactions of the stocks. So thissoftware helps much in maintenance of stocks. It makes very easy to accountpersons to maintain the transactions of inventories.There are six different menus in this software these are as follows:Data entryQueriesReportsProcessingCalculatorExit .
Concept of inventoriesInventory refers to the holding of raw materials. Work-in-progressand finished good held by a firm at any time. Inventory turns overat frequent intervals and thus can be expected to convert in cashrather quickly.Types of inventory:1. Inventory of raw materials.2. Inventory of work-in-progress.3. Inventory of finished goods.4. Inventory of consumables.5. Inventory of spares.
THEORETICAL FRAMEWORKCONSTRUCT OF THE STUDY:“Study the Impact of cost of inventory (raw material cost, holding cost and orderingcost) on profitability and sales, using EOQ and ABC analysis.”INDEPENDENT VARIABLE:COST OF INVENTORY• HOLDING COST• ORDERING COST• RAW MATERIAL COSTDEPENDENT VARIABLE:• SALES• PROFIT(PAT)
RESEARCH OBJECTIVES•To see the impact of holding cost of inventory on net profits.•To see the impact of ordering cost of inventory on net profits.•To see the impact of raw material cost of inventory on net profits.•To see the impact of ordering and holding cost of inventory on sales.•To see the impact of raw material cost of inventory on sales.•To observe the effectiveness of company’s inventory management system.•To study the company’s EOQ2 model in order to know the buying and carrying costof company.
Research methodologyPURPOSE OF THE STUDY DescriptiveTYPE OF INVESTIGATION CausalSTUDY SETTING Non contrivedTIME HORIZON Cross-SectionalTime Period 2009-12
Hypothesis Development And TestingNULL HYPOTHESIS:There is no significant impact of cost of inventory on sales.ALTERNATE HYPOTHESIS:There is significant impact of cost of inventory on sales.NULL HYPOTHESIS:There is no significant impact of cost of inventory on net profits.ALTERNATE HYPOTHESIS:There is significant impact of cost of inventory on net profits.
T-TESTT –test is small sample test. It was developed by Williamgusset in 1908. For applying t-test, the value of t-test, thevalue of t-statistics computed. For this, the following formulais used:T=deviation from population parameter standard error ofsample statistics
Cost of inventory and net profit for the year One-Sample Test Test Value = 0.05 95% Confidence Interval of the Difference t df Sig. (2-tailed) Mean Difference Lower Upper inventorycost 8.805 3 .003 5235.68750 3343.4220 7127.9530 Profits 4.478 3 .021 298.94250 86.4837 511.4013Interpretation:As calculated value of t>significant value which means that null hypothesis isrejected and alternate is accepted i.e. there is significant impact of cost ofinventory on net profits.
Analytical toolsUSE OF CONTROL RATIOSInventory turnover ratio helps management to avoid capital beinglocked up unnecessarily. This ratio reveals the efficiency of stockkeeping.Inventory turnover ratio =Cost of materials consumed / Cost ofaverage stock held during the periodWhere,Cost of average stock = [Cost of opening stock + Cost of closingstock] / 2, Inventory turnover ratio = Days during the period/Inventory turnover ratio.
Sales and cost of inventory One-Sample Test Test Value = 0.05 95% Confidence Interval of the Difference T df Sig. (2-tailed) Mean Difference Lower Upper inventorycost 8.805 3 .003 5235.68750 3343.4220 7127.9530 Sales 3.741 3 .033 19940.70500 2976.1875 36905.2225Interpretation:As calculated value of t>significant value which means that nullhypothesis is rejected and alternate is accepted i.e. there is significantimpact of cost of inventory on sales.
INTERPRETATION:The Stock turnover ratio shows how long goods are kept in storebefore being sold. In the year 2009-2010, 2010-2011, 2011-2012the ratio is good which indicates efficient sales performance.However in the year 2008-2009 it is very low i.e. 4.52 shows thatstock does not sell quickly and remains in the godown for a longtime.
NET PROFIT RATIO: PAT / SALES *100 NET PROFIT RATIO 1.75 1.7 1.65 Axis Title 1.6 1.55 1.5 1.45 2008-09 2009-10 2010-11 2011-12 NET PROFIT RATIO 1.71 1.56 1.72 1.64
INTERPRETATION:Net profit ratio is slightly fluctuating it was 1.71% in 2008-2009, 1.56% in 2009-2010, 1.72% in 2010-2011 and 1.64% in2011-12. This ratio express the cost price effectiveness of theoperation. A high net profit margin would ensure adequate returnto the owners as well as enable to with stand adverse economicconditions when selling price is decline, cost of production isrising and demand for product is falling.
