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FINANCIAL MANAGEMENT
CHECK POINT 54: INVENTORY MANAGEMENT

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1. typical inventory problems
2. classification of inventories
3. importance of inventory management
4. small business example
effect of an inventory value error on the income  statement
5. inventory counting procedures
6. accounting principles for inventory control
7. inventory costing methods
8. iRS requirements for inventory costing
9. small business example
comparison of inventory costing methods
10. popularity of inventory costing methods
11. the lIFO method
12. the fIFO method
13. the average cost method
14. the specific identification method
15. inventory control systems
16. periodic inventory system
17. perpetual inventory system
18. small business example
perpetual inventory record card
19. accounting of inventory loss
20. inventory valuation methods
21. ending inventory valuation
22. the retail method
23. small business example
the retail method of inventory valuation
24. the gross profit method
25. small business example
the gross profit method of inventory valuation
26. JIT Inventory Control.
27. for serious business owners only
28. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?

 

FINANCIAL MANAGEMENT
CHECK POINT 54: INVENTORY MANAGEMENT

Please Select Any Topic In Check Point 54 Below And Click.

1. typical inventory problems
2. classification of inventories
3. importance of inventory management
4. small business example
effect of an inventory value error on the income  statement
5. inventory counting procedures
6. accounting principles for inventory control
7. inventory costing methods
8. iRS requirements for inventory costing
9. small business example
comparison of inventory costing methods
10. popularity of inventory costing methods
11. the lIFO method
12. the fIFO method
13. the average cost method
14. the specific identification method
15. inventory control systems
16. periodic inventory system
17. perpetual inventory system
18. small business example
perpetual inventory record card
19. accounting of inventory loss
20. inventory valuation methods
21. ending inventory valuation
22. the retail method
23. small business example
the retail method of inventory valuation
24. the gross profit method
25. small business example
the gross profit method of inventory valuation
26. JIT Inventory Control
27. for serious business owners only
28. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?

 

WELCOME TO CHECK POINT 54

TUTORIAL 1 General Management TUTORIAL 2 Human
Resources Management
TUTORIAL 3 Financial Management TUTORIAL 4 Operations Management TUTORIAL 5 Marketing
And Sales Management
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96
2 7 12 17 22 27 32 37 42 47 52 57 62 67 72 77 82 87 92 97
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4 9 14 19 24 29 34 39 44 49 54 59 64 69 74 79 84 89 94 99
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
 

HOW CAN YOU BENEFIT FROM CHECK POINT 54?

 
The main purpose of this check point is to provide you and your management team with detailed information about Inventory Management and how to apply this information to maximize your company's performance.
 
In this check point you will learn:
 
• About typical inventory problems.
• About classification of inventories.
• About effect of inventory value on the income statement.
• About inventory counting procedures.
• About four generally accepted inventory costing methods.
• About the LIFO and FIFO methods.
• About the average cost and the specific identification cost methods.
• About the inventory control systems.
• About three inventory valuation methods.
• About lean methods of inventory control... and much more.
 

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 54

 
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.
 
You and your team should adhere to basic lean management guidelines on a continuous basis:
 
Treat your customers as the most important part of your business.
Provide your customers with the best possible value of products and services.
Meet your customers' requirements with a positive energy on a timely basis.
Provide your customers with consistent and reliable after-sales service.
Treat your customers, employees, suppliers, and business associates with genuine respect.
Identify your company's operational weaknesses, non-value-added activities, and waste.
Implement the process of continuous improvements on organization-wide basis.
Eliminate or minimize your company's non-value-added activities and waste.
Streamline your company's operational processes and maximize overall flow efficiency.
Reduce your company's operational costs in all areas of business activities.
Maximize the quality at the source of all operational processes and activities.
Ensure regular evaluation of your employees' performance and required level of knowledge.
Implement fair compensation of your employees based on their overall performance.
Motivate your partners and employees to adhere to high ethical standards of behavior.
Maximize safety for your customers, employees, suppliers, and business associates.
Provide opportunities for a continuous professional growth of partners and employees.
Pay attention to "how" positive results are achieved and constantly try to improve them.
Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. TYPICAL INVENTORY PROBLEMS

INVENTORY MANAGEMENT SYSTEM

Business owners and financial and operations managers must be familiar with effective inventory management control procedures which represent a major responsibility in every business organization.

One of the main management tasks is the development, implementation and maintenance of an effective inventory management system within every company. Development of an Inventory Management System is particularly important since the company often commits a substantial part of its capital to inventory. Many companies frequently experience serious problems related to inventory management. Some typical inventory problems are outlined below.

