The inventory represents the existence of stored goods destined to carry out an operation, be it purchase, rental, sale, use or transformation. It must appear, accounting, within the asset as a current asset.
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What is inventory
A company's inventories are made up of its raw materials, its products in process, the supplies it uses in its operations, and its finished products. An inventory can be something as basic as a bottle of glass cleaner used as part of a building's maintenance program, or something more complex, such as a combination of raw materials and sub-assemblies that are part of a manufacturing process. (Muller, p.1)
Set of corporeal, tangible and existing goods, own and immediately available for consumption (raw material), transformation (products in processes) and sale (goods and finished products). (Perdomo, p.72)
An inventory is defined as the accumulation of materials (raw materials, products in process, finished products or items in maintenance) that will later be used to satisfy future demand. (Moya, p.19)
Stock is the set of products stored awaiting further use, more or less close, which allows regular supplies to those who consume them, without imposing on them the discontinuities that manufacturing entails or possible delays in deliveries by suppliers.. (Ferrín, p.47)
Inventories are defined as idle goods stored waiting to be used. (Eppan, p.364)
Types of Inventories
There are different classifications, some of them are listed below.
Classification of inventories according to their shape
- Raw Materials Inventory: It is made up of all the materials with which the products are made, but which have not yet received processing. Inventory of Products in Manufacturing Process: It is made up of all those goods acquired by manufacturing or industrial companies, which are in the manufacturing process. Its quantification is made by the amount of materials, labor and manufacturing expenses, applicable to the closing date. Inventory of Finished Products: They are all those goods acquired by manufacturing or industrial companies, which are transformed to be sold as manufactured products.
There is a type of complementary inventory, according to its form, that is not commonly cited in the literature:
- Factory Supplies Inventory: These are the materials with which the products are made, but which cannot be quantified in an exact way (Paint, sandpaper, nails, lubricants, etc.).
Additionally, in commercial companies there are:
- Inventory of Merchandise: It is made up of all those goods that belong to the company, whether commercial or commercial, which are bought and then sold without being modified. All merchandise available for Sale will be displayed in this Account. Those that have other characteristics and are subject to particular conditions must be shown in separate accounts, such as goods on the way (those that have been purchased and not yet received), goods given on consignment or pledged goods (those that are property of the company but that have been given to third parties as a guarantee of value that has already been received in cash or other goods).
Inventory classification according to their function
According to Castillo (p.5):
- Safety or reserve inventory is the one that is kept to compensate for the risks of unplanned production stoppages or unexpected increases in customer demand. Decoupling inventory is the one required between two adjacent processes or operations whose production rates cannot be synchronized; this allows each process to work as planned. Inventory in transit is made up of materials that advance in the value chain. These materials are items that have been ordered but have not yet been received. Cycle Inventory, results when the number of units purchased (or produced) in order to reduce costs per unit of purchase (or increase the efficiency of production) is greater than the immediate needs of the company. Forecast or seasonal inventory accumulates when a company produces more than immediate requirements during periods of low demand to meet those of high demand. Often this builds up when demand is seasonal.
Inventory classification from a logistics point of view
For Ballou (p.330, 331) they can be classified as follows:
- In pipelines: these are the inventories in transit between the levels of the supply channel. Inventories of work in process, in manufacturing operations, can be considered as inventory in pipelines. Stock for speculation: Commodities such as copper, gold and silver are purchased both to speculate on the price and to satisfy the requirements of the operation and when inventories are established in advance of seasonal or seasonal sales. Stocks of a regular or cyclical nature: these are the inventories required to meet average demand during the time between successive replenishments. Safety stocks- The inventory that can be created to protect against variability in inventory demand and total replenishment time. Obsolete, Dead or Lost Stock: When it is held for a long time, it is spoiled, expired, lost or stolen.
Other kinds of inventories
In the following video presentation, by Professor Francisco de la Peña from the Universidad a Distancia de Madrid, three inventory classification models are presented: (1) Depending on the phase of the production process in which it is found; (2) depending on the source of the demand; and (3) based on its annual monetary use (ABC Model).
