With the advancements and introduction of new and efficient techniques of inventory control and valuation, it is essential for every business to keep up and adopt these methods to improve their profitability and efficiency.

What is Inventory control and valuation?

Inventory control is the process of maintaining sufficient stock of raw material and ensuring the continuous process for uninterrupted production schedule. The main objective is to avoid overstocking or understocking. It is essential to do so because:

1. Overstocking leads to higher costs of holding the inventory
2. Understocking acts as a hindrance to the production process and interrupts the flow

It reduces wastage and cost by allowing the enterprise to purchase raw material economically by purchasing the exact number of units needed for production at the time.

There are two commonly used inventory control techniques- Just in time Approach (JIT) and Economic order quantity (EOQ).

• Just In Time (JIT) Approach: This approach focuses on increasing efficiency and minimizing inventory. This is done by aligning the raw material orders directly with the production schedules on an as-needed basis. It ensures minimal wastage of material and reduces storage cost as well. However, it relies on steady production, high-quality workmanship and most importantly, reliable suppliers. It can be used for items that are not essential for daily production and are not needed in huge quantities. For example, machine spare parts.

• Economic Order Quantity: This method focuses on determining the number of units to be purchased at one time which ultimately reduces the ordering and carrying cost of the company. Ideally, it is used when demand for a particular input is constant throughout the year. This method is ideal for placing orders for raw material that is needed in huge quantities and is a common ingredient or material required in the production of various goods.

Inventory Valuation is the process of determining the monetary value of the inventory with the company. The value is ascertained on the basis of the cost incurred to acquire to inventory and get it ready for sale.

It is essential that the value of the inventory is accurate as it-

• is used to determine Cost of Goods Sold (COGS) and Gross Profit for the year.
• helps in ascertaining the financial position of the company
• allows companies to maintain accurate records and gives a realistic picture

There are several methods of Inventory Valuation-

• First In First Out
• Last In Last Out
• Weighted Average Method

• First In First Out: This method is based on the premise that the first inventory purchased is the first to be sold. It is one of the most common methods of inventory valuation used by businesses as it is simple and easy to understand. Unfortunately, the FIFO model fails to present an accurate depiction of the costs when there is a rapid hike in prices.

• Last in First Out: Under this inventory valuation method, the assumption is that the newer inventory is sold first while the older inventory remains in stock. This method is hardly used by businesses since the older inventories are rarely sold and gradually lose their value. This results in significant loss to the business.

• Weighted Average Method: Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory. It is the most efficient method and gives a realistic picture of the inventory value.

It is essential to weigh the pros and cons of the inventory valuation and control methods mentioned above and choose the ones that would give the most realistic and accurate picture of the company’s inventory according to the nature of the business operations.