TYPICAL INVENTORY PROBLEMS

1.

The value of inventories is increasing at a faster rate than the level of sales.

2.

There is a disparity between the actual value of inventories in the stores and in relevant accounting records.

3.

There is a substantial quantity of slow moving and obsolete inventories in the stores.

4.

There is a frequent shortage of fast moving items, which results in a loss of sales.

5.

Shortage of certain inventories creates an unnecessary burden on production planning efforts and causes an increase in machine set-up and idle times.

6.

Inventory turnover rate is below the norm acceptable in a particular industry.

 

ADDITIONAL INFORMATION ONLINE

Problems In Inventory Management Part 1 By Global Supply Chain Group.
Problems In Inventory Management Part 2 By Global Supply Chain Group.
Inventory Management Software By Global Supply Chain Group.
Basic Inventory Principles By Arun Kanda, ITT Delhi, Nptelhrd.
Inventory Management System By John Palermo.

2. CLASSIFICATION OF INVENTORIES

RANGE OF INVENTORIES

Different Types Of Inventories may be used by the company depending upon the nature of its activities. In an earlier discussion about financial statements, all Inventories have been classified into four categories illustrated below.

CLASSIFICATION OF INVENTORIES

     
Direct Materials Inventory   Work-In-Process Inventory   Finished Goods Inventory   Merchandise Inventory
This includes all raw materials, components, and spare parts purchased by a manufacturing or a service company.
 
This includes all raw materials and components used in a manufacturing process and converted into semi-finished parts and sub-assemblies.
 
This includes all work-in-process inventory which is converted into finished goods inventory at the end of the manufacturing process.
 
This includes all goods purchased for resale by a merchandising company - a wholesaler or a retailer.

3. IMPORTANCE OF INVENTORY MANAGEMENT

IMPORTANCE OF INVENTORY MANAGEMENT

Inventory is usually converted into cash during an accounting period not exceeding one year, and for this reason it is considered a current asset. Inventory consists of all goods that are owned by the company at any point in time and their value must be measured on a regular basis. 

The American Institute Of Certified Public Accountants (AICPA) states that: 

"A major objective of accounting for inventories is the proper determination of income through the process of matching appropriate costs against revenues" (8). 

Hence, Inventory Management plays an important role in determining the final results of the company's operating activities during a specific accounting period.

Inventory owned by the company at the start of an accounting period is termed "Beginning Inventory", while inventory that remains at the end of the accounting period is termed "Ending Inventory".

The determination of accurate inventory costs is essential in calculating several values and determining company results outlined below.

RESULTS INFLUENCED BY THE INVENTORY VALUES

1.

Cost of goods manufactured.

2.

Cost of goods available for sale.

3.

Cost of goods sold.

4.

Gross margin from sales.

5.

Net income.

IMPORTANCE OF CORRECT INVENTORY VALUATION

It is important to ensure that the Values Of Inventory at the start and at the end of the fiscal period are stated correctly. An understatement or an overstatement of inventory values leads to inaccurate results on financial statements.

A typical effect of an error on the computation of results specified in the income statement in ending inventory is illustrated below. In this example, an error in the Ending Inventory for one fiscal period ($20,000) is transferred as an error in the beginning inventory for the succeeding fiscal period. This, in turn, causes incorrect computation of the company's performance results.

4. SMALL BUSINESS EXAMPLE
EFFECT OF AN INVENTORY VALUE ERROR ON THE INCOME STATEMENT

EFFECT OF AN INVENTORY VALUE ERROR ON THE INCOME STATEMENT

5. INVENTORY COUNTING PROCEDURES

The cost assigned to inventory depends on two Basic Measurements illustrated below.
 

TWO BASIC MEASUREMENTS FOR INVENTORY COSTING AND CONTROL

 
Quantity   Unit Cost
 
 

INVENTORY COUNTING PROCEDURES

Quantity is determined by a systematic Physical Count Of Inventory, or simply Taking Inventory, at the end of the fiscal year. When taking inventory, all materials should be arranged in a suitable order to ensure that items are neither counted twice nor omitted altogether.

Furthermore, it is essential to establish correct Ownership Of Materials at the inventory-taking date or a pre-determined cut-off point. Only inventory that is the property of the company should be included in the count. 

All other materials that may have been sold, but not yet dispatched to customers, or materials received on consignment (trial purchase) from suppliers, i.e. not yet really purchased, must be excluded from the inventory count. These materials must be recorded separately for informational purposes only.

