- if the manufacturing company from were you import is out of stock of a specific product then it can also cause your company a disadvantage or also cause it to a halt.
Stock Levels
Stock levels are set to determine when one should re-order. Raw material, work in progress and finished goods make- up stock.
Good control and stogie is imperative.
Storage
- Storage is important since stocks are not delivered on demand.
- Having stock flowing is important to meet customer’s demand
- Stocks are also important to reduce the risk of halting production process and incurring a more expensive cost than investing in more stocks.
- Stocks help to keep prices stable and not inflated due to shortages
The main objective of stock control is:-
- To meet demand
- To avoid loss of customers
- To avoid stock piling
This is because it could cost money, so one must find a balance.
Stock Levels
Maximum Stock Level
Minimum Stock Level
Re-Order Level
Re-order Quantity
Economic Order Quantity
- Maximum Stock Level – this is decided when one considers the rate of consumption, the risk of deterioration and storage space available for normal stock.
Maximum Stock Level = Re-order level –
(Minimum consumption * minimum lead time) +
Re-order quantity
- Minimum Stock Level – the lowest amount of stock that should be held in the store to satisfy customer demands and enough to keep production flowing.
Minimum Stock Level = Re-order level –
(Normal consumption * Normal lead time)
- Re-Order Level – the level at which a company should re-order stock. This level should be slightly above the minimum level so that stock can arrive on time before the other stock is finished. To calculate the re-order level one must take into consideration the maximum consumption and the maximum lead time.
Re-Order Level = Maximum consumption / Maximum lead time
- Re- Order Quantity – the amount of stock that is normally ordered in normal circumstances.
- Economic Order Quantity –if the demand for an item is stable through out a period, the economic order quantity will be the one which will minimize total costs pf procuring and holding stock. This quantity can be worked either by a method of trial and error or by using the formula below.
Economic Order Quantity = 2*Ordering cost/order * Demand/annum
Unit price * Stock holding cost
Sources of Documents
Stock control is carried out by recording all movements of stock on various forms. This documentation includes the following:
- Material Requisition
A material requisition note is sent to the storekeeper from the production department regarding stock that the production department is in need of to continue production.
- Purchase Requisition
A purchase requisition note is sent to the purchasing department from the storekeeper to place an order of the necessary stock needed.
- Inquiry
An inquiry is sent to various suppliers regarding the stock needed so the suppliers can send various quotations and the company then chooses the best cost price and quality.
- Quotations
The company receives these various quotations regarding the stock in need of purchase and the company then chooses the best cost price and quality.
- Purchasing Order
A purchase order is sent to the selected suppliers after the purchasing department has chosen which is the best quotation, quoting how much stock the company would need and any other specified information of stock needed.
- Delivery Note
The delivery note is given to the storekeeper by the supplier quoting the amount of stock that has arrived. Usually a delivery note has two copies so when the stock arrives the store keeper signs this note and one is returned to the supplier specifying delivery and the other is kept by the storekeeper with a record of each receipt. The store keeper checks the actual stock with the delivery note and the purchase order.
- Goods Received Note
The goods received note is raised by the storekeeper from the delivery name signed by him and sent to the purchase department acknowledging the receipt of goods.
- Invoice
An invoice is sent by mail to the financial department quoting the amount that is to be paid to the supplier. More than one invoice is sent if the bill isn’t settled.
- Stock Records
Stock records are completed by the storekeeper. These records include:
- The amount of stock bought and
- The amount of stock issued
This is done so the storekeeper can keep an account of how much stock is left.
Below is a figure illustrating the Flow of Documents
Stock Valuation
Stock can be controlled in two ways, either by Perpetual Stock Valuation or else on a Periodic Stock Valuation basis. If stock has been controlled by one of the above ways, then the fiscal amount and quantity of stock should be the same amount as recorded.
Periodic Stock Valuation
Periodic stock valuation is done on a longer basis then the perpetual, it is usually a done annually (after a long period of time). The periodic stock valuation is also used when checking physical stock.
A few factors need to be taken into consideration when using the periodic stock valuation. These are:
- Stock take is ideally to be done when the company is not in its production period this is because stock take takes up a lot of time and might stop production and sales, thus it is ideally best to be done either on a weekend or overnight
- There will be the need of many stop checkers who may have little knowledge or interest in accuracy of their work (errors may take place)
- Stock sheets should be checked on their own to make sure that they are correct.
- Differences between stock records and physical stock are revealed after a long period and therefore difficult to be tackled
Perpetual Stock Valuation
The perpetual stock valuation is records every purchase or sale that is made. When using the perpetual system the stock is checked frequently. A few advantages over the periodic stock valuation are:
- Reductions of errors as skilled stock takers are employed.
- No disruptions take place in the production and sale of stock
- Differences between physical and recorded stock is revealed sooner and investigated at once.
FIFO _ = First In, First Out – this method assumes that the first stock be bought is the first stock to be brought out (sold or used), this so the valuation of stock is always the most recent acquired stock.
Advantages:
- Realistic, i.e. It assumes that goods are issued in order of receipt
- Easy to calculate
- Stock valuation includes the actual prices that the items have been bought at.
- Closing stock valuation is similar to the most recent prices
Disadvantages
- The prices could, not be the latest prices
- When prices rise, the profit will also be higher than with other methods (thus increase in tax to pay)
LIFO = Last In, First Out – this method assumes that the last stock bought is the first stock to leave(sold or used), this is so the stock is of old purchases made.
Advantages
- Goods are released at the latest prices
- LIFO is easy to calculate
Disadvantages
- Illogical i.e. it takes into consideration that goods are issued in reverse order from that in which they are received
- Closing stock valuation is not similar to the most recent prices
- When the old stock is being used they would be selling at the old out-of-date prices
AVCO = Average Weighted Costs – in this method the average costs are calculated and every time something is bought a new average cost is calculated.
Advantages
- Over a number of accounting periods reported profits are almost alike . I.e. both high and low profits are avoided.
- The irregularity in purchase price is set alike so the prices do not vary greatly.
- Logical i.e. AVCO assumes that even though the items were bought at different times they still carry the same value
- The closing stock valuation is close to the current market values.
Disadvantages
- AVCO is difficult to calculate
- Issues and stock valuation could have prices that never existed
- It is possible for issues not to be at current prices and sometimes when the price is rising it could be below current prices.
Comparing FIFO, LIFO, and AVCO
FIFO and LIFO are almost the total opposite of each other cause one uses up the old stock first whilst the other just takes from the new stock and leaves the old stock pending whilst as for AVCO is almost in the middle as it just takes the average of all and relies on that price.
Financial Recording By: Kirsten Ann Demicoli