Controlling Stock Inventories

Just what is an Inventory Management Program?

Businesses cannot function without inventory management systems since inventory is a valuable asset.

The inventory is the hub around which a company’s day-to-day operations revolve.

Therefore, it is essential to set up efficient control systems to protect the inventory (for example, to save costs and stop fraud, theft, damage, and manipulation of physical units and inventory records).

The term “inventory control system” is commonly used to refer to such mechanisms.

In order to meet these standards, businesses typically implement both internal and management control systems for their stock.

Management and internal control systems are implemented to reduce wasteful spending and protect against things like theft, damage, and tampering with stock data.

Methods of Internal Auditing

A company’s internal control systems are the systems it implements to prevent inventory loss and maintain reliable records of that inventory.

There is a wide range of possible components for an inventory’s internal control system. Several of these characteristics are discussed in this section.

In the first place, a control system for accountability should be designed, with a single person or group of employees held responsible for the inventory and its state. This reduces the possibility that stolen or damaged goods may go unreported.

Second, a control should be implemented to ensure that the received inventory is checked for quality and quantity by the receiving department.

Bills and invoices should only be considered valid if they bear the authorized signatory’s signature.

The warehouse manager accepts liability for transferred products, vouching for the quantity and quality of any inventory received, if storage is required.

Third, the transferring report must be separate from the department that submitted it. This allows for an accurate assessment of the quantity and quality of the goods received.

Fourth, the warehouse should only process official requisitions for moving inventory. This ensures that the requisitioning department takes on the burden instead of the warehouse staff.

Fifth, there needs to be adequate security measures in place, including fire alarms, guards, night watchmen, and more.

Sixth, it is important that the records and physical units are not under the direct control of the same person or group of people.

Therefore, the records department should not have access to the physical inventory, and these two departments should submit the reports straight to the accounting department.

Finally, no one from accounting should ever be allowed to see inventory (and vice versa). This prevents any misadjustments or fraudulent actions.

In a word, a system of internal controls relies heavily on the division of roles in inventory handling and accounting.

The inventory is vulnerable to theft, fraud, and pilferage if solid internal control procedures are not in place.

Methods of Controlled Management

Maintaining the right stock level requires reliable management control systems.

This is due to the fact that excessive stockpiling results in higher carrying costs and lower revenue. In a similar vein, losing customers because of insufficient stock levels can significantly impact a company’s bottom line.

Two goals must be met by any management control system:

A method for deciding how much stock should be ordered or produced

Setting the best possible prices for stock items

Keeping an eye on stock levels is crucial for maximizing profits and decreasing losses.

There is a risk of overstocking if the business does not have adequate management control measures in place.

Excessive stock means higher property taxes, insurance premiums, handling and storage fees, and other administrative charges, which add up quickly.

Too little stock can cost a business clients and sales.

An excessively limited inventory creates a loss of business, which in turn results in lost or reduced income, just as an excessively big inventory produces high carrying costs that contribute to avoidable losses.

The obvious conclusion is that stocking too much or too little inventory is harmful to a business.

This is why inventory management control systems exist: to keep stock at just the right level. Internal control could fail without the addition of such a mechanism.

Theft, pilferage, damage, and obsolescence are all possible outcomes.

Several mathematical models are employed to zero in on these two measures for management control systems.

The EOP is the inventory threshold at which an economic order must be placed.

The EOQ is the minimum order size that will still allow you to take advantage of volume discounts and other cost savings opportunities.

Thus, it is possible to develop appropriate management control by carefully introducing a model suited to the firm.

This safeguards the company against the possibility of financial loss as a result of an inefficient inventory management system.

Additionally, picking the right model that needs no adjustments aids the business in keeping the right amount of stock on hand.

Conclusion: The Inventory Management System

An inventory can be labeled as ABC, VED, FSN, or SDE to facilitate better management. This categorization is useful for selecting choices.

The inventory turnover ratio or average inventory holding period is a measure of the effectiveness of inventory management.

There are two main types of inventory control systems: internal and management.

Theft, damage, pilferage, and obsolescence are all things that internal control systems should be able to prevent.

To improve inventory management efficiency, management control systems should include means of calculating the optimum stock level.

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