Asset Management: Inventory Management

Stock Control Levels

The reorder level is the point at which a new order is placed. The minimum stock level is the lowest level stock should fall to before urgent action is taken. The maximum stock level is the highest level that should be held. The average stock level is the typical amount held. Buffer stock and safety stock are extra stock held to cover unexpected demand or late deliveries. The economic order quantity (EOQ) is the order size that minimises the total of ordering and holding costs.

Here you are using the stock control policy to decide how much to order and when. Find the EOQ with √(2 × ordering cost × yearly demand ÷ holding cost per unit per year), then the reorder level as maximum usage × maximum lead time. Once you have the reorder level, the minimum and maximum levels are worked out from it. Below, we show you how it is done, step by step.

Importance of the Policy

A clear stock control policy prevents stock-outs that stop work and lose customers, avoids tying up cash in excess stock, reduces storage costs and losses from theft, damage and obsolescence, and gives storekeepers clear rules, so that decisions do not depend on guesswork.

Requisitions, Authorisations and Issuing Procedures

Stock is issued only against a stores requisition, which states the item, quantity, department and purpose, and is signed by an authorised officer. The storekeeper checks the authority, issues the goods, and the person collecting signs for receipt. Issues are made in the order of the stock valuation policy, such as oldest first, and no stock leaves without a document.

Completing and Updating the Bin Card

A bin card is kept at the storage location of each item and shows the quantity received, issued and in balance. It is updated immediately after every receipt or issue, from the GRN or requisition, so that the balance always matches the stock on the shelf.

Checking the Records

Records are checked by tracing each entry to its document, confirming signatures and authority, checking the arithmetic of balances, and comparing the bin card with the stores ledger kept in the accounts office. In the bin card above, the delivery took stock to 455, just above the maximum of 450, which should be reported, because the reorder was placed when stock was already below the reorder level.

Organising the Count

Management sets the time frame for the count, such as the last working day of the year, identifies counting bays by dividing the stores into areas, and prepares pre-numbered stock sheets listing items and locations. Teams count, record quantities on the stock sheets, sign them, and a supervisor checks a sample.

Methods of Counting and Recording

Under the perpetual inventory system, records are updated after every movement, so the balance is always known and counts are used to confirm it, often by continuous stocktaking of a few items at a time. Under the imprest system, a fixed stock level is kept for each item and topped up to that level after each period. After the count, computer records are updated with the counted figures, stock figures are recorded in the ledger, and differences are investigated.

Stock Valuation Methods

Under FIFO, the earliest stock is assumed to be issued first, so closing stock is valued at the latest prices. Under LIFO, the latest stock is issued first, so closing stock is valued at the oldest prices; it is not permitted under IAS 2 for financial statements. Under AVCO, a weighted average cost is recalculated after each purchase. In every case, inventory is shown at the lower of cost and net realisable value.

Here you are giving a money value to the stock issued and the stock left. First work out how many units are left. Under FIFO, the units left come from the latest purchases; under LIFO, they come from the oldest; under AVCO, divide the total cost by the total units to get one average price and use it for everything. Below, we show you how it is done, step by step.

Identifying and Isolating Obsolete Stock

Obsolete stock is stock that can no longer be used or sold at a normal price, because it is out of date, expired, damaged, or replaced by newer models. It is identified through physical verification of the state of stock and from records showing slow-moving items with no issues for a long period. Such stock is isolated in a separate area, clearly labelled, pending authorisation, so that it is not issued by mistake.

Authorisation and Methods of Disposal

A disposal report listing the items, quantities, cost and reason is submitted for authorisation, often after inspection by a board of survey. Approved stock is disposed of by auction, by donation to charities or schools, or by destruction, for example expired medicines or chemicals, which must be destroyed safely and in line with environmental and health regulations, with a certificate of destruction.

Writing Off and Reconciling

Identify the stock records affected, such as bin cards, stores ledger cards and the inventory account. Write off obsolete stock by reducing the quantity and value on the records and recording the loss as an expense, with the authority as evidence. Then reconcile the records, so the bin cards, stores ledger and inventory control account agree with the physical count. For example, if 20 bags of cement costing $11 each are hardened and written off, inventory is reduced by 20 × $11 = $220 and an expense of $220 is recorded.