ADDITIONAL INFORMATION ONLINE

Cycle Counting With Jon Schreibfeder.
RF Cycle Count Demonstration By Barcodedotcom.
Cycle Count Accounting Procedures By Isaac Rodriguez, eHow.
Cycle Counting For Storeroom By Doug Wallace, Life Cycle Engineering.

6. ACCOUNTING PRINCIPLES FOR INVENTORY CONTROL

ACCOUNTING PRINCIPLES FOR INVENTORY CONTROL

The American Institute Of Certified Public Accountants (AICPA) states that:
 
"The primary basis of accounting for inventory is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location". (9)

Thus, inventory should be recorded at its cost, which includes not only the net purchase price but also all additional expenses in acquiring the material, such as freight or transportation costs, transit insurance, custom and excise duties or tariffs, and  handling charges.

7. INVENTORY COSTING METHODS

INVENTORY COSTING METHODS

Since the company's investment in inventory often constitutes a significant part of the total assets, it is essential to ensure accurate valuation of inventory. There are several Generally Accepted Inventory Costing Methods, whereby each method is based on a different assumption illustrated below.

GENERALLY ACCEPTED INVENTORY COSTING METHODS

     
The Specific
 Identification
 Method
  The Average 
Cost 
Method
  The First-In, 
First-Out 
(FIFO) Method
  The Last-In, 
First-Out 
(LIFO) Method
This method is based on the assumption that the cost of each inventory item can be identified.
 
This method is based on the assumption that the cost of ending inventory is the average cost of beginning inventory plus the net cost of all purchases during the period.
 
This method is based on the assumption that the first merchandise purchased is the first merchandise sold. As a result, the ending inventory consists of the most recently purchased merchandise.
 
This method is based on the assumption that the most recently purchased merchandise is the first merchandise sold. As a result, the ending inventory consists of the merchandise purchased during the earlier period.
 

ADDITIONAL INFORMATION ONLINE

Please watch these excellent videos professionally narrated and produced by Susan Crosson and SFCC:

Inventories 1 - Periodic FIFO By Susan Crosson.
Inventories 2 - Periodic LIFO By Susan Crosson.
Inventories 3 - FIFO & LIFO Recap By Susan Crosson.
Inventories 4 - Periodic Average By Susan Crosson.
Inventories 5 - Perpetual FIFO By Susan Crosson.
Inventories 6 - Perpetual LIFO By Susan Crosson.
Inventories 7 - Estimates Gross Margin Method By Susan Crosson.
Inventories 8 - Estimates Retail Method By Susan Crosson.

© 2008 - 2013 Susan Crosson and CFCC. All rights reserved.

8. IRS REQUIREMENTS FOR INVENTORY COSTING

IRS REQUIREMENTS FOR INVENTORY COSTING

Each of the above Inventory Costing Methods can be adopted by the company regardless of whether or not the actual flow of merchandise corresponds with the relevant assumption. But once a particular method is selected, it must be used consistently from one year to the next to meet the requirements of the Internal Revenue Service (IRS). Hence, the final selection of the most suitable method rests with the financial manager and, perhaps, with the company's CPA or accountant. 

Selection of a specific inventory costing method often entails comparison of results pertaining to the application of each method. Such a comparison is illustrated below.

Note:

Please consult with your accountant regarding the most suitable inventory costing method for your company.

ADDITIONAL INFORMATION ONLINE

You can obtain updated information about the IRS Requirements For Inventory Costing provided by Internal Revenue Service online.

9. SMALL BUSINESS EXAMPLE
COMPARISON OF INVENTORY COSTING METHODS

COMPARISON OF INVENTORY COSTING METHODS

10. POPULARITY OF INVENTORY COSTING METHODS

POPULARITY OF INVENTORY COSTING METHODS

It is apparent from the comparison of Inventory Costing Methods that there is a significant variation in the value of ending inventory, cost of goods sold, and subsequently in the gross margin from sales. Hence, such variation may affect the costing of finished goods as well as the tax liability of the company.

All four methods are regarded as acceptable accounting practice and used in determining taxable income. The American Institute Of Certified Public Accountants (AICPA) states, however, these methods are not equally popular among business owners as explained below.

The inventory costing and control process can be maintained manually or by using a specific accounting software program.

