Inventory management is major part for logistic operations as the decisions made with regard to storage area, stock levels and order quantity that has considerable impact on cost of inventory and risk of being out of the stock. Further, it is associated with timely replenishment of operations, availability of shelf and relationship with the customers. Optimal method of inventory management controls the company’s inventory irrespective of the fact that the inventories are kept for resale or internal use. It manages fully fledged profile for inventories that includes all aspects like re-order level, re-order quantity, product specification, product information and lead time (Agrawal and Smith 2013). It manages multi-store, multi currency, multi-level and multi location inventory structure. Drill down facilities, reporting and inquiries capabilities are controlled in best way for company’s inventories. Optimal management of inventory assist is achieving 3 major aims of the company. Optimal inventory management is beneficial for – (i) estimating exact requirement of inventory on-hand. It will help in preventing the shortages of product and will allow keeping sufficient inventory without storing high level of inventory in the warehouse (ii) it will support in maintaining organized warehouse. Companies prefer to optimize the warehouse through storing highest selling items together to make it easily accessible. This assists in speeding up the process of order fulfilments and keeping the customers happy (iii) optimal management of inventory helps to save money as well as time. Through keeping the track of on-hand orders seller can save the effort in recounting the inventories to assure that the records are accurate. It also helps in saving money as the money is not wasted in slow moving products (Raviv and Kolka 2013).
Economic order quantity (EOQ) is the production formula that is used for determining most efficient amount for goods that shall be purchased on the basis of carrying and ordering costs. To be more specific, it indicates the optimal inventory quantity that shall be ordered by the company each time for minimizing the cost related to holding and ordering the inventories. EOQ assumes that the demand is constant and inventory will be depleted at fixed rate until it is reached to zero. At this point particular number of items is arrived for returning the inventory to beginning level. Hence, inventory cost under EOQ model involves trade-off among order cost and costs of inventory holding. Ordering large amount of product at once will increase the holding cost of the business (Chen, Cárdenas-Barrón and Teng 2014). On the contrary, more frequent orders for small number of items will decrease the cost of holding however it will increase the ordering cost. Therefore, the EOQ shall