Home COMMERCE TOPIC 6: STOCK ADMINISTRATION | COMMERCE FORM 2

TOPIC 6: STOCK ADMINISTRATION | COMMERCE FORM 2

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COMMERCE FORM TWO FULL NOTES

Meaning of the Term Administration

Define the term stock administration

Are the overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale.
A business’s inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business,
whether the mismanagement results in an inventory glut or an inventory shortage.
The Meaning of Receiving; Issuing; Stocktaking; Care of Stock; Placement of Stock Items
Explain what is meant by: Receiving; Issuing; Stocktaking; Care of stock; Placement of stock items
FUNCTIONS OF STOCK ADMINISTRATION
Receiving the stock:
the major function of receiving section of the organisation are
unloading and packaging. Receiving involves accepting deliveries from
carriers, unpacking the deliveries, checking the deliveries on the kind,
quantity and quality etc
Placing the goods:
the stores convenient for the organisation and the layout should be
convenient to the class of goods handled and bins etc should be arranged
in logical order.
Basic rules for placing goods in the warehouse
  • Stock must be kept in a way that will clearly show which ones are old stocks and new stocks
  • heavy goods should be kept near the flow
  • goods most frequently required should be easily accessible.
  • valuable or fragile goods should receive special protection.
Care of stock:
the shopkeeper should cleaning a warehouse in and outside including the
general cleaning of floors, walls, ceiling boards, rooms, container
etc, Dusting of various items kept in rooms or stocks. Ensuring that the
materials are well preserved, sorting out spoilt goods, for fragile
goods and perishable materials needs special handling care.
Issuing of stock:
issuing of stocks should be done by the storekeeper and has assistance
who have free access to the storeroom. When a department needs materials
from the store, stock should be issued against voucher or requisition
order signed by the person who authorized to issue. This is purposely
done to keep proper records and control the movement of stock i.e.
delivery is done against vouchers to ensure that the outflow of stock is
equal to inflow of stock.
Inventory Control:
refers to the process of checking and keeping records of the quality
and value of goods in stock. It includes all activities that are
necessary to ensure that the right stock levels are maintained at all
time to ensure that overstocking and shortages do not occur. The goal
for a business is to invest the least amount in inventory while
maintaining specific operating requirements. Ideally, the inventory
control in place allows the business to supply needs in regards to
production or to the customer at the precise moment needed, at the
minimal price. Successful inventory control keeps waste and surplus at a
minimum and efficiently handles storage, production and distribution of
inventory.
Basic duties of stock control.
  • Assessing the items to be held in stock.
  • Deciding the extent of stock holding of items.
  • Regulating receipts and issues into store houses.
The Meaning and Determination of Turnover; Stock leve
Give the meaning and determination of Turnover; Stock level
Stock Levels Definition:
To
overcome the problem of over-stocking or under-stocking it is very
essential that pace of consumption should be studied carefully for a
number of months and following stock – levels should be fixed by
management for all individual items of material except low value items.
  1. Maximum Level.
    It means maximum quantity which may be held in stock. This level is
    fixed on basis of various considerations main of which are : rate of
    consumption, finances and storage space available.
  2. Minimum Level.
    It means the lowest level below which stocks should not be allowed to
    fall. It is essentially a buffer stock. This level is fixed by taking
    into account the rate of consumption and the time necessary to obtain
    delivery of fresh materials (called lead time).
  3. Danger Level.
    This is a very critical level which is below minimum level If stock of
    any particular item reaches this level immediate action to make purchase
    in a quantity sufficient to tide over the delay in the regular supply,
    may be necessitated so that production may not stop. In view of the
    above levels it is necessary that a level of stock should be fixed at
    which further action for purchases is made for normal procurement. This
    level is called REORDER LEVEL.
  4. Fixation of Stock Levels.
    The levels of stocks to be held may be determined by policy decision of
    the management keeping in view the level of production, finances
    available, lead time and the storage capacity.
Formula:
Economic order Quantity (EOQ) is generally worked out by using the following formula:- FOQ = 2 C O/I where
  • C = Annual consumption quantity
  • O = Cost of placing one order
  • I = Carrying cost of one unit of materials inventory