POPULAR ACCOUNTING SOFTWARE PROGRAMS
There are several excellent Accounting Software Programs available to small business owners at present. Some of the most popular accounting software packages are presented below:

• Sage One

• QuickBooks Intuit

• FreshBooks

• Harvest Software Systems

• NetSuite

Various accounting software programs may include additional functions, depending on each specific package. This is discussed in detail in Integrated Financial Management in Tutorial 3.

11. THE LIFO METHOD

The LIFO Method appears to be the most popular for several reasons outlined below.
 

THE LIFO METHOD

1.

This method may provide the most accurate measurement of net income based on current costs. For this reason, the LIFO Method may be best suited to produce the most realistic income statement.

2.

This method may help produce lower taxable income, thereby reducing the tax liability.

Note:

Please consult with your accountant regarding the most suitable inventory costing method for your company.

 

ADDITIONAL INFORMATION ONLINE

LIFO, FIFO & Average Cost - Part 1 By Craig Pence.
LIFO, FIFO & Average Cost - Part 2 By Craig Pence.
Perpetual LIFO Inventory Valuation Method By Judy Daulton.
Periodic LIFO Inventory Valuation Method By Brian Lazarus.

12. THE FIFO METHOD

The FIFO Method is also widely used, but less frequently than the LIFO Method.
 

 THE FIFO METHOD

1.

This method may provide a more realistic valuation of inventories. For this reason, the FIFO Method may be most suited to produce the most realistic balance sheet.

2.

Many accountants believe that, as a result of applying the FIFO Method, the company's taxable profit is overstated. This may lead to increased tax liability and, subsequently, lower net income.

Note:

Please consult with your accountant regarding the most suitable inventory costing method for your company.

 

ADDITIONAL INFORMATION ONLINE

FIFO Inventory Costing By Matt Fisher 64.
Inventory Methods FIFO, LIFO By David Krug, JCCCVideo.
Perpetual FIFO Inventory Valuation Method By Judy Daulton.
Periodic FIFO Inventory Valuation Method By Brian Lazarus.

13. THE AVERAGE COST METHOD

THE AVERAGE COST METHOD

The Average Cost Method is becoming less popular since it has an effect similar to the FIFO Method.

ADVANTAGES OF THE AVERAGE COST METHOD

1.

An additional disadvantage of the Average Cost Method is that it conceals changes in current replacement costs of inventory since these costs are averaged with older ones.

2.

As a result of costing averaging, the reported taxable income may not reflect true market conditions.

Note:

Please consult with your accountant regarding the most suitable inventory costing method for your company.

 

ADDITIONAL INFORMATION ONLINE

Inventory Assumptions By Stephan Ignatovski.
Moving Average Inventory Costing By Matt Fisher 64.
Inventory Costing Methods By Learning Commons TCC.
Periodic Average Cost Inventory Valuation Method By Brian Lazarus.

14. THE SPECIFIC IDENTIFICATION METHOD

THE SPECIFIC IDENTIFICATION METHOD

The Specific Identification Method is used least frequently despite its apparent reasonableness.

ADVANTAGES OF THE SPECIFIC IDENTIFICATION METHOD

1.

This method might be used in pricing expensive inventory items such as automobiles, jewelry, or heavy machinery.

2.

In other instances, this method proved to be impractical since it is very difficult to keep track of the purchase and sale of low and medium-cost inventory items.

3.

If the company buys and sells identical items at different costs, the use of the Specific Identification Method may lead to faulty pricing decisions and miscalculation of net income.

Note:

Please consult with your accountant regarding the most suitable inventory costing method for your company.

 

ADDITIONAL INFORMATION ONLINE

Basic Concepts Of Inventory Costing By Larry Walther.
Specific Identification Inventory Costing Method By Allen Mursau.
Specific Identification Inventory Costing Method By Judy Daulton.
Specific Identification Inventory Costing Method By Matt Fisher 64.

15. INVENTORY CONTROL SYSTEMS

INVENTORY CONTROL SYSTEMS

There are two Basic Inventory Control Systems that can be used by the company as illustrated below.

TWO BASIC INVENTORY CONTROL SYSTEMS

Periodic Inventory System

Perpetual Inventory System

This system is based on counting inventory on a periodic basis, possibly once every six or twelve months. Under this system, no detailed record of inventory status is kept during the year.

This system entails recording every transaction pertaining to movement of inventory on a continuous basis. Under this system, every purchase, entry, withdrawal, and sale of inventory is recorded in a Perpetual Inventory Record Card, illustrated below.

A PERPETUAL INVENTORY CONTROL SYSTEM


Inventory
Description
And Number

Required
Level
Of Inventory

 

Storage
Location

Inventory
Movement
In The Stores

• Inventory description.
• Inventory number.
• Inventory code.

