Describe and apply the management of stock and fixed assets in a business unit
DESCRIBE AND APPLY THE MANAGEMENT OF STOCK AND
FIXED ASSETS IN A BUSINESS UNIT
US 13945
NQF LEVEL: 4
CREDITS: 2
NOTIONAL HOURS: 20
LEARNER GUIDE
Full Name
I.D Number
Residential Address
Cell Phone Number
E-mail
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Describe and apply the management of stock and fixed assets in a business unit
TABLE OF CONTENTS
HOW TO USE THIS GUIDE ................................................................................................ 3
ICONS .............................................................................................................................. 3
PURPOSE.......................................................................................................................... 4
LEARNING ASSUMPTIONS ............................................................................................... 4
HOW YOU WILL LEARN ................................................................................................... 4
HOW YOU WILL BE ASSESSED ......................................................................................... 4
FORMATIVE ASSESSMENT ............................................................................................... 4
SUMMATIVE ASSESSMENT ............................................................................................... 5
SECTION 1: FIXED ASSETS AND STOCK IN A BUSINESS UNIT ....................................................... 8
1.1 INTRODUCTION ......................................................................................................... 9
1.2 FIXED ASSETS IN A BUSINESS UNIT AND THEIR PURPOSES ...................................... 13
1.3 STOCK IN A BUSINESS UNIT ..................................................................................... 15
1.4 INSUFFICIENT STOCK PROBLEMS ............................................................................ 17
1.5 EXCESS INVENTORY PROBLEMS ............................................................................. 18
SECTION 2: STOCK MANAGEMENT & BUSINESS PROFITABILITY .................................................20
2.1 INTRODUCTION ...................................................................................................... 21
2.2 WAYS OF MANAGING STOCK ............................................................................... 24
2.3 IMPORTANT STOCK MANAGEMENT TERMS ........................................................... 26
2.4 RATE OF STOCK TURNOVER ................................................................................... 28
2.5 ECONOMIC ORDERING QUANTITY MODEL .......................................................... 30
SECTION 3: MANAGEMENT OF FIXED ASSETS IN A BUSINESS UNIT ...........................................33
3.1 INTRODUCTION ....................................................................................................... 34
3.2 ASSET REGISTER ....................................................................................................... 35
3.3 ASSET VALUATION ................................................................................................... 36
3.4 PURPOSE OF DEPRECIATION .................................................................................. 37
SECTION 4: THE BASIC PRINCIPLES OF STOCK AND FIXED ASSET MANAGEMENT ...................39
4.1 INTRODUCTION ....................................................................................................... 40
4.2 RISKS ASSOCIATED WITH FIXED ASSETS MANAGEMENT ....................................... 42
4.3 STOCK MANAGEMENT SYSTEM .............................................................................. 44
4.4 A PLAN TO MINIMISE FIXED ASSETS RISKS .............................................................. 46
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Describe and apply the management of stock and fixed assets in a business unit
HOW TO USE THIS GUIDE
This workbook belongs to you. It is designed to serve as a guide for the duration of your
training programme and as a resource for after the time.
It contains readings, activities,
and application aids that will assist you in developing the knowledge and skills stipulated
in the specific outcomes and assessment criteria.
Follow along in the guide as the
facilitator takes you through the material, and feel free to make notes and diagrams that
will help you to clarify or retain information. Jot down things that work well or ideas that
come from the group. Also, note any points you would like to explore further. Participate
actively in the skill practice activities, as they will give you an opportunity to gain insights
from other people’s experiences and to practice the skills. Do not forget to share your
own experiences so that others can learn from you too.
ICONS
For ease of reference, an icon will indicate different activities. The following icons indicate
different activities in the manual.
Outcomes
Assessment Criteria
Course Material
Notes (Blank)
Definition
Learning Activities
Take note
Reflection
References
Summaries
Example
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Describe and apply the management of stock and fixed assets in a business unit
PROGRAMME OVERVIEW
PURPOSE
At the end of this training session you will be able to:

Differentiate between fixed assets and stock in a business unit.

Explain the influence that stock management can have on the profitability of a
business.

Explain the management of fixed assets in a business unit.

Apply the basic principles of stock and fixed asset management to a business unit.
LEARNING ASSUMPTIONS
There is open access to this unit standard. Learners should be competent in;

Communication and Mathematical Literacy at NQF Level 3
HOW YOU WILL LEARN
The programme methodology includes facilitator presentations, readings, individual
activities, group discussions, and skill application exercises.
HOW YOU WILL BE ASSESSED
This programme has been aligned to registered unit standards.
You will be assessed
against the outcomes of the unit standards by completing a knowledge assignment that
covers the essential embedded knowledge stipulated in the unit standards. When you
are assessed as competent against the unit standards, you will receive a certificate of
competence and be awarded 2 credits towards a National Qualification.
FORMATIVE ASSESSMENT
In each Learner Guide, several activities are spaced within the content to assist you in
understanding the material through application. Activities in the learner manual are not
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Describe and apply the management of stock and fixed assets in a business unit
for assessments. Formative assessments are in a separate module written formative
assessment. Please make sure that you complete ALL activities in the Formative
Assessment Guide, Formative activities must be completed at the end of each section.
SUMMATIVE ASSESSMENT
You will be required to complete a Portfolio of Evidence for summative assessment
purposes. A portfolio is a collection of different types of evidence relating to the work
being assessed. It can include a variety of work samples.
The Portfolio Guide will assist you in identifying the portfolio and evidence requirements for
final assessment purposes. You will be required to complete Portfolio activities on your own
time, using real life projects in your workplace environment in preparing evidence towards
your portfolio.
Being Declared Competent Entails:
Competence is the ability to perform whole work roles, to the standards expected in
employment, in a real working environment.
There are three levels of competence:
 Foundational competence: an understanding of what you do and why.
 Practical competence: the ability to perform a set of tasks in an authentic context.
 Reflexive
competence:
the
ability
to
adapt
to
changed
circumstances
appropriately and responsibly, and to explain the reason behind the action.
To receive a certificate of competence and be awarded credits, you are required to
provide evidence of your competence by compiling a portfolio of evidence, which will be
assessed by a Services SETA accredited assessor.
You Have to Submit a Portfolio of Evidence
A portfolio of evidence is a structured collection of evidence that reflects your efforts,
progress and achievement in a specific learning area, and demonstrates your
competence.
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Describe and apply the management of stock and fixed assets in a business unit
The Assessment of Your Competence
Assessment of competence is a process of making judgments about an individual's
competence through matching evidence collected to the appropriate national
standards. The evidence in your portfolio should closely reflect the outcomes and
assessment criteria of the unit standards of the learning programme for which you are
being assessed.
To determine a candidate’s knowledge and ability to apply the skills before and during
the learning programme, formative assessments are done to determine the learner’s
progress towards full competence. This normally guides the learner towards a successful
summative (final) assessment to which both the assessor and the candidate only agree
when they both feel the candidate is ready.
