Question

Describe the control procedures that firms commonly used for inventory. Explain which controls and tests of controls would be appropriate for each of the specific controls that you mentioned.

Answer 1

Control procedure commonly used for inventory-

Basics

Many small businesses use a basic method of inventory control called minimum stock levels. With this form of control, additional stock gets ordered when the existing stock has reached a certain level.

JIT

One of the most popular methods for controlling inventory in the manufacturing environment remains just in time, or JIT, inventory control. JIT seeks to deliver inventory to the production floor just in time for use. The JIT method delivers only the exact quantities required to complete current production—no more, no less. JIT inventory control is highly dependent on the ability of the company’s suppliers to deliver on demand. In most manufacturing environments utilizing JIT delivery, the supplier has a warehouse very close to the manufacturing facility.

Economic Considerations

The economic order quantity, commonly referred to as EOQ, seeks to find a balance between holding too much or too little inventory. The EOQ formula gets quite complex, and to make use of it, a company must know the following information—annual usage in units, ordering cost in dollars per order, annual carrying cost rate as a decimal of a percentage, unit cost in dollars and the order quantity in units. The EOQ method seeks to find the order quantity that has the lowest total cost of carrying the inventory.

Safety Stock

Safety stock refers to an additional amount of stock carried over the normal stocking level requirements as a buffer against uncertainty. Some reasons for using safety stock as an inventory control method include supplier performance problems, long lead times and material uncertainty.