• Reorder level.
• Minimum level.

• Storage location name.

• Date.
• Quantity received.
• Quantity sold.
• Balance.
• Unit cost.
• Total cost.

Both systems can be utilized by a company in a manual or computerized fashion, depending upon the company's size, nature of operations, and specific requirements.

 

ADDITIONAL INFORMATION ONLINE

Cycle Inventory By Narendar Sumukadas.
Other Inventory Types By Narendar Sumukadas.
Inventory Control Systems By Narendar Sumukadas.
Inventory Management System By John Palermo.

16. PERIODIC INVENTORY SYSTEM

 PERIODIC INVENTORY SYSTEM

A Periodic Inventory System is based on counting and costing inventory on a periodic basis, possibly once every six month, or once a year. Under this system, no detailed record of inventory movement has to be kept during the year, thus resulting in low cost record-keeping and shelf-monitoring procedures.

Periodic Inventory System, however, also has several disadvantages outlined below.

 DISADVANTAGES OF THE PERIODIC INVENTORY SYSTEM

1.

Lack of detailed records of what items of inventory are available at any point in time.

2.

Inability to respond efficiently to manufacturing inquiries concerning availability of raw materials and work-in-process inventories.

3.

Inability to prepare accurate income statements on a monthly basis.

However, the low cost of record-keeping and shelf-monitoring often seems to outweigh the disadvantages mentioned above.

 

ADDITIONAL INFORMATION ONLINE

Periodic Inventory Method By Brian Lazarus.
Periodic Inventory Accounting Basics By Allen Mursau.
Perpetual Vs. Periodic Inventory System By Note Pirate.
Introduction To Periodic And Perpetual Inventory By Kristin Ingram.

17. PERPETUAL INVENTORY SYSTEM

 PERPETUAL INVENTORY SYSTEM

A Perpetual Inventory System is based on the recording on a continuous basis of every transaction pertaining to the movement of inventory. Under this system every purchase entry, withdrawal, and sale of inventory is recorded in a Perpetual Inventory Record Card, whether manually or in a computerized manner.

In order to maintain detailed perpetual inventory records, an individual record card must be prepared for every item of inventory kept by the company. A typical Perpetual Inventory Record Card is illustrated below.

 

ADDITIONAL INFORMATION ONLINE

What Is Perpetual Inventory System By Disprax.
The Perpetual Inventory System By Larry Walther.
Sales Journal Entry For Perpetual System ByNote Pirate.
Perpetual Inventory Accounting Vs. Periodic Inventory System By Allen Mursau.

18. SMALL BUSINESS EXAMPLE
PERPETUAL INVENTORY RECORD CARD

PERPETUAL INVENTORY RECORD CARD

Item Description: Machine Link

Inventory No: 234567-400

Reorder Level:
100

Minimum Level:
50

Additional Details:

Date

Received

Sold

Balance

Units

Costs ($)

Units

Costs ($)

Units

Costs ($)

Unit

Total

Unit

Total

Unit

Total

09.01.09

           

50

5

250

09.04.09

100

5

500

     

150

5

750

09.20.09

 

 

 

90

5

450

60

5

300

10.01.09

100

6

600

 

 

 

60

5

 

             

100

6

900

11.15.09

100

6

600

40

5

200

20

5

 

             

100

6

700

                   
                   
                   
                   

However, the low cost of record-keeping and shelf-monitoring often seems to outweigh the disadvantages mentioned above.

19. ACCOUNTING OF INVENTORY LOSS

 ACCOUNTING OF INVENTORY LOSS

Although the Perpetual Inventory System provides accurate information about the quantity and cost of inventory on hand at any given point in time, it does not eliminate the need for physical inventory counting at the end of the fiscal period. 

The perpetual inventory records indicate what should be in the stores, but not necessarily what actually is in the stores. Hence, there may be a Discrepancy between actual and recorded values of inventories due to possible damage or theft of goods.

Any noted Inventory Loss should be recorded by debiting inventory loss (not cost of goods sold!) and by crediting the inventory account.

20. INVENTORY VALUATION METHODS

 THE LOWER-OF-COST-OR-MARKET RULE

The process of Inventory Valuation is usually based on the inventory's actual cost. 
Sometimes, however, the market value of inventory may decline below the original cost paid by the company. In this instance, the inventory should be valued at the lower cost or market value by applying the Lower-Of-Cost-Or-Market (LCM) Rule

There are three basic Inventory Valuation Methods based on this rule as illustrated below.

