Inventory value

Inventory value
See also

Inventory value is a value of tangible personal property held for sale in the usual course of business, in the process of production for such sale, or to be used currently in the production of items for sale[1].

Inventory is an asset that is difficult to control – it arrives and departs company premises daily, is scattered throughout the warehouse and production areas (and possibly off-site storage locations), may contain obsolete or scrap items, can include thousands of part numbers and also can include items owned by suppliers or clients, and it may be valued using a variety of methods for both direct and overhead costs. It is used control systems to make I less likely that the units and costs associated with inventory are incorrect[2].

Control Over Inventory Value

One way of keeping control over inventory value is to balance the values of input and output. If the value of the input is kept to below the value of output, then stock decreases. The value of supplier deliveries should be smaller than the forecast value of consumer dispatches in each time period. Supplier deliveries are a consequence of the purchase order and schedule commitment, so it is the ordering process that has to be kept under budgetary control. The control process relies on gathering information on [3]:

  • the forecast value of demand for each time period (week or month)
  • the amount of schedule or order commitment already made for delivery in each time period
  • the standard value of last-minute (emergency) orders which are committed each time period

A system on stock reduction, or increase, has also to be defined in terms of what value change in inventory level is considered practical or helpful each time period. From this information it is easy to estimate:

  • The maximum delivery value for every time period
  • The maximum value of order commitment for delivery per period
  • The maximum value available for new orders set for delivery during that period

This maximum value obtainable for new orders is the ceiling for total order value for delivery in the time period. If this value is exceeded by placing a further supply order, then that order should be rescheduled into a later time period (or another order delayed) or otherwise, the resulting stock value will increase[4].

Application of Inventory Value

Inventory is expensive and it equals up working capital. Furthermore, inventory requires storage space and incurs other carrying costs. Some products such as perishable food items and hazardous materials (hazmat) require special handling and storage that add to the cost of holding inventory. Inventory can also worsen quickly while it is in storage. Additionally, inventory can become obsolete very promptly as new materials and technologies are being added. And the important thing is that large piles of inventory delay a firm's ability to react swiftly to production difficulties and changes in technology and market conditions.

Inventory investment can be estimated in various ways. The typical annual physical stock counts to discover the total dollars invested in inventory provides an absolute measure of inventory investment. Then The inventory value is recorded on a firm's balance sheet. This value can be handled to compare the budget and past inventory investment. Nevertheless, the absolute dollars invested in inventory does not provide a sufficient sign concerning whether the company is using its inventory intelligently.

The inventory turnover ratio (or inventory turnovers) is widely used to measure to analyze how efficiently a firm uses its inventory to generate revenue. This ratio determines how many times a company turns over its inventory in an accounting period. Faster turnovers are regularly observed as a positive trend because it indicates that the company is able to create more revenue per dollar in inventory investment. Further, faster turnovers allow the company to improve cash flow and decrease warehousing and carting costs. Conversely, a low inventory turnover may show to overstocking or deficiencies in the product line or marketing effort[5].

Footnotes

  1. P. R. Delaney, O. R. Whittington, 2010, page 187
  2. S. M. Bragg, 2005, page 35
  3. S. M. Bragg, 2005, page 85
  4. S. M. Bragg, 2005, pages 85, 86
  5. M. A. S. García, R. T. M. Salgado, V. M. R. Carbajal, 2013

References

Author: Monika Mendak