Should it happen that a candidate is deemed not yet competent upon a summative
assessment, that candidate will be allowed to be re-assessed. The candidate can,
however, only be allowed two reassessments.
When learners have to undergo re-assessment, the following conditions will apply:
Specific feedback will be given so that candidates can concentrate on only those areas
in which they were assessed as not yet competent.
Re-assessment will take place in the same situation or context and under the same
conditions as the original assessment.
Only the specific outcomes that were not achieved will be re-assessed.
Candidates who are repeatedly unsuccessful will be given guidance on other possible
and more suitable learning avenues.
In order for your assessor to assess your competence, your portfolio should provide
evidence of both your knowledge and skills, and of how you applied your knowledge and
skills in a variety of contexts.
This Candidate’s Assessment Portfolio directs you in the activities that need to be
completed so that your competence can be assessed and so that you can be awarded
the credits attached to the programme.
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Describe and apply the management of stock and fixed assets in a business unit
NOTE YOUR POE GUIDE HAS MORE INFORMATION ON THE ASSESSMENT
PROCESS
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Describe and apply the management of stock and fixed assets in a business unit
SECTION 1: FIXED ASSETS AND STOCK IN A BUSINESS UNIT
Specific Outcome
On completion of this section you will be able to differentiate
between fixed assets and stock in a business unit.
Assessment Criteria
 The concepts of fixed assets and stock are explained
with examples. (SO 1, AC 1)
 The different fixed assets in a business unit are
identified and an indication is given of the purpose of
each asset in the business unit. (SO 1, AC 2)
 Stock in a business unit is identified and a list is
compiled of the stock usually needed in a business
unit. (SO 1, AC 3)
 The problems that occur in a specific business unit if
there is insufficient stock are indicated and a plan is
compiled to ensure that the required stock is
available when needed. (SO 1, AC 4)
 Problems if a business unit has too much stock are
explained and an indication is given of how
stockpiling impacts on the bottom line of the
business. (SO1, AC 5)
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Describe and apply the management of stock and fixed assets in a business unit
1.1 INTRODUCTION
In order to survive in the fast growing and changing market, business managers must be
able to manage stock and fixed assets. Asset management is a systematic process of
effectively maintaining, upgrading and operating assets, combining engineering
principles with sound business practice and economic rationale, and providing the tools
to facilitate a more organised and flexible approach to making decisions necessary to
achieve the public's expectations.
Fixed assets and stock are the life blood of any
organisation. Therefore, it is of paramount importance that they are managed properly.
Today there are a lot of fixed assets and stock management software on the market.
Many businesses use such software to help them manage the most important assets in the
business: fixed assets and stock. Stock and asset management is going to be discussed in
full in this learner guide.
Key terms
I.
Fixed assets: are long-term, tangible assets held for business use and not expected
to be converted to cash in the current or upcoming fiscal year, such as
manufacturing equipment, real estate, and furniture.
II.
Stock: is the value of materials and goods held by an organization
to support production (raw materials, subassemblies, work), for
support activities (repair, maintenance, consumables), or for sale or customer
service (merchandise, finished goods, spare parts).
III.
Stock management: is the process of efficiently overseeing the constant flow of units
into and out of an existing stock. This process usually involves controlling the transfer
in of units in order to prevent the stock from becoming too high, or dwindling to
levels that could put the operation of the company into jeopardy. Competent stock
management also seeks to control the costs associated with the stock, both from
the perspective of the total value of the goods included and the tax burden
generated by the cumulative value of the stock.
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Describe and apply the management of stock and fixed assets in a business unit
IV.
Fixed asset management: It is the management of fixed assets such
as buildings, fixtures and machinery, which cannot be converted to a fair cash
value in a timely manner. Fixed assets are often managed through the use of asset
tags, which are tracked through serial numbers or bar codes, for easier organization,
and are filed for the purpose of accounting, maintenance and theft deterrence.
1.1.1
FIXED ASSETS CONCEPT
Fixed assets are assets that are not consumed or sold during the normal course of a
business, such as land, buildings, equipment, machinery, vehicles, leasehold
improvements, and other such items. Fixed assets enable their owner to carry on
its operations. In accounting, fixed does not necessarily mean immovable; any asset
expected to last, or be in use for, more than one year is considered a fixed asset.
Following the accruals principal, these assets are shown on the balance sheet but their
value is depreciated, and treated as an expense in the Profit and Loss account for each
year of their life.
In many cases it may be necessary to adjust for the value of intangibles (usually by
deducting them from total fixed assets) in order to allow fair comparisons between
companies or to make measures of financial strength (such as gearing) more meaningful.
This is because the value of intangibles is often less certain and usually reflects the history
of the company.
Although the commonest way of accounting for the limited useful life of a fixed asset is to
depreciate it, intangible assets are amortised (essentially the same), and assets whose use
can be measured (such as mines) may be depleted. Assets that do not have a limited life
or that keep their value (such as land and investments) may not need to be depreciated,
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Describe and apply the management of stock and fixed assets in a business unit
amortised or depleted. If the value of such assets does change, impairment or revaluation
may be necessary.
1.1.2
STOCK CONCEPT
Stock is a company’s merchandise, raw materials, and finished and unfinished products
which have not yet been sold. These are considered liquid assets, since they can be
converted into cash quite easily. There are various means of valuing these assets, but to
be conservative, the lowest value is usually used in financial statements. Stock is often the
largest item in the assets category, and must be accurately counted and valued at the
end of each accounting period to determine a company's profit or loss.
Organizations whose
Stock
items
have
a
large unit
cost generally keep a day
to
day record of changes in Stock (called perpetual Stock method) to ensure accurate and
on-going control. Organizations with Stock items of small unit cost generally update their
Stock records at the end of an accounting period or when financial statements are
prepared (called periodic Stock method).
The value of any Stock depends on the valuation method used, such as first-in, first-out
(FIFO) method or last-in, first-out (LIFO) method.
Generally Accepted Accounting Practices/ Principles require that Stock should be valued
on the basis of either its cost or its current market price whichever is lower of the two to
prevent overstating of assets and earning due to sharp increase in the Stock's value
in inflationary periods. The optimum level of Stock for an organization is determined
by Stock analysis. Stock is also called Inventory.
Stock and Inventory are used interchangeably in this guide.
Companies need inventory because it is impossible to forecast demand 100% accurately
and because problems can occur along the supply chain that will necessite some form of
backup in case of loss, obsolescence, damage, market fluctuation or production error.
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Describe and apply the management of stock and fixed assets in a business unit
Fixed assets are therefore different from stock although both of them are assets. Stock is
classified under current assets (Assets such as receivables, inventory, work in process, or
cash that is constantly flowing in and out of an organization in the normal course of
its business, as cash is converted into goods and then back into cash. In accounting, any
asset expected to last or be in use for less than one year is considered a current asset.
Current assets are also called circulating asset).
1. Define the following terms:
i.