 THREE INVENTORY VALUATION METHODS

   
The Item-By-Item 
Method
  The Major Category 
Method
  The Total Inventory 
Method
This method entails comparison of original cost and market value for each item  in the inventory and subsequent valuation of inventory at lower values.   This method entails comparison of total costs and total market values for each major category of items in the inventory and subsequent valuation of inventory at lower values.   This method entails comparison of total costs and total market values for all items in the inventory and subsequent selection of lower total value.

21. ENDING INVENTORY VALUATION

 ENDING INVENTORY VALUATION

It is often necessary to complete the Ending Inventory Valuation on the monthly basis. This is required for accurate preparation of monthly financial statements and computation of net income. 

Since the physical counting of ending inventory is a time-consuming and expensive task, two Ending Inventory Value Estimating Methods may be used as illustrated below.

TWO METHODS OF ENDING INVENTORY VALUATION

 
The Retail Method   The Gross Profit Method

22. THE RETAIL METHOD

 THE RETAIL METHOD

The Retail Method is generally used in retail merchandising organizations. The use of this method is based on the availability of inventory values at the beginning of the period at cost and at retail, i.e. the original cost and marked-up selling price. Additional records, which are required, include the value of new purchases and net sales during the period.

The Retail Method entails calculation of a Ratio Of Cost-To-Retail Price and subsequent application of this ratio to the Estimated Ending Inventory Value. An illustration of a typical Retail Method of inventory valuation is presented below.

23. SMALL BUSINESS EXAMPLE
THE RETAIL METHOD OF INVENTORY VALUATION

THE RETAIL METHOD OF INVENTORY VALUATION

ABC Merchandising Company, Inc.
Period: September 30, 2012 – August 31, 2013

Description

Cost($)

Retail ($)

+

Beginning Inventory

20,000

33,000

+

Net Purchases For The Period (Including Freight-In Costs)

100,000

167,000

=

Merchandise Available For Sale

120,000

200,000

 

Cost-To-Retail Ratio:

$120,000 = 0.6 x 100% = 60%
$200,000

-------

-------

-

Net Sales During The Period At Retail Price

-------

150,000

=

Estimated Ending Inventory At Retail Price

-------

50,000

x

Cost-To-Retail Ratio = 60%

 

-------

-------

=

Estimated Ending Inventory At Cost = Estimated Ending Inventory At Retail x Cost-To-Retail Ratio =  $50,000 x 60%

30,000

-------

24. THE GROSS PROFIT METHOD

 THE GROSS PROFIT METHOD

The Gross Profit Method represents an additional method of estimating the ending inventory value. This method is based on the assumption that the company's gross profit margin remains relatively steady from one year to the next.
 

However, since Gross Profit Margin may change from year to year, the Gross Profit Method cannot be used for financial statement preparation. It may be used, on the other hand, for insurance claims when inventory is destroyed. This method is simple in application and does not require details of retail prices of inventory and net purchases.

An illustration of a typical Gross Profit Method of inventory valuation is presented below. In this example an estimated profit margin of 40% is assumed.

25. SMALL BUSINESS EXAMPLE
THE GROSS PROFIT METHOD OF INVENTORY VALUATION

THE GROSS PROFIT METHOD OF INVENTORY VALUATION

26. JIT INVENTORY CONTROL

JIT INVENTORY CONTROL

A sound Inventory Management Policy prescribes economical and cost-effective utilization of materials within a company in accordance with Just-In-Time (JIT) methodology.

The main purpose of JIT methodology is "to produce only what is needed, when it is needed, and in the amount needed!". JIT methodology was envisioned by Kiichiro Toyoda, the president of Toyota Corporation between 1941 and 1950 and developed by Taiichi Ohno in 1950's. JIT methodology is an integral part of the Toyota Production System (TPS), which represents the foundation of lean manufacturing.

The basic objective of JIT methodology is complete elimination of waste of materials, equipment, working time, and space. Effective implementation of JIT methods may result in a reduction of overall manufacturing expenses and in a more efficient utilization of inventory.

Additional details about the inventory management and control in the context of Just-In-Time (JIT) are discussed in Tutorial 4.

Lean Management is discussed in detail in Tutorial 1.

27. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

28. THE LATEST INFORMATION ONLINE

 

LESSON FOR TODAY:
You Don't Need To Be An Inventor To Have A Good Inventory Control System!

Go To The Next Open Check Point In This Promotion Program Online.