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The word inventory means in commerce ‘a quantity of merchandise or goods held in stock’. Inventory control is the process operated to maximize a company’s use of inventory.
Inventory control is also known as stock control which simply means the activity of checking the company’s stock.
The purpose behind Inventory Control to ensure an adequate supply of products to customers and avoid shortage as far as possible.
Let’s discuss some benefits of inventory control to understand how important inventory control is?
- Improvement in customer relationships because of the on-time delivery of goods/services.
- Reduce the cost of purchasing.
- Smooth production which means no stock out.
- Efficient utilization of working capital.
What are the costs connected with inventory?
- Purchase Cost: The purchase cost is the production cost. This cost becomes significant when availing of the price discount. The purchase cost is expressed as Rs/unit.
- Capital Cost: The amount invested in an item is known as the capital cost is an amount of capital not available for other purchases.
- Ordering Cost: The cost of ordering is the amount of money expended to get an item into inventory.
there are two types of ordering costs: Fixed cost & Variable costs
Variable costs depend upon the no. of orders whereas fixed orders do not.
For example the permanent salaries of employees, purchasing, inspections, etc. are the forms of fixed cost.
- Holding cost: Also known as inventory carrying costs, associated with holding a given level of inventory on hand and this cost varies in direct proportion to the amount of holding and period of holding the stock in stores.