Fixed assets
ii. Stock
iii. Fixed assets management
iv. Stock management
2. Why should managers manage stock and fixed assets in an organisation?
3. What is the difference between Fixed assets and stock?
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Describe and apply the management of stock and fixed assets in a business unit
1.2 FIXED ASSETS IN A BUSINESS UNIT AND THEIR PURPOSES
A fixed asset is an asset of a business intended for continuous use, rather than a short-term,
temporary asset such as stocks. There are two types of fixed assets:
Tangible fixed assets: these are long-lived property (assets that have a physical

existence) owned by a firm and are used in the production of goods and services that
generate the firm’s income. They include physical assets such as Land and Buildings
and Equipment. Long term financial investments are also considered tangible assets.
A company can use Land for development (that is, constructing new offices), buildings
where companies carry out the day to day business activities; a company uses
vehicles for deliveries during its day to day operations. Every office must have
equipment and furniture and these form part of the tangible fixed assets of the
organisation.

Intangible fixed assets: are items lacking physical substance (for example, goodwill
which is assumed value of the attractive force that generates sales revenue in
a business, and adds value to its assets. Goodwill is an intangible but saleable asset,
almost indestructible except by indiscretion. It is built painstakingly over the years,
generally with heavy and continuous expenditure in promotion, creation
and maintenance of durable customer and supplier relationships, high quality
of goods and services, and high quality and conduct of
management and employees. Goodwill includes the worth of corporate identity, and
is enhanced by corporate image and a proper location. Its value is not recognized
in accounting books but is realized when the business is sold, and is reflected in
the firm's selling price by the amount in excess over the firm's net worth. In well
established firms, goodwill may be worth many times the worth of its physical assets.
GAAP requires the firm's purchaser to write off (amortize) the amount paid as goodwill
over a period (usually 10 to 30 years) for financial reporting purposes or representing a
right granted by the government, for example, a patent or trademark or by another
company, eg franchise. Intangibles have a life in excess of one year. Limited life
intangible assets are amortized into expenses over the period benefitted. Unlimited life
intangibles are subject to a yearly impairment test.
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Describe and apply the management of stock and fixed assets in a business unit
The benefits that a business obtains from a fixed asset extend over several years. For
example, a company may use the same piece of production machinery for many years.
Fixed assets are held by an enterprise for the purpose of producing goods or rendering
services, as opposed to being held for resale in the normal course of business, so they must
be managed properly.
What is a fixed asset? Give five examples of fixed assets and their uses in
the business unit.
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Describe and apply the management of stock and fixed assets in a business unit
1.3 STOCK IN A BUSINESS UNIT
Inventory is defined as a stock or store of goods. These goods are maintained on hand at
or near a business's location so that the firm may meet demand and fulfil its reason for
existence. If the firm is a retail establishment, a customer may look elsewhere to have his or
her needs satisfied if the firm does not have the required item in stock when the customer
arrives. If the firm is a manufacturer, it must maintain some inventory of raw materials and
work-in-process in order to keep the factory running. In addition, it must maintain some
supply of finished goods in order to meet demand. Generally, inventory types can be
grouped into two categories:
1. Merchandise Inventory: merchandise available on hand and available for sale to
customers for example, canned foods, meats and dairy products. Items in the
merchandise inventory have two common characteristics, that is, they are owned by
the company or they are in the form ready for sale to customers in the ordinary course
of business. Inventory sold becomes the cost of merchandise sold. It is the ready-to-sell
inventory of merchandising firms.
2. Manufacturing Inventory: merchandise that needs to be produced in order to sell is
called manufacturing inventory. Although products may differ, manufacturers normally
have three inventory accounts, each of which is associated with a stage of the
production process that is; raw material, work-in-process and finished goods.
i.
Raw materials- Raw Materials are the most basic materials that businesses need in
making their final products. Raw material inventory consists of basic materials that
have not yet been committed to production in a manufacturing firm. Raw
materials that are purchased from firms to be used in the firm’s production
operations range from iron ore waiting processing into steel to electronic
components to be incorporated into computers. The purpose of maintaining raw
material inventory is to separate the production function from the purchasing
function so that any problem in shipment of raw materials do not cause production
delays.
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Describe and apply the management of stock and fixed assets in a business unit
ii.
Work-in-Process Inventory: This category includes those materials that have had
work done on them but have not been completed. The more complex and lengthy
the production process, the larger will be the investment in work-in-process
inventory. Its purpose is to uncouple the various operations in the production
process so that machine failures and work stoppages in one operation will not
affect the other operations.
iii.
Finished Goods Inventory: These are completed products awaiting sale. The
purpose of finished goods inventory is to uncouple the productions and sales
functions so that it no longer is necessary to produce the goods before a sale can
occur.
The basic flow of production reveals the necessary type of inventory that businesses must
keep. Raw materials are turned into work in process which is then transformed into finished
goods. There are other types of inventory that some businesses can have such as rejected,
damaged or obsolete goods, but the three mentioned above cover most industries.
1. What is inventory?
2. Compile a list of stock/ inventory that is usually needed in a business
unit.
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1.4 INSUFFICIENT STOCK PROBLEMS
There is more to inventory control than simply buying new products. Managers have to
know what to buy, when to buy it and how much to buy. Managers also need to track
their inventory; whether manually or by computer and use that knowledge to hone
Inventory purchasing process. A business' basic stock should provide a reasonable
assortment of products and should be big enough to cover the normal sales demands of
the business. When calculating basic stock, Managers must also factor in lead time that is,
the length of time between reordering and receiving a product. For instance, if an
organisation’s lead time is four weeks and a particular product line sells 10 units a week,
then Managers must reorder before the basic inventory level falls below 40 units. If
Managers do not reorder until the business actually needs the stock, the business will be
without the product for four weeks.
Insufficient inventory means lost sales and is costly, time-consuming back orders. If the
firm is a retail establishment, a customer may look elsewhere to have his or her needs
satisfied if the firm does not have the required item in stock when the customer arrives.
Running out of raw materials or parts that are crucial to a business’ production process
means increased operating costs too. A business’ employees will be getting paid to sit
around because there won’t be any work for them to do; when the inventory does come
in, they will be paid for working overtime to make up for lost production time. In some
situations, Managers could even end up buying emergency inventory at high prices.
One way to protect a business from such shortfalls is by building a safety margin into basic
inventory figures. To figure out the right safety margin for a business, try to think of all the
outside factors that could contribute to delays, such as suppliers who tend to be late or
goods being shipped from overseas (for example, in the clothing business). Once
organisations have been in business for a while, they will have a better feel for delivery
times and will find it fairly easy to calculate their safety margin.
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Describe and apply the management of stock and fixed assets in a business unit
State and explain the problems that occur in a specific business unit of your choice if there
is insufficient stock and compile plans to ensure that the required stock is available when
needed.