GROSS PROFIT RATIO: GROSS PROFIT / NET SALES *100 GROSS PROFIT RATIO 7 6 5 Axis Title 4 3 2 1 0 2008-09 2009-10 2010-11 2011-12 GROSS PROFIT RATIO 6.22 6.5 2.77 3.17
INTERPRETATION:This ratio measures the relationship between gross profit in relation to netsales. This ratio tends to increase year by year with increase in the grossprofit. It was 6.50 in 2009-2010 and decrease to 3.17 up to 2011-2012. Thisyear to year change may be the result of decrease in cost of goods sold withoutincrease in sales revenue or change in the method of valuation of closingstock. .
STATISTICAL TOOLSMEANING Broadly speaking, the term statistics has been generally used in twosenses:-Plural SenseSingular SensePlural sense refers to the numerical data. Singular Sense refers to aScience in which we deals with the techniques ofcollecting, classifying, presenting, analyzing and interpreting thedata, the concept in its singular sense, refers to Statistical Method.
CORRELATIONKarl Pearsons coefficient of correlation methodKarl Pearsons coefficient of correlation method is the main important methodto calculate the correlation between two variables.CORRELATION (Net profit and cost of inventory) Correlations inventorycost Profits inventorycost Pearson Correlation 1 .927* Sig. (1-tailed) .037 N 4 4 Profits Pearson Correlation .927* 1 Sig. (1-tailed) .037 N 4 4Significant at the o.o5 level(1-tailed) correlation is:
INTERPRETATION:The correlation between profit and cost of inventory is foundto be significant. As it can be seen that its value is .927which shows that they are highly positively related to eachother.
CORRELATION (sales and cost of inventory) Correlations inventorycost Sales inventorycost Pearson Correlation 1 .853 Sig. (1-tailed) .074 N 4 4 sales Pearson Correlation .853 1 Sig. (1-tailed) .074 N 4 4INTERPRETATION:The correlation between sales and cost of inventory is found to be significant. As it canbe seen that its value is .853 which shows that they are highly positively related to eachother.
REGRESSIONCOST OF INVENTORY AND PROFITS: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .934a .873 .809 58.32965 a. Predictors: (Constant), Inventory cost.INTERPRETATION:After applying regression value of r square is observed as .873, which means that there ishigh dependency between independent and dependent variables net profit and cost ofinventory i.e. 87.3% which is a significant value.
COST OF INVENTORY AND SALES Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .853a .727 .590 761.05253INTERPRETATION:After applying regression value of r square is observed as .727, which meansthat there is high dependency between independent and dependent variablessales and cost of inventory i.e. 72.7% which is a significant value.
LIMITATIONS OF THE STUDYIn spite of best efforts of the investigator the study was subjected to following limitations:-Less Time Period:The time period given to the researcher for the completion of the project was short, in such a shortspan of time it is difficult to complete any project in detail.Less Response:Some officers were too busy to give a sincere response to investigators & hence their response maynot relate to real picture.Unavailability of primary data:Manager some time denied disclosing some important financial matters, which can be helpful inprocessing of this study.Limited Area of Study:Researcher lack of experience in the field of research creates so many problems during the study.
FINDINGSWith increase in cost of inventory, production will also increase, with this saleand profits will also increase because of high growth of the firm and demand for itsproducts.After applying correlation, researcher found that there is positive relationbetween dependent and independent variable that is cost of inventory and net profit& sales which means that on increasing the cost of inventory, the sales and profitswill increase simultaneously.After applying regression, researcher found that there is high dependencybetween dependent and independent variable means with increase in cost ofinventory, there will be increase in sales and profit also.After applying t-test researcher found that there is significant impact ofdependent variable on independent variable that is with increase in cost ofinventory, the sales and profits will increase.
RECOMMENDATIONSCompany should reduce its carrying cost of inventory.Company should reduce its ordering cost of inventory.Company should order in optimum quantity with the helpof EOQ analysis so that holding and ordering cost shouldnot go high.Company should increase its sales by increasing thevarious promotional activities..