Inventory management

accounting

Inventory management is the administration regarding the entry and exit of inputs, finished or semi-finished products, auxiliary goods and tools that a company has.

This type of management is part of cost accounting, being essential to optimize the company's operations.

Importance of inventory management

The importance of inventory management lies in certain points:

  • It allows you to accurately calculate the cost of producing the goods.
  • It is key to reducing inventory maintenance costs. The less inventory remains immobilized, the less the company will have to spend in storage or on loss of perishable products.
  • It allows calculating the production necessary to supply all the expected demand by consumers, also considering an extra stock to face unexpected requests.
  • Another risk to consider is theft. Proper inventory management makes it possible to identify if in any part of the production chain stocks are disappearing.
  • By efficiently monitoring inventories, customer demand can be more accurately predicted. In turn, they are classified, for example, by geographic area or income level.
Inventory control

Types of inventory management for valuation

There are three ways to calculate the cost of a commodity:

  • FIFO valuation method: The value of the good produced is estimated taking into account that the inputs that are used first are those of the longest age in the warehouse.
  • LIFO valuation method: It is the opposite of the previous case. This time the most recently purchased raw material is the one used to produce the merchandise.
  • Weighted average price (PMP): An average is calculated between the value of the inputs registered at the beginning and that of those that were entering while the final product was being produced.

Useful inventory ratios

As indicators in inventory management, we can use the following ratios:

  • Inventory turnover: Indicates the number of times the inventory is converted into money or accounts receivable, that is, it has been sold. The formula is as follows:
  • Coverage: It is the number of periods that the expected demand can be met with the current inventory. For example, monthly installments can be taken as a reference, as in the following formula:

Suppose then that a company has an inventory of US $ 20,000 as of December 2018. Also, during that year, sales were US $ 100,000.

So the inventory turnover is 5 (100,000 / 20,000). In turn, the coverage was 2.4 (12 * 20,000 / 100,000). This means that the goods remained in the warehouse for approximately two and a half months before being sold.

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