1.5 EXCESS INVENTORY PROBLEMS
Sometimes organisations buy excess inventory than required. Avoiding excess inventory is
especially important for owners/ managers of companies with seasonal product lines,
such as clothing, home accessories, and holiday and gift items. These products have a
short "shelf life" and are hard to sell once they are no longer in fashion. Entrepreneurs who
sell more timeless products, such as plumbing equipment, office supplies or auto products,
have more leeway because it takes longer for these items to become obsolete. No matter
the type of business, excess inventory should be avoided. It costs money in extra
overhead, debt service on loans to purchase the excess inventory, additional personal
property tax on unsold inventory and increased insurance costs. One merchandise
consultant estimates that it costs the average retailer from 20 to 30 percent of the original
inventory investment just to maintain it.
Buying excess inventory also reduces a company’s liquidity something to be avoided.
Consider the example of an auto supply retailer who finds himself with the opportunity to
buy 1,000 gallons of antifreeze at a huge discount. If he buys the antifreeze and it turns out
to be a mild winter, he will be sitting on 1,000 gallons of antifreeze. Even though he knows
he can sell the antifreeze during the next cold winter, it's still taking up space in his
warehouse for an entire year; space that could be devoted to more profitable products.
When a company finds itself with excess inventory, its natural reaction will probably be to
reduce the price and sell it quickly. Although this solves the overstocking problem, it also
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Describe and apply the management of stock and fixed assets in a business unit
reduces the organisation’s return on investment. All the company’s
financial projections assume that it will receive the full price for its goods. If the company
slash their prices by 15 to 25 percent just to get rid of the excess inventory, it will be losing
money it has counted on bringing in. Some trainee managers react to excess inventory by
being overly cautious the next time they order stock. However, this puts their businesses at
risk of having an inventory shortage. To avoid accumulating excess inventory, set a
realistic safety margin and order only what the business is sure it can sell.
Inventory management is a very important function that determines the health of the
supply chain as well as the impacts of the financial health of the balance sheet. Every
organization constantly strives to maintain optimum inventory to be able to meet its
requirements and avoid over or under inventory that can impact the financial figures.
Explain the problems that are likely to arise if a business unit has too much
stock and indicate how stockpiling impacts on the bottom-line of the
business.
What have you leant in this section
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Describe and apply the management of stock and fixed assets in a business unit
SECTION 2: STOCK MANAGEMENT & BUSINESS PROFITABILITY
Specific Outcome
On completion of this section you will be able to explain the
influence
that
stock
management
can
have
on
the
profitability of a business.
Assessment Criteria
 The need for stock control is explained with reference
to fraud, theft, and carelessness
and ensuring
sufficient stock. (SO 2, AC 1)
 Two different ways of managing stock are explained
with reference to records and stocktaking. (SO 2, AC
2)
 The importance of quality, quantity, time, price and
source
in
managing
stock
are
explained
with
examples (SO 2, AC 3)
 The rate of stock turnover for a business unit is
calculated and an indication is given of how knowing
turnover assists in planning. (SO 2, AC 4)
 An Economic Ordering Quantity Model (EOQ) model
is explained and applied to a business unit to
calculate the optimum stock level for three items in a
business unit. (SO 2, AC 5)
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2.1 INTRODUCTION
Every company strives to improve profitability. Countless hours are spent in meetings
devising ways to lower operating costs while increasing sales and gross margins.
Unfortunately, management in many companies assumes that:

All material currently in stock is necessary to properly serve customers.

Costs can best be reduced by lowering wages, reducing benefits, and squeezing
any possible amount from the operations budget.

Salespeople should focus on increasing sales Rands and gross margin profit Rands.
Buyers should order whatever salespeople request to help them achieve these
goals.

New warehouse technology is an expense that cannot be easily afforded.
In the quest to maximize return on investment many organisations fail to scrutinize their
investment in inventory. This is unfortunate because improving the way you control and
manage your inventory may have the greatest potential for improving your organisation’s
bottom line. Effective inventory management is key to running a profitable business.
2.1.1
THE NEED FOR STOCK CONTROL
Inventory control is a planned approach of determining what to order, when to order and
how much to order and how much to stock so that costs associated with buying and
storing are optimal without interrupting production and sales. Inventory control basically
deals with two problems: When should an order be placed? (Order level), and How much
should be ordered? (Order quantity) .
These questions are answered by the use of inventory models. The systematic inventory
control system strikes the balance between the loss due to non-availability of an item and
cost of carrying the stock of an item. Systematic inventory control aims at maintaining
optimum level of stock of goods required by the company at minimum cost to the
company.
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2.1.1
OBJECTIVES OF INVENTORY CONTROL
1
The objectives of inventory control are as follows:
2
To ensure adequate supply of products to customer and avoid shortages as far as
possible.
3
To make sure that the financial investment in inventories is minimum (that is, to see that
the working capital is blocked to the minimum possible extent).
4
Efficient purchasing, storing, consumption and accounting for materials.
5
To maintain timely record of inventories of all the items and to maintain the stock within
the desired limits.
6
To ensure timely action for replenishment.
7
To provide a reserve stock for variations in lead times of delivery of materials.
8
To provide a controlled base for both short-term and long-term planning of materials.
8.1.1
1
BENEFITS OF INVENTORY CONTROL
It is an established fact that through the practice of scientific inventory control,
following are the benefits of inventory control:
2
Improvement in customer’s relationship because of the timely delivery of goods and
service.
3
Smooth and uninterrupted production and, hence, no stock out.
4
Efficient utilisation of working capital. Helps in minimising loss due to deterioration,
obsolescence damage and pilferage.
5
Economy in purchasing.
6
Eliminates the possibility of duplicate ordering
7
Stock taking helps in preventing fraud and theft by employees or management. This is
usually the case where stock is not controlled in an organisation.
8
In short, inventory control is monitoring the supplies, raw materials, work-in-process, and
finished goods by various accounting and reporting methods. Some controls are the
maintenance of detailed stock records showing receipts and issuances; inventory
ledger showing quantities and Rands; and written policies regarding purchasing,
receiving, inspection, and handling. Periodic inventory counts should occur to verify
that the inventory amounts per books physically exist. A good system of inventory
control assists in reducing inventory ordering and carrying costs.
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Describe and apply the management of stock and fixed assets in a business unit
State and explain the need for stock control with reference to:
i.
fraud
ii.
theft
iii.
carelessness and
iv. ensuring sufficient stock
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Describe and apply the management of stock and fixed assets in a business unit
2.2 WAYS OF MANAGING STOCK
Business owners or managers know how difficult it can be to keep track of inventory.
Fortunately, there are several different methods of inventory management that can be
implemented in order to assure managers or owners get the most out of their inventory
tracking. The first and perhaps most important method is to use the barcode system.
Barcodes assign special numbers to each and every item the organisation is trying to
track, all with an integrated system of data. Once inventory's barcodes is scanned, they
automatically get decoded and entered into a database, which then allows managers to
track and maintain inventory quantities, pricing, and any other data they want to save.
