CMA Part 1 | Financial Planning,Performance and Analytics | Inventory | LetsLearn Global
Channel: LetsLearn Global
Date: 2022-07-13

Inventory :

Inventory consists of a stock of items, the size of which is called the inventory level. Inventory management involves making decisions concerning how much inventory to order and when. The basic criterion in making these decisions is to minimize total inventory costs, such as the cost to carry inventory, the cost to order inventory, and the item cost, subject to meeting demand for the items. Inventory control involves process, procedures, and infrastructure to maintain the inventory at the desired level. Inventory management is the subject of this module. You will visit some inventory control considerations in the operations management course.

The quantitative methods designed to help make effective inventory management decisions apply to independent demand items. A simple example of an independent demand item is the automobile. Demand for the automobile is forecasted based on past demand, market conditions, and so forth. On the other hand, demand for the two axles for the automobile is derived from the demand for the automobile. Thus the demand for axles is dependent demand.

There are two ways in which a company may account for their inventory. They can use a perpetual or periodic inventory system. Let’s look at the characteristics of these two systems.
Characteristics of the Perpetual and Periodic Inventory Systems

A perpetual inventory system automatically updates and records the inventory account every time a sale, or purchase of inventory, occurs. You can consider this “recording as you go.” The recognition of each sale or purchase happens immediately upon sale or purchase.

A periodic inventory system updates and records the inventory account at certain, scheduled times at the end of an operating cycle. The update and recognition could occur at the end of the month, quarter, and year. There is a gap between the sale or purchase of inventory and when the inventory activity is recognized.


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