Example 1
Example:
One
Unit of Material Omega Costs Rs.0.50, yearly consumption is 20,000.
Cost of placing one order is Rs.20 and carrying cost of inventory is
20%.
  1. EOQ = 2 x CO/I = 2 x 20,000 x 20/20% of 0.50 = 800,000/ 0.1 = 8.000.000 = 2,828 units approx per order.
  2. Finances required for each order = 2828 x 0.50 = Rs.1414.
  3. Number
    of orders to be placed in a year = Total annual consumption/EOQ
    = 20,000/2828 Approximately 7 orders.
What is ‘Inventory Turnover’
Inventory
turnover is a ratio showing how many times a company’s inventory is
sold and replaced over a period. The days in the period can then be
divided by the inventory turnover formula to calculate the days it takes
to sell the inventory on hand or “inventory turnover days.”
Generally it is calculated as:
  • Inventory Turnover = Sales / Inventory
  • However, it may also be calculated as:
  • Inventory Turnover = Cost of Goods Sold / Average Inventor.
FORMULAS
  1. Maximum
    Level of Stock = (Reorder Level + Reorder Quantity) – (Minimum rate of
    consumption x Minimum reorder period) Maximum Level may be alternatively
    fixed as Safety Stock + Reorder Quantity or EOQ.
  2. Minimum level of stock = Reorder level – (Average rate of consumption x Average reorder period)
  3. Safety Stock = (Annual Demand/365) x (Maximum Reorder Period – Average Reorder Period)
  4. Reorder
    level or Ordering level = Maximum rate of consumption × Maximum reorder
    period. Alternatively, it will be = safety stock + lead time
    consumption [lead time consumption will be = (Annual consumption -s-
    360) × lead time]
  5. Danger level = It is slightly below the
    minimum level. It is a level at which special efforts should be made to
    obtain supplies of materials, i.e. Minimum rate of consumption ×
    Emergency delivery time
  6. Average Stock level = (Maximum stock
    level + Minimum stock level) x 14 or Minimum Stock level + 14 Reorder
    Quantity. Obviously, the Reordering level is below the Maximum level,
    and Minimum level is below the Reordering level and the Danger level is
    below the Minimum level. Safety Stock is above minimum level.
Important Elements:
In above calculations, the following elements are important:
  1. Consumption Rate:
    It is consumption or use of material per day (or per week) by
    production department. These rates will be maximum and minimum, the
    simple average of maximum and minimum rates is average consumption rate
    per day or per Week.
  2. Reorder Period: It is
    period between materials ordered and materials received. The average
    reorder period is simple average of maximum and minimum reorder periods.
  3. Reorder Quantity:
    At the time of purchase of material, one of the important problems to
    be faced is how much quantity of a particular materials to be purchased
    at a time. If purchases are made frequently in small quantities it will
    result in loss of trade discounts and economies in purchasing. On the
    other hand if purchases are made in large quantities it will lead to
    over stocking and cost of storage will be high. The ordering quantity
    should be economic and reasonable by all aspects. It should be Economic
    Order Quantity (EOQ). The calculation of EOQ has been discussed later
    on.
Example 2
Illustration 1: [Fixation of stock levels]:
Two components A and B are used as follows:
  • Normal usage 50 units per week each
  • Minimum usage 25 units per week each
  • Maximum usage 75 units per week each
  • Reorder Quantity A 300 units; B 500 units
  • Reorder Period A 4 to 6 weeks, B 2 to 4 weeks
Calculate for each component:
  1. Reorder level,
  2. Minimum Level,
  3. Maximum level,
  4. Average Stock Level.
Solution:
  1. Reorder Level = Maximum Rate of Consumption x Maximum Reorder Period. A = 75 x 6 = 450 units B = 75 x 4 = 300 units
  2. Minimum
    Level = Reorder Level – (Average Rate of consumption x Average Reorder
    Period) A = 450 – (50 – 5) = 200 units B = 300 – (50 x 3) = 150 units
  3. Maximum
    Stock Level = (Reorder Level + Reorder Quantity) – (Minimum Consumption
    Rate x Minimum Reorder Period) A = (450 + 300) – (25 x 4) = 650 units B
    = (300 + 500) – (25 x 2) = 750 units
  4. Average Stock Level = (Maximum Stock Level + Minimum Stock Level)/2 A = (650 + 200)/2 = 425 units B = (750 + 150)/2 = 450 units
  • Average Stock Level can also be calculated by the formula.
  • Minimum Stock Level + ½ of Reorder Quantity
  • A = 200 + ½ x 300 = 350 units
  • B = 150 + ½ x 500 = 400 units
Example 3
Illustration 2:
If
the minimum stock level and average stock level of raw material A are
4,000 and 9000 units respectively, find out its reorder quantity.
Solution:
  • Average stock level = Minimum stock level + ½ of Reorder Quantity
  • 9000 = 4000 + of Reorder Quantity
  • ½ Reorder Quantity = 9000 – 4000 = 5000
  • Reorder Quantity = 10,000 units
Exercise 1
QUIZ
  1. Describe the effects of a warehouse being without stock.
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