Inventory Management refers to the process of ordering, storing, using, and selling a company’s inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items.

Inventory

Merchandise has two common characteristics: (1) they are owned by the company, and (2) they are in a form ready for sale to customers in the ordinary course of business.

Manufacturing has three categories: finished goods, work in process, and raw materials.

1. Finished goods inventory is manufactured items that are completed and ready for sale.

2. Work in process is that portion of manufactured inventory that has been placed into the production process but is not yet complete.

3. Raw materials are the basic goods that will be used in production but have not yet been placed into production.

Determining Inventory Quantities

1. Taking a Physical Inventory involves actually counting, weighing, or measuring each kind of inventory on hand.

2. Ownership of Goods must answer: Do all of the goods included in the count belong to the company? Does the company own any goods that were not included in the count

   Goods in Transit - The company may have purchased goods that have not yet been received, or it may have sold goods that have not yet been received, or it may have sold goods that have not yet been delivered. It should be included in the inventory of the company that has legal title to the goods.

   FOB (Free on Board) - ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. The ownership of the goods remains with the seller until the goods reach the buyer.

   Consigned Goods - It is common to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods.

Inventory Management Methods

1. Just-In-Time (JIT) Inventory Methods

   This method allows companies to save significant amounts of money and reduce waste by only the inventory they need to produce and sell products. This approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.

2. Material Requirements Planning (MRP)

   This method is sales-forecast dependent, meaning that manufacturers must have accurate sales records to enable accurate planning or inventory needs and to communicate those needs with materials suppliers on time.

Economic Order Quantity (EOQ) - This model is used in inventory management by calculating the number of units a company should its add to inventory with each batch order to reduce the total costs of its inventory while assuming constant consumer demand.

Days Sales of Inventory (DSI) - is the average number of days it takes for a firm to sell of inventory. High rate of this can indicate that a firm is not properly managing its inventory or that it has inventory that is difficult to sell.

Ordering and Purchasing Stocks: Cost Flow Assumptions

There are four ways to keep track of how much your inventory is worth:

1. Last in, first out (LIFO) method assumes that the latest goods purchased are the first to be sold.

2. First in, first out (FIFO) method assumes that the earliest goods purchased are the first to be sold.

3. Average cost method allocates the cost of goods available for sale based on the weighted average unit cost incurred.

4. Specific Identification method works well with unique or uniquely marked inventory items. What you paid for that particular item now becomes the cost of goods sold.