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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER TWENTY-TWO

Inventory Management

THE OBJECTIVE OF inventory management is to formulate policies that will result in an optimal inventory investment. The optimal inventory level varies among industries and among companies in a given industry. The successful management of inventory minimizes inventory at all manufacturing stages while retaining cost-efficient production volume. This improves corporate earnings and cash flow. By operating with minimum inventory and with short production lead times, the company increases its flexibility. This flexibility immediately responds to changing market conditions.

INVENTORY RECORDING AND CONTROL

What inventory records should be kept?

Inventory files should contain records of balance on hand, quantity committed, and inventory location. The inventory balance must be adequate to maintain production schedules, properly utilize machines, and meet customer orders. Some inventory must be kept at the different manufacturing stages as hedges against the variabilities of supply and demand as well as to hedge against the possibility of problems arising during the manufacturing process. A sales forecast is the beginning step for effective inventory management since expected sales determines how much inventory is required.

Inventory records should provide information to meet the needs of the financial, production, sales, and purchasing managers. Inventory information may include the following by major type:

  • Unit cost
  • Quantity on order
  • Historical ...

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