inventory management

the literary meaning of the word inventory is stock of goods inventories are greatly influenced by the level of sales. since inventories are acquired before sales can take place, inaccurate sales forecast is critical to effective inventory management inventories generally represent the major element in the working capital of as organization and a very significant proportion of total assets. investment in inventory also involves certain risk and costs. therefore the financial manager should try to maintain optimum size of inventory, which maximizes the value of the firm and minimizes the total costs associated with the inventory management inventory related costs include or ding costs, carrying costs and stock out costs. or ding costs include all the costs of placing and receiving as order. carrying costs include the various costs of holding items in inventory, including the cost of funds invested in inventory. stock out cost are the costs incurred when demand exceeds available inventory such as lost profits. raw materials are the inventories purchased from supplies which ultimately will be transformed in to finished goods. work-in process refers to inventory in-various stages of completion. finished goods are inventories that have completed the production process and are ready for sale.
cost of inventories management
the first step in inventory management in to identify all the costs involved in purchasing and maintaining inventories. carrying costs are associated with having inventory and generally increase in proportion to the average amount of inventory held.
- carrying costs associated with inventory include cost of the funds tied up, strong costs, insurance, and depreciation.
- the annual total carrying cost is equal to the product of average inventory in units, annual percentage carrying cost,and price per unit.
ordering costs are the costs of placing an order. the cost of each order generally is fixed regardless of the average size of inventory.