COMMERCE: FORM TWO: Topic 6 - STOCK ADMINISTRATION

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TOPIC 6: STOCK ADMINISTRATION

Stock Administration

Meaning of the Term Administration

Define the term stock administration

Are the overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.

The Meaning of Receiving; Issuing; Stocktaking; Care of Stock; Placement of Stock Items

Explain what is meant by: Receiving; Issuing; Stocktaking; Care of stock; Placement of stock items

FUNCTIONS OF STOCK ADMINISTRATION

Receiving the stock: the major function of receiving section of the organisation are unloading and packaging. Receiving involves accepting deliveries from carriers, unpacking the deliveries, checking the deliveries on the kind, quantity and quality etc

Placing the goods: the stores convenient for the organisation and the layout should be convenient to the class of goods handled and bins etc should be arranged in logical order.

Basic rules for placing goods in the warehouse

Stock must be kept in a way that will clearly show which ones are old stocks and new stocks
heavy goods should be kept near the flow
goods most frequently required should be easily accessible.
valuable or fragile goods should receive special protection.

Care of stock: the shopkeeper should cleaning a warehouse in and outside including the general cleaning of floors, walls, ceiling boards, rooms, container etc, Dusting of various items kept in rooms or stocks. Ensuring that the materials are well preserved, sorting out spoilt goods, for fragile goods and perishable materials needs special handling care.

Issuing of stock: issuing of stocks should be done by the storekeeper and has assistance who have free access to the storeroom. When a department needs materials from the store, stock should be issued against voucher or requisition order signed by the person who authorized to issue. This is purposely done to keep proper records and control the movement of stock i.e. delivery is done against vouchers to ensure that the outflow of stock is equal to inflow of stock.

Inventory Control: refers to the process of checking and keeping records of the quality and value of goods in stock. It includes all activities that are necessary to ensure that the right stock levels are maintained at all time to ensure that overstocking and shortages do not occur. The goal for a business is to invest the least amount in inventory while maintaining specific operating requirements. Ideally, the inventory control in place allows the business to supply needs in regards to production or to the customer at the precise moment needed, at the minimal price. Successful inventory control keeps waste and surplus at a minimum and efficiently handles storage, production and distribution of inventory.

Basic duties of stock control.

Assessing the items to be held in stock.
Deciding the extent of stock holding of items.
Regulating receipts and issues into store houses.

The Meaning and Determination of Turnover; Stock leve

Give the meaning and determination of Turnover; Stock level

Stock Levels Definition:

To overcome the problem of over-stocking or under-stocking it is very essential that pace of consumption should be studied carefully for a number of months and following stock - levels should be fixed by management for all individual items of material except low value items.

Maximum Level. It means maximum quantity which may be held in stock. This level is fixed on basis of various considerations main of which are : rate of consumption, finances and storage space available.
Minimum Level. It means the lowest level below which stocks should not be allowed to fall. It is essentially a buffer stock. This level is fixed by taking into account the rate of consumption and the time necessary to obtain delivery of fresh materials (called lead time).
Danger Level. This is a very critical level which is below minimum level If stock of any particular item reaches this level immediate action to make purchase in a quantity sufficient to tide over the delay in the regular supply, may be necessitated so that production may not stop. In view of the above levels it is necessary that a level of stock should be fixed at which further action for purchases is made for normal procurement. This level is called REORDER LEVEL.
Fixation of Stock Levels. The levels of stocks to be held may be determined by policy decision of the management keeping in view the level of production, finances available, lead time and the storage capacity.

Formula:

Economic order Quantity (EOQ) is generally worked out by using the following formula:- FOQ = 2 C O/I where

C = Annual consumption quantity
O = Cost of placing one order
I = Carrying cost of one unit of materials inventory

Example 1

Example:

One Unit of Material Omega Costs Rs.0.50, yearly consumption is 20,000. Cost of placing one order is Rs.20 and carrying cost of inventory is 20%.

EOQ = 2 x CO/I = √2 x 20,000 x 20/20% of 0.50 = √800,000/ 0.1 = √8.000.000 = 2,828 units approx per order.
Finances required for each order = 2828 x 0.50 = Rs.1414.
Number of orders to be placed in a year = Total annual consumption/EOQ = 20,000/2828 Approximately 7 orders.

What is 'Inventory Turnover'

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."

Generally it is calculated as:

Inventory Turnover = Sales / Inventory
However, it may also be calculated as:
Inventory Turnover = Cost of Goods Sold / Average Inventor.

FORMULAS

Maximum Level of Stock = (Reorder Level + Reorder Quantity) – (Minimum rate of consumption x Minimum reorder period) Maximum Level may be alternatively fixed as Safety Stock + Reorder Quantity or EOQ.
Minimum level of stock = Reorder level – (Average rate of consumption x Average reorder period)
Safety Stock = (Annual Demand/365) x (Maximum Reorder Period – Average Reorder Period)
Reorder level or Ordering level = Maximum rate of consumption × Maximum reorder period. Alternatively, it will be = safety stock + lead time consumption [lead time consumption will be = (Annual consumption -s- 360) × lead time]
Danger level = It is slightly below the minimum level. It is a level at which special efforts should be made to obtain supplies of materials, i.e. Minimum rate of consumption × Emergency delivery time
Average Stock level = (Maximum stock level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder Quantity. Obviously, the Reordering level is below the Maximum level, and Minimum level is below the Reordering level and the Danger level is below the Minimum level. Safety Stock is above minimum level.

Important Elements:

In above calculations, the following elements are important:

Consumption Rate: It is consumption or use of material per day (or per week) by production department. These rates will be maximum and minimum, the simple average of maximum and minimum rates is average consumption rate per day or per Week.
Reorder Period: It is period between materials ordered and materials received. The average reorder period is simple average of maximum and minimum reorder periods.
Reorder Quantity: At the time of purchase of material, one of the important problems to be faced is how much quantity of a particular materials to be purchased at a time. If purchases are made frequently in small quantities it will result in loss of trade discounts and economies in purchasing. On the other hand if purchases are made in large quantities it will lead to over stocking and cost of storage will be high. The ordering quantity should be economic and reasonable by all aspects. It should be Economic Order Quantity (EOQ). The calculation of EOQ has been discussed later on.

Example 2

Illustration 1: [Fixation of stock levels]:

Two components A and B are used as follows:

Normal usage 50 units per week each
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Reorder Quantity A 300 units; B 500 units
Reorder Period A 4 to 6 weeks, B 2 to 4 weeks

Calculate for each component:

Reorder level,
Minimum Level,
Maximum level,
Average Stock Level.

Solution:

Reorder Level = Maximum Rate of Consumption x Maximum Reorder Period. A = 75 x 6 = 450 units B = 75 x 4 = 300 units
Minimum Level = Reorder Level – (Average Rate of consumption x Average Reorder Period) A = 450 – (50 – 5) = 200 units B = 300 – (50 x 3) = 150 units
Maximum Stock Level = (Reorder Level + Reorder Quantity) – (Minimum Consumption Rate x Minimum Reorder Period) A = (450 + 300) – (25 x 4) = 650 units B = (300 + 500) – (25 x 2) = 750 units
Average Stock Level = (Maximum Stock Level + Minimum Stock Level)/2 A = (650 + 200)/2 = 425 units B = (750 + 150)/2 = 450 units

Average Stock Level can also be calculated by the formula.
Minimum Stock Level + ½ of Reorder Quantity
A = 200 + ½ x 300 = 350 units
B = 150 + ½ x 500 = 400 units

Example 3

Illustration 2:

If the minimum stock level and average stock level of raw material A are 4,000 and 9000 units respectively, find out its reorder quantity.

Solution:

Average stock level = Minimum stock level + ½ of Reorder Quantity
9000 = 4000 + of Reorder Quantity
½ Reorder Quantity = 9000 – 4000 = 5000
Reorder Quantity = 10,000 units

Exercise 1

QUIZ

Describe the effects of a warehouse being without stock.