WHAT IS INVENTORY ? AND INVENTORY MANAGEMENT?

Definitions of inventory

• a detailed list of all the items in stock
• stock: the merchandise that a shop has on hand; "they carried a vast inventory of hardware"; "they stopped selling in exact sizes in order to reduce inventory"
• (accounting) the value of a firm's current assets including raw materials and work in progress and finished goods
• armory: a collection of resources; "he dipped into his intellectual armory to find an answer"
• make or include in an itemized record or report; "Inventory all books before the end of the year"
• making an itemized list of merchandise or supplies on hand; "an inventory may be necessary to see if anything is missing"; "they held an inventory every month"

What is Inventory Management?


Effective inventory management is a crucial aspect of a successful business practice.

Inventory management is an integral part of a successful business. Inventories typically consist of goods, raw materials and finished products. Each of these elements translates into money for the business owner. The key to profitability is a carefully balanced inventory.

Balanced inventories are important because many businesses rely on its stock of items to make a profit. Stockpiles that never move from the shelves do little good for the company. A proper balance is of the utmost importance.
Mismanaged Inventories

Inventory mismanagement can be detrimental to a business, especially considering the weight these items carry. Inventories that run out of control can lead to significant losses that the company may not be able to recoup. Considerable investment is required to develop adequate stock. Poorly managed supplies lead to profit loss.
Booming Inventory Management

Properly managing supplies requires the ability to create a balance. Part of the balancing approach should include aspects of inventories that many business owners fail to recognize. Issues that may be underestimated include:

* Storage cost
* Insurance
* Taxes
* Ordering dilemmas
* Pricing

Storage costs, insurance and taxes are important aspects of stocking shelves and keeping necessary supplies at hand. These costs should be figured into the purchasing budget for the stock. The upfront purchasing costs are complicated with ordering dilemmas and pricing considerations.
Ordering and Pricing

Managing inventories can be complicated, but some considerations can make the process much easier. Management may be concerned primarily with having a balanced stock while keeping supplies readily available without overstocking the shelves. Other considerations are important as well.

* Balanced assortment of items
* Quick, efficient turnover
* Maintaining service quality
* Stocking up-to-date items
* High volume purchases
* Cost control


Successful inventory management may seem as if it requires psychic abilities, and while a peek into the future can help, managers can fare pretty well by addressing managerial performance. Creating realistic goals backed by evaluations can be beneficial. The data collected in evaluations can give managers insight into the best approach for purchasing stock in the future.
POS Software

One of the most valuable tools available to business managers is POS software. Point of Sale software offers an array of features that provide the guidance necessary for proper inventory and business management. A good program offers more than simply tracking inventories and sales.

Different programs offer different features, so it is important to consider the company’s specific needs. The right software system can save a business considerable time and money in a number of ways. The benefits of a Point of Sale software program range from inventory control to accounts receivable, depending on the program.
Technological Advances in Managing Inventories

The latest technologies for businesses offer a wide range of benefits that make managerial tasks much easier. The intricacies of balancing supplies can be as simple as reviewing a tracking summary. Collected data may include the latest purchasing trends and higher demands for specific services.

Technological advances in the realm of inventories provide the necessary tools to help managers make reliable decisions according to current trends in their industries. Software products have a significant impact on the efficiency of a company’s performance. Well-balanced inventories translate into profits and effective inventory management can be very lucrative.

Today's question to solve is about COST ACCOUNTING!

During my MBA classes i found Accounting the most difficult subject and i found 6 out of 10 saying the same so i want to help the students of I.Com, B.COM, M.Com , M.B.A or who ever want to improve their understanding of accounting because after going through the courses i realized that it is only the understanding that troubles, if u could understand the basic things about accounting it is the best as it gives the advantage of 100% scoring in exams ;)



Lets Learn todays question " what is Cost Accounting why it is been used by managers?..what are its basic Approaches"?



DEFINITION:

"Cost accounting is the process of tracking, recording and analyzing costs associated with the products or activities of an organization. "'

Generally Accepted Accounting Principles (GAAP) are used to govern Financial Statements required by authorities such as governments , auditors and shareholders, cost accounting is governed exclusively by logic. GAAP reporting records historical events and assigns a monetary value to each event that has taken place.



Cost accounting could also be defined as:

"a kind of management accounting that translates the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values. "

WHY MANAGERS USE COST ACC?

• Managers use cost accounting to support decision making to reduce a company's costs and improve its profitability.
• In order to support decision-making by management it is fundamentally critical that cost accounting is built on systems that will yield relevant, useful data for decision-making (as opposed to GAAP which uses concepts such as historical costs which have no value for decision-making).

APPROACHES:

There are at least three approaches:

• Standard Cost Accounting
• Activity-based Costing
• Marginal Costing

Standard Cost Accounting

The concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production.

• This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.

For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000/100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000/50)), a relatively minor difference.

Activity-based costing (ABC)

Activity-based costing (ABC) is as system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company. "Talking with customer regarding invoice questions" is an example of an activity performed inside most companies.

• Each product or service is produced and delivered via the activities performed in the company. The accountant can then assign the different activities to the different products using an appropriate allocation method.

For example, a job based manufacturer may find that a high percentage of their workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount that will be associated with the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for the resolutions of this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business.

Marginal Costing:

This method is used particularly for short-term decision-making. Its principal tenets are:

• Revenue (per product) - Variable Costs (per product) = Contribution (per product)
• Total Contribution - Total Fixed Costs = Total Profit or (Total Loss)

Thus it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource.

Other COSTING Methods:

More varieties of costing methods have been proposed in order to tailor for different aspects of the business. Some of the uprising ones include inventory costing method, process costing, average costing method, target costing method.

to be contd...