An important part of inventory management is controlling inventory, in other words,
knowing when stock gets low and when it needs to be re-ordered. There are various
methods that can be used to control inventory. The most obvious is simple, visual control.
Managers keep a close eye on things and they can usually see when things are getting
low in stock and need to be re-ordered. But what about small parts or articles/items that
are stored in large quantities? In cases such as this, a point-of-sale method may need to
be used. This method just means that every time an item is sold or distributed/shipped, it is
logged. The quantity of items in stock goes down, and the quantity of items needing
replacement goes up.
The most common method for inventory management is to establish good training for
employees. A good idea is to test employees from time to time to be sure that they know
the correct procedures for managing the inventory and to meet with them individually to
go over corrective measures to ensure accuracy in the future when they make mistakes.
Managers must decide which computer program or style to use to manage the inventory.
They can choose from something as simple as a spreadsheet, to as complex as an entire
software package that tracks everything almost automatically. When shopping for
software, look for products that offer barcode reading, tracking counts, returns processing,
cycling, and more all in one package. This will help to avoid any confusion and prevent
the need to add another program into the mix later.
Stocktaking is another way of stock management. Businesses must set time for stock take
periodically, for example, once in a month. With the combination of proper tools like
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Describe and apply the management of stock and fixed assets in a business unit
barcodes and scanners, thorough employee training, periodic stock taking and an
accurate, comprehensive database, stock will be managed properly.
State and explain the different methods of managing stock.
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Describe and apply the management of stock and fixed assets in a business unit
2.3 IMPORTANT STOCK MANAGEMENT TERMS
Quality is a measure of excellence or a state of being free from defects, deficiencies,
and significant variations, brought about by the strict and consistent adherence to
measurable and verifiable standards to achieve uniformity of output that satisfies specific
customers or user requirements. Every organisation must endeavour to produce high
quality products for them to stay in business. For example, Nike is one of the largest
footwear manufacturing companies in the whole world because it manages its inventory
properly and thus produces high quality products. In short, high quality raw materials are
equal to quality end products.
Quantity is the extent, size, or sum of countable or measurable discrete events, objects, or
phenomenon, expressed in a numerical value. An organisation must manage the
quantities of its raw materials or goods in order to reduce warehouse costs. At the same
time, companies must have enough quantities of stock in order to meet demand.
When it comes to inventory values, time is of the essence. An organisation cannot sell
something they do not have: it can sell only inventory at hand. Therefore, it is important to
consider the lead time during production planning. An organisation can consider saving
warehouse costs by applying Just-In-Time Inventory system. This way manager will make
their production agile thus able to adapt to changing customer demands.
Price is a value that will purchase a definite quantity, weight, or other measure of a
good or service. As the consideration is given in exchange for transfer of
ownership, price forms the essential basis of commercial transactions. Price is
important in managing stock because it is determined by what a buyer is willing
to pay, a seller is willing to accept, and the competition is allowing to be charged.
Some companies reduce their prices in order to sell inventory, for example specials
that are offered by many retail shops soon after winter or summer in order to clear
excess stock.
The importance of a source in managing stock is to have adequate supply of raw
materials. A source in business terms is simply where the organisation gets its resources (for
example, its suppliers). It is of paramount importance in stock management for a business
to have a reliable source. This will enable the business to carry out its day to day activities
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Describe and apply the management of stock and fixed assets in a business unit
effectively and meet customer demands. For example, if a beverage manufacturing
company has a reliable source of raw materials; it will enable the company to meet their
production target.
Explain the importance of quality, quantity, time, price and source in
managing stock.
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Describe and apply the management of stock and fixed assets in a business unit
2.4 RATE OF STOCK TURNOVER
Inventory turnover ratio, defined as how many times the entire inventory of a company
has been sold during an accounting period, is a major factor to success in any business
that holds inventory. It shows how well a company manages its inventory levels and how
frequently a company replenishes its inventory. In general, a higher inventory turnover is
better because inventories are the least liquid form of asset.
Inventory turnover ratio explanations occur very simply through an illustration of high and
low turnover ratios. Despite this, many businesses do not survive due to issues with
inventory. A low inventory turnover ratio shows that a company may be overstocking or
having deficiencies in the product line or marketing effort. It is a sign of ineffective
inventory management because inventory usually has a zero rate of return and high
storage cost. Higher inventory turnover ratios are considered a positive indicator of
effective inventory management. However, a higher inventory turnover ratio does not
always mean better performance. It sometimes may indicate inadequate inventory level,
which may result in decrease in sale. Rate of stock turnover is calculated as follows:
Inventory turnover
= Sales
OR Inventory Turnover =
Inventory
Cost of goods sold
Average inventory
For instance, if a company was able to generate R10 million in sales but averaged R5
million in inventory, the inventory turnover would be 10 million / 5 million = 2.
This number indicates that there would be 2 inventory turns per year, meaning that it
would take 6 months to sell the entire inventory.
The importance of inventory turnover is to measure how fast a company’s investment is
returned. One important decision is how the company is going to spend the cash in
investing for stock replenishment. A company has to consider whether it should buy in bulk
order or to partially allocate per period the cost of replenishing its order. In most cases,
higher turnover is a good indication of efficient cash flow, for example, a turn-over of 6
times per annum. An increase in inventory on-hand will decrease the net income for a
particular period and will increase cash outflow.
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Describe and apply the management of stock and fixed assets in a business unit
Assume, (1) annual credit sales are R10, 000, and inventory is R5,000 and ( 2) cost of goods
sold during the period is R10,000 and average inventory is R5,000, Calculate rate of stock
turnover. How does knowing turnover assist managers in planning?
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Describe and apply the management of stock and fixed assets in a business unit
2.5 ECONOMIC ORDERING QUANTITY MODEL
Economic Order Quantity model is the inventory management technique for determining
the optimum order quantity which is the one that minimizes the total of its ordering and
carrying costs. It also balances the fixed ordering costs against variable ordering costs. The
EOQ is the optimum amount of goods to order each time to minimize total inventory costs.
EOQ analysis should be applied to every product that represents a significant proportion
of sales. Thus, the EOQ analysis provides answers to the following order quantity problems:
1. How much of inventory should be bought in an order for each replenishment?
2. Should the quantity be purchased be large or small?
3. Should the requirement of materials during a given period of time be purchased in
one lot or should it be purchased in instalments?
8.1.1
ASSUMPTIONS OF EOQ MODEL
The assumptions of EOQ Model are as follows:
1. Demand is known with certainty and is constant during the period.
2. Depletion of stock is linear and constant.
3. The time interval between placing an order and receiving delivery (lead time), is
constant.
4. The orders placed to replenish inventory stocks are received at exactly that point in
time when inventories reach zero.
EOQ FORMULA
EOQ
=
√2SP / C
Where:
S
=
Annual usage in units
P
=
Ordering cost per order
C
=
Carrying cost per unit
Number of orders to be placed in a period = S / EOQ
Example: A Company is determining its frequency of orders for Product A. Each product
costs R20. The annual carrying cost is R400 and the cost per order is R15. The company
expects to sell 50 units of Product A, each month. It has also decided to maintain an
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Describe and apply the management of stock and fixed assets in a business unit
average inventory level of 40 units. Find the EOQ.
Solution:
S (Annual usage in units) => 50 units per month x 12 = 600 units annually.
P (Ordering cost per order) => R15
C => Average inventory x carrying cost per unit. In this case, R400 is the total carrying cost
annually. Therefore, carrying cost per unit = R400 / 40 = R10 per unit.
EOQ = √2SP / C => = √ (2 x 600 x 15) / 10 => 42 units (after rounding)
Number of orders per year = S / EOQ => 600 units/42 = 14.29 or 14 orders (rounded)
8.1.2
SAFETY STOCK LEVEL
Stock-outs of inventory can result in customer dissatisfaction. In order to avoid a stockout
situation, a safety stock level should be maintained. Safety stock is needed for an item
based on anticipated usage and the expected delivery time from the supplier. A business
maintains safety stocks to protect itself against the losses caused by inventory stock-outs.
These can take the form of lost sales or lost production time. Safety stock is necessary
because of the variability in lead time and usage rates. As the variability in lead time
increases, a company will tend to carry larger safety stocks. The reorder point (ROP) is the
inventory level that signals the time to reorder merchandise at the EOQ amount.
ROP = Lead time x Average usage per unit of time
If a safety stock is needed, then add this amount to the reorder point.
Example
A business needs 6,400 units evenly throughout the year. There is a lead-time of one week.
There are 50 working weeks in the year. The safety stock is 20 units.
ROP = 1 week x (6.400 / 50 weeks) = 20 = 1 x 128 + 20 = 148 units
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Describe and apply the management of stock and fixed assets in a business unit
1. Sporton Ltd is determining its frequency of orders for Product A. Each product A
costs R30. The annual carrying cost is R600 and the cost per order is R20. The
company expects to sell 60 units of Product A each month. It has also decided to
maintain an average inventory level of 50 units. Find the EOQ.
2. A business needs 7, 200 units evenly throughout the year. There is a lead-time of two
weeks. There are 55 working weeks in the year. The safety stock is 30 units.
Calculate Reorder Point.
What have you leant in this section
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Describe and apply the management of stock and fixed assets in a business unit
SECTION 3: MANAGEMENT OF FIXED ASSETS IN A BUSINESS UNIT
Specific Outcome
On completion of this section you will be able to explain the
management of fixed assets in a business unit.
Assessment Criteria
 The fixed assets in a business unit are identified from a
balance sheet (SO 3, AC 1)
 The asset register for a business unit is updated for
three case studies. (SO 3, AC 2)
 The valuation of assets in a business unit is explained
with reference to depreciation and investment. (SO
3, AC 3)
 Reasons for depreciation are explained with
examples and an indication is given of the purpose
of depreciation.(SO 3, AC4)
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Describe and apply the management of stock and fixed assets in a business unit
3.1 INTRODUCTION
Fixed assets management is an accounting process that seeks to track fixed assets for the
purposes of financial accounting, preventive maintenance, and theft deterrence. Many
organizations face a significant challenge to track the location, quantity, condition, and
maintenance and depreciation status of their fixed assets. A popular approach to
tracking fixed assets utilizes serial numbered Asset Tags, often with bar codes for easy and
accurate reading. Periodically, the owner of the assets can take inventory with a
mobile barcode reader and then produce a report.
3.1.1 FIXED ASSETS IN A BUSINESS UNIT
Below is an example of a balance sheet. Fixed assets are clearly shown in the balance
sheet.
Identify fixed assets from the Balance sheet extract below.
River Ltd Company Consolidated Balance Sheet - January 31, 2011
Dec. 31, 2011
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Describe and apply the management of stock and fixed assets in a business unit
Cash & Equivalents
R1,819,000,000
R1,611,000,000
Receivables
R1,757,000,000
R1,798,000,000
Inventories
R1,066,000,000
R1,076,000,000
Long Term Assets
R8,129,000,000
R8,916,000,000
Property, Plant, & Equipment
R4,168,000,000
R4,267,000,000
Goodwill
R1,917,000,000
R1,960,000,000
Accounts Payable
R9,300,000,000
R4,483,000,000
R21,000,000
R5,373,000,000
R1,004,000,000
R902,000,000
Short Term Debt
Other Liabilities
3.2 ASSET REGISTER
An asset register is a statement of assets owned (controlled) by a business showing details
of about the assets.
Organizations assets register - data requirements
1.
Asset description
General Description: - Use the following formula: (Item)(Make)(Model)
2.
Serial number
Serial number recorded on the manufacturer's label or plate.
3.
Asset number
Each asset recorded on the assets register should have a unique
identification number that may be used to locate the asset entry in
the assets register. Depending on the type of assets register kept, the
asset number could be a line or folio number in a manual ledger
through to a bar code label number in a sophisticated computerised
system.
4.
Supplier
As described on the purchase order.
5.
Asset
Person or title of person with custodial responsibility.
custodian/control
ler
6.
Address
Enter full postal address where the asset is located.
7.
Asset value
Usually the gross purchase price, that is, the cost before deducting
any trade in allowance.
8.
Purchase date
Purchase date of asset or date asset was transferred from another
funded organisation.
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Describe and apply the management of stock and fixed assets in a business unit
9.
Department
Enter the R amount of department funds used to acquire this asset.
funds used
10. Year of funding
Enter the financial year when grant was disclosed as a cash receipt.
11. Department
The department program that funded or part funded the asset
program
purchase.
12. Accumulated
Enter: asset value x (depreciation rate *x years**)
depreciation
13. Written down
Enter - asset value less accumulated depreciation.
value
14. Depreciation
Accumulated depreciation and written down value should be
date
calculated annually.
15. Disposal date
Date that asset was removed from service.
16. Disposal method
Enter details of disposal, for example, trade in, sale, theft etc.
17. Disposal receipts
Enter the R proceeds received on disposal of asset.
3.3 ASSET VALUATION
Asset valuation is the process of determining the fair market value of an asset. This is done
periodically when determining the value of real estate, a portfolio, an investment, an item
on a balance sheet, or any number of other assets. There are a number of tools used for
asset
valuation,
including
the historical
value,
values
of
similar
assets,
current
supply and demand, fundamental analysis, and so forth. Asset Valuation is also the
process of determining the current worth of a portfolio, company, investment, or balance
sheet item.
In financial accounting, revaluation of fixed assets is the process of increasing or
decreasing the carrying value of fixed assets to account for major changes in fair market
value of the asset. Where an asset is purchased, its cost is simply the purchase price plus
any expenses incidental to its acquisition. Where an asset is produced by a company for
its own use, its production cost must include the cost of raw materials, consumables and
other attribute direct costs such as labour cost. Production cost may additionally include a
reasonable proportion of indirect costs, together with the interest on any capital borrowed
to finance production of the asset.
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Describe and apply the management of stock and fixed assets in a business unit
The cost of any fixed asset having a limited economic life, whether purchase price or
production cost, must be reduced by provisions for depreciation calculated to write off
the cost, less any residual value, systematically over the period of the assets useful life. This
very general requirement is supplemented by the more detailed provisions of financial
reporting standards.
Provision for a permanent reducing in value of a fixed asset must be made in the profit
and loss account and the asset should be disclosed at the reduced amount in the
balance sheet. Any such provision should be disclosed on the face of the profit and loss
account or by way of note. Where a provision becomes no longer necessary, because
the conditions giving rise to it have altered, it should be written back, and again disclosed
should be made.
Explain valuation of fixed assets in a business with reference to depreciation
and investment.
3.4 PURPOSE OF DEPRECIATION
The benefits that a business obtains from a fixed asset extend over several years. For
example, a company may use the same piece of production machinery for many years,
whereas a company-owned motor car used by a salesman probably has a shorter useful
life. By accepting that the life of a fixed asset is limited, the accounts of a business need to
recognise the benefits of the fixed asset as it is "consumed" over several years. This
consumption of a fixed asset is referred to as depreciation. Depreciation is the wearing
out, using up or other reduction in the useful economic life of a tangible fixed asset
whether arising from use, effluxion of time or obsolescence through either changes in
technology or demand for goods and services produced by the asset.
A portion of the benefits of the fixed asset will be used up or consumed in each
accounting period of its life in order to generate revenue. To calculate profit for a period,
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Describe and apply the management of stock and fixed assets in a business unit
it is necessary to match expenses with the revenues they help earn. In determining the
expenses for a period, it is therefore important to include an amount to represent the
consumption of fixed assets during that period (that is, depreciation). In essence,
depreciation involves allocating the cost of the fixed asset (less any residual value) over its
useful life. To calculate the depreciation charge for an accounting period, the following
factors are relevant: the cost of the fixed asset, the (estimated) useful life of the asset and
the (estimated) residual value of the asset.
The purpose of depreciation is to match the cost of a productive asset (that has a useful
life of more than a year) to the revenues earned from using the asset. Since it is hard to
see a direct link to revenues, the asset’s cost is usually allocated to (assigned to, spread
over) the years in which the asset is used. Depreciation systematically allocates or moves
the asset’s cost from the balance sheet to expense on the income statement over the
asset’s useful life. In other words, depreciation is an allocation process in order to achieve
the matching principle; it is not a technique for determining the fair market value of the
asset. The accounting entry for depreciation is a debit to Depreciation Expense and a
credit to Accumulated Depreciation (a contra-asset account that is reported in the same
section of the balance sheet as the asset that is being depreciated). There are several
depreciation methods allowed for achieving the matching principle. The depreciation
methods can be grouped into two categories: straight line depreciation and accelerated
depreciation. The cost of a fixed asset less its estimated residual value represents the total
amount to be depreciated over its estimated useful life.
What is depreciation? Explain the purpose of depreciation. Use examples
to support your answer.
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Describe and apply the management of stock and fixed assets in a business unit
SECTION 4: THE BASIC PRINCIPLES OF STOCK AND FIXED ASSET
MANAGEMENT
Specific Outcome
On completion of this section you will be able to apply the
basic principles of stock and fixed asset management to a
business unit.
Assessment Criteria
 The risk associated with the management of stock in a
business unit is identified and quantified in terms of
probability and severity (SO 4, AC 1)
 The risk associated with the management of fixed
assets in a business unit is identified and quantified in
terms of probability and severity. (SO 4, AC 2)
 A system for managing stock in a business unit is
applied with reference to ensuring sufficient stock,
control of costs and the value of the stock. (SO 4, AC
3)
 A plan is designed to minimize the risk associated with
fixed assets in a business unit. (SO 4, AC4)
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Describe and apply the management of stock and fixed assets in a business unit
4.1 INTRODUCTION
As already outlined in this guide, stock and fixed assets are the life blood of any
organisation therefore their management is of paramount importance to the success of
any business. Two risks are inherent in any stocking decision: the risk of getting caught short
and the risk of getting caught long. The end objective is to get a balanced inventory, one
with neither too much overstocking nor too much under stocking.
RISK ASSOCIATED WITH STOCK MANAGEMENT
Risk is a probability or threat of damage, injury, liability, loss, or other negative occurrence
that is caused by external or internal vulnerabilities, and that may be neutralized through
pre-emptive action. In other words, risk is a measure of the probability and severity of
adverse effects or the combination of probability of an event and its consequences.
Probability/ Severity tool is used to quantify the likelihood (or frequency) and impact (or
consequence) of identified risks in order to prioritize risk response activities in stock
management (see table below). The probability that stock may be stolen or destroyed is
very high. The severity will also be high if the organisation does not have other stock at
hand or they do not have money to purchase new stock. Another risk associated with
stock management is when a company’s suppliers are no longer able to supply the
company with resources (as a result the company will be under stocked). The severity of
such a risk is very high especially when the company solemnly depend on that supplier for
resources. On the other hand, the probability of such a risk is usually very low because
there are a lot of suppliers on the market.
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Describe and apply the management of stock and fixed assets in a business unit
For each risk element on an organisation’s list, risk managers must determine if the
likelihood of it actually materializing is High, Medium or Low. If they absolutely have to use
numbers, they may figure Probability on a scale from 0.00 to 1.00. 0.01 to 0.33 = Low, 0.34
to 0.66 = Medium, 0.67 to 1.00 = High. If the probability of an event occurring is ZERO, then
it will be removed from consideration. Risk managers must also assign Impact as High,
Medium or Low based on some pre-established guidelines.
Identify and quantify the risk associated with the management of stock
in a business unit in terms of probability and severity.
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4.2 RISKS ASSOCIATED WITH FIXED ASSETS MANAGEMENT
As already highlighted, risk is the combination of the probability of harm occurring and the
severity of the harm once it occurs. For example, considering investment as a fixed asset,
risk is the probability that an investment's actual return will be different than expected. This
includes the possibility of losing some or all of the original investment. Fixed assets like
buildings and depreciate during the course of its life. An organisation’s assets may be
stolen or destroyed. Fixed assets may also malfunction during the course of their life. These
are some of the risks associated with the fixed assets of an organisation.
The probability that an organisation’s motor vehicles might be stolen is high and its severity
maybe high too depending on the number of vehicles an organisation has. For example,
if Company Y has only two delivery vehicles, if they are stolen it means that the company
will be out of business until it has replaced those vehicles. If company Y decides to hire
delivery vehicles on the other hand, the company will have to spend a lot of money to
pay for the service as well as maintaining the vehicles. A lot of companies have been
brought to their knees because of the risks associated with managing assets.
It is also probable that an organisation’s buildings may be destroyed by fire for example,
or natural disasters like floods. Every year, we have headlines on television and
newspapers of major buildings collapsing or floods destroying a lot of buildings (or fixed
assets) and infrastructure. In this case, the probability is usually low because natural
disasters usually happen when people are not prepared for them. The severity of such a
risk (natural disasters) is very high. A lot of companies under such circumstances usually do
not rise again.
It is due to these considerations that a lot of companies insure their fixed assets and use
tracking devices on their motor vehicles. Risks associated with managing fixed assets are
to be anticipated. Companies use a lot of money on insurance and tracking devices
every year in order to control or keep the risks at a minimum. This will also reduce the
probability and severity of such risks to a minimum. If risk managers absolutely have to use
numbers, they may figure Probability on a scale from 0.00 to 1.00. 0.01 to 0.33 = Low, 0.34
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to 0.66 = Medium, 0.67 to 1.00 = High and Severity on a scale from 0.00 to 1.00. 0.01 to 0.33
= Low, 0.34 to 0.66 = Medium, 0.67 to 1.00 = High.
Risks associated with managing fixed assets (that is, Loss / Theft, Misuse / Abuse,
Deterioration / Damage and Inaccurate / Qualified accounts) of an organisation are
inevitable but managers where possible, must keep the probability and severity of such
risks at a minimum.
Identify the risks associated with the management of fixed assets in a
business unit. Quantify these risks in terms of probability and severity.
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4.3 STOCK MANAGEMENT SYSTEM
Inventory is one of a business's most valuable assets, consisting of raw materials for items to
be produced, as well as non-production inventory such as office supplies. Since a business
often has a substantial sum invested in its inventory, it should ensure that a proper
management system is in place to utilize the inventory. By selecting a specific inventorymanagement method, a business can maximize the return on the inventory investment.
Inventory Management system provides information to efficiently manage the flow of
materials, effectively utilize people and equipment, coordinate internal activities and
communicate with customers. Inventory Management does not make decisions or
manage operations; they provide the information to managers who make more accurate
and timely decisions to manage their operations.
MATERIAL REQUIREMENTS PLANNING (MRP)
Material Requirements Planning (MRP) is an inventory-management system designed to
optimize inventory levels based on production schedules. MRP dictates that inventory be
available in sufficient quantities for the job at hand. Additionally, MRP requires that
inventory should not be received too far in advance, to avoid carrying costs. An
important part of MRP is the Bill of Material, which is essentially a master list of components
that make up a finished good. The Bill of Material helps a company calculate lead times
which the purchasing agent uses to acquire raw materials needed in the production
process.
JUST IN TIME (JIT)
The Just In Time (JIT) inventory-management system is designed to ensure that the
company has minimum inventory holding costs. JIT dictates that the company acquire the
raw materials needed for a job only after the company has booked a sale or received an
order. The JIT method is pertinent in industries where inventories have the potential for high
holding cost or a short shelf life. Companies can lower inventory holding costs and
minimize the risk of possessing obsolete or spoiled inventory by not ordering raw materials
until they are in direct demand for production.
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VALUATION METHODS
An organisation must determine how to record the costs of items sold. This is an important
decision.
A
method
that
lowers
costs
will
increase
net
income
and
taxes.
The company must consider factors like expected sales volume and whether future
inventory purchases will rise or fall in price. Let's look at two methods of inventory
valuation.
i.
FIFO: FIFO stands for first in -first out. With this valuation method, the cost of the
oldest inventory on the shelf (the first purchased) is used to record a sales
transaction. The physical inventory sold does not have to be the oldest; this is a cost
valuation method. With FIFO, the value of the inventory account will be the same
with perpetual or periodic accounting because the earliest costs are used whether
the account is updated immediately or at the end of the period.
ii.
LIFO: LIFO stands for last in-first out. When using LIFO, the cost for the most recently
purchased inventory is used when posting a sales transaction. As with FIFO, the
accounting of costs does not have to coincide with the movement of units out the
door. In fact, with LIFO, the unit need not even be on hand when a sale is made. If
it is purchased before the end of the period, it is the last unit, and its cost will be
used when a sale is made.
iii.
Average Cost Method. Under the average cost method, the costs of goods are
equally divided, or averaged, among the units of inventory. It is also called the
weighted average method. When this method is used, costs are matched against
revenue according to an average of the unit of cost of goods sold. The same
weighted average unit costs are used in determining the cost of the merchandise
inventory at the end of the period. For businesses in which merchandise sales may
be made up of various purchases of identical units, the average method
approximates the physical flow of goods. This method is determined by dividing the
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total cost of the units of each item available for sale during the period by the
related number of units of that item.
Many companies use inventory management software to manage their stock. Inventory
management is of paramount importance in any business because the survival of any
business unit directly depends on how it manages its inventory.
Discuss stock management systems that a company can apply to ensure
sufficient stock, control costs and to determine the value of the stock.
4.4 A PLAN TO MINIMISE FIXED ASSETS RISKS
Risk management is commonly defined as the systematic application of management
practices, policies, and procedures for identifying, analyzing, controlling and monitoring
risk. Continuous investment in fixed asset is often necessary to grow the revenue of a
company and significant investment in fixed assets could lead to new challenges in
managing and tracking the fixed assets. A company can use a Fixed Assets Risk
Management service in order to keep track of the usage, condition and location of their
fixed assets so as to manage the assets optimally. Risk management involves a three-step
procedure: hazard identification, risk assessment, and risk mitigation in case of
unacceptable risk levels. An organisation can do the following in order to minimise the risks
associated with fixed assets management:
Separation of Duties: Purchase of asset, Custody of asset, Maintaining asset register and
Annual physical check should be performed by different people in order to ensure that
no one individual is responsible for all aspects of the system, so minimising the risk of
intentional manipulation or error. Where resources do not allow this, a company can
employ a risk manager who will assess the risks and initiate additional recorded
management checks as appropriate.
The risk manager should list the type of
construction, locations, and hazards to which each fixed asset is exposed to. Each
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structure and major piece of equipment should be listed separately. The current condition
of each item should be determined and its replacement cost evaluated.
1. Independent physical check of all assets: Each individual asset must be subject to an
independent physical check each year to confirm existence and to inform the
accounting system.
2. Exit Check: Assets being removed from the establishment must be properly authorised
and checks must be made to ensure this authorisation has been granted. This will minimise
the risk of loss or theft.
3. Maintaining and Reconciling Individual and Central Asset Register: Each fixed asset must
have an asset register (see Section 3.2) and the individual accounting entries of an asset
must be reconciled to the Central Fixed Asset Register at least quarterly. This will minimise
the risk of incorrect accounts.
4.
Management checks: The Head of Finance must carry out additional management
checks to ensure the systems and controls are being operated effectively, such as Sample
documentation checks and Sample checks on asset register details.
Design a plan to minimise the risk associated with fixed assets in your
organisation.
What have you leant in this section?
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Describe and apply the management of stock and fixed assets in a business unit
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