Why it is useful to keep inventories
Following Muller (pp. 3 and, 4), in a just-in-time manufacturing environment, inventory is considered waste. However, if the organization experiences cash flow difficulties or lacks robust control over (i) the transfer of electronic information between major departments and suppliers, (ii) delivery times and (iii) the quality of The materials you receive, taking inventory plays important roles. Among the most important reasons for building and maintaining an inventory are:
- Predictability: In order to plan capacity and establish a production schedule, it is necessary to control how much raw material, how many parts, and how many subassemblies are processed at any one time. Inventory must balance what is needed and what is processed. Fluctuations in demand: A reserve of inventory on hand provides protection; It is not always known how much will be needed at any given time, but demand from customers or production must still be met in time. If you can see how customers act in the supply chain, surprises in fluctuations in demand are kept to a minimum.Supply instability: Inventory protects against unreliable suppliers or when an item is in short supply and difficult to insure a constant supply.Price Protection: Properly purchasing inventory at the right times helps avoid the impact of cost inflation Quantity Discounts: Discounts are often offered when purchasing in large quantities rather than small Lower order costs: Yes you buy a larger quantity of an item, but less frequently, ordering costs are lower than buying in small quantities over and over again (however, the costs of holding an item for a longer period of time will be higher In order to control ordering costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic release and receipt dates of ordered stock units.Buying inventory wisely at the right times helps avoid the impact of cost inflation Quantity Discounts: Discounts are often offered when buying in large quantities rather than small Lower order costs: When purchasing a quantity of an item, but less often, ordering costs are lower than buying in small quantities over and over again (however, the costs of holding an item for a longer period of time will be higher). In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic release and receipt dates for ordered stock units.Buying inventory wisely at the right times helps avoid the impact of cost inflation Quantity Discounts: Discounts are often offered when buying in large quantities rather than small Lower order costs: When purchasing a quantity of an item, but less often, ordering costs are lower than buying in small quantities over and over again (however, the costs of holding an item for a longer period of time will be higher). In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic release and receipt dates for ordered stock units.Discounts are often offered when purchasing in large quantities rather than small Lower order costs: If you buy a larger quantity of an item, but less frequently, your order costs are lower than if you buy in small quantities an time and time again (however, the costs of holding an item for a longer period of time will be higher) In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic delivery dates. departure and receipt of the inventory units ordered.Discounts are often offered when purchasing in large quantities rather than small Lower order costs: If you buy a larger quantity of an item, but less frequently, your order costs are lower than if you buy in small quantities an time and time again (however, the costs of holding an item for a longer period of time will be higher) In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic delivery dates. departure and receipt of the inventory units ordered.costs of holding an item for a longer period of time will be higher) In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic delivery and receipt dates of the units of stock ordered.costs of holding an item for a longer period of time will be higher) In order to control order costs and ensure favorable prices, many organizations issue global purchase orders coupled with periodic delivery and receipt dates of the units of stock ordered.
Inventory accounting systems
There are two basic methods or systems of inventory control:
1. Periodic inventory system
With this method, the company does not keep a continuous record of its stock, instead, it performs the inventory count at the end of the period or year and the results are reflected in the financial reports.
González (p.88) mentions as the main characteristics of this system:
- It is costly insofar as it becomes necessary to paralyze the activity of the company to carry out the physical count of the merchandise, which implies a significant waste of resources. carry out adequate monitoring or a correct product policy (losses, breakages, rotations, profitability, etc.)
2. Permanent or perpetual inventory system
With this method the company keeps a continuous record of its stocks and the costs of the products or merchandise it has sold.
González (p.89) also points out the following advantages of this method over the newspaper:
- It allows better control of the items and the application of product techniques by having information in relative time of the inventory levels, rotations, price evolution, etc. Therefore, it improves decision-making. It facilitates the physical count in the event that this is necessary to carry out an inventory verification. It allows to reduce costs and offer better service to customers, etc.
Inventory valuation methods
Among the most important methods for valuing inventories, we have:
- FIFO or FIFO method. This method is based on the first thing in is the first thing out. Its assessment is more adapted to the reality of the market, since it uses a valuation based on more recent costs. LIFO or UEPS method. Contemplate that all the merchandise that enters last is the one that leaves first. Its advantage is based on the fact that the inventory maintains its stable value when there is a rise in prices. Arithmetic Average Cost Method. The result will be given by the arithmetic mean of the unit prices of the items. Harmonic or Weighted Average Method. This average will be calculated by weighting the prices with the units purchased, and then dividing the total amounts by the total of the units.Moving Average Cost or Balance Method. It calculates the value of the merchandise, according to the variations produced by the inputs and outputs (purchases or sales), obtaining successive averages. Basic Cost Method. By means of this method, fixed values are attributed to the minimum inventory, this method is quite similar to the LIFO with the difference that it applies only to the minimum inventory quantity. Retail Price Method. It allows the estimation of inventories as often as desired. The physical inventory will be carried out, based on the sale prices marked on the items. Market Cost or Lowest.The lower price of stocks is taken as the basis, maintaining the accounting principle of conservatism which does not anticipate profits and foresees possible losses.
To learn more about inventory accounting systems and inventory valuation methods: Inventory valuation systems
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Essential concepts of inventory management
Finally, and as a learning summary, we share a series of video lessons (from ConTabilizalo.com) in which essential concepts of the accounting management of inventories in the company are presented: concept, types of inventory, UEPS method, FIFO method, weighted average and periodic inventories. We trust that you will find it useful. (5 videos - 55 minutes)
Bibliography
- Ballou, Ronald H. Logistics: supply chain management, Pearson Education, 2004, p.330,331 Castillo Gómez, Karla Alicia. Proposal of inventory policy for products "A" of the company REFA Mexicana SA de CV, Thesis. Universidad de las Américas Puebla, 2005, p.5 Eppan GD and others. Operations research in administrative science, Pearson Education, 2000, p.364 Ferrín Gutiérrez, Arturo. Stock management in warehouse logistics, FC Editorial, 2007, p.47 González Gómez, José Ignacio, Morini Marrero Sandra and Do Nascimento, Eduardo. Control and management of the commercial and production area of the SME, Netbiblo, p.88Moya Navarro, Marcos Javier. Inventory control and queuing theory, EUNED, 1999, p.19 Muller, Max. Inventory Management Fundamentals, Editorial Norma, 2005, p.1 Perdomo Moreno, Abraham.Internal Control Fundamentals, Cengage Learning Editores, 2004, p.72
