Business Finance

1. Inventory Management
Arshad Islam; Lecturer in Accounting & Finance; Cell No: 0313-9911865 Page 1
Inventory Management:
One of the most important current assets is inventory. Inventory has a large portion in costof
productions. Under the heads of raw material, work in process and finished goods inventory
must be managed properly to overcome the over costing. There are two areas of inventory
management; Costof inventory and quantity of Inventory.
I)- Quantity Management:
Quantity of inventory is managed by using two approaches namely; Red Line approachand
Just-in-time approach.
a) - Red Line Approach: The minimum limits of each item of inventory is kept by the store
keeper. When that minimum limit is approached, the system gives red alert and the quantity
of the inventory is repurchased.
b) - Just-in-time approach: Under this approachonly those items are purchased which are
required under the productionline. When the need of an item arises it is, only then,
purchased.
II) - CostManagement:
Costof inventory is also important to have a good management command over the
inventory. There are three costs which are lowered by the management of the company.
ordering cost, Carrying Costand Unit Cost. Each costhas a technique to be at lower level.
a)- Order Cost: The order costis get lowered by using JIT system. If the order is prior to
purchase the godonrent will increase.
b) - Carrying Cost: Carrying costis get low by ordering only sufficient amount of
inventory. If extra amount is ordered the carrying costwill be increased.
C-Unit Cost:Unit costof inventory items is get lowered by market survey. When the lowest
possible supplier is found, the order is placed.

2. Inventory Management
Arshad Islam; Lecturer in Accounting & Finance; Cell No: 0313-9911865 Page 2
Quantity Management Cost Management
JIT Approach Red Line Approach OrderingCost Carrying Cost UnitCost
Raw Materials Assemblies by exact time by exact quantity by exact supplier
Big items Small Units
Laps
Production
Continues
Production
Seasonal
Business Regular Business