Inventory Control Methods

WealthHow Staff Oct 8, 2018
Within a given production house, cost accountants resort to different inventory control methods in order to control the consumption of materials. Some of the effective methods explained here will help you to maintain a good flow of material, thereby minimizing wastage.
According to the second International Accounting Standard (IAS 2), inventories are a list of all items in stock and are valued at a price lower than the net realizable cost. According to the general doctrine of accountancy, stock is an asset; but from the producer's point of view, it is treated as an expenditure.
This logic is very realistic, because a stock is always valued at a lesser price than the net realizable. In addition, over consumption of stock, uncontrolled wastage, delayed stock supply, and unaccounted stock add to the production expenditure.

Objectives of Inventory Control

  • To minimize wastage and over consumption
  • To keep a good and even flow of the intake and issue of stock
The art of costing probably originated during the world wars, when war profiteers realized that controlling an expenditure before it is incurred is much more profitable and saves a lot of resources.
This nature of cost accounting has proved to be advantageous, as it overcomes the demerits of financial accounting, which aims at just recording transactions after they have taken place.

Methods of Inventory Control

The following are the primary stock control methods that are often used by companies in their production operations. All these methods are well established and have been used in production industry for quite a long period of time.

Min-Max Plan

In the min-max plan, the cost accountant who is in charge of the inventory control, establishes two levels - the minimum and maximum level of stock. When the items/materials/units reach the minimum level, the order to replenish the stock is placed.
The maximum level is the level that the stock quantity should not exceed, as it will put a considerable strain on the finances of the company and will also create problems, such as storage, wastage, and over consumption.

Two Bin System

The two bin system is used to establish a connection between the order and reorder procedures. As mentioned, from the point of view of a producer, uneven supply of stock and odd consumption is not very healthy. Such unevenness is sorted by two-bin system. In such a system, the stock is sorted into two bins, or piles.
The first stock (bin 1), is the larger of the two and is used up between the time period that lasts from purchase of stock till the reorder. The second stock (bin 2), can be used from the time when the reorder is placed till the order is actually received. The second stock has a considerable amount of stand by that can be used for emergencies.

Order Cycling System

This system is based upon a review timetable. According to this system, a review of the entire inventory is done at regular intervals, such as 30 days, 60 days, or 90 days. After the review is done, the cost accountant views stock items with low quantities that will not last up to the next review interval.
The purchase order for such a stock item is placed immediately. The order cycling system is not exactly foolproof, and one requires a rather experienced cost accountant to efficiently conduct the same.

ABC Analysis

Any stock is segregated into different sections and items classified into 3 sections, A, B, and C. The logic of segregation is that section A has limited number of items that are very expensive. Section B has items that are not expensive, and the number of units to be ordered is also not very large. Section C has numerous items having low monetary value.
The logic behind the segregation is that every section is viewed differently by the cost accountant due the difference in order time, reorder time, and delivery period. For example, the units in section A are less but their monetary value and delivery period is high. The ABC analysis is simple and perhaps the most effective of all stock control methods.
There are many other methods, such as FIFO and LIFO (issuance inventory valuation methods) that are considered to be very effective in managing the inventory. In addition to that, you might also refer to some established mathematical formula, such as the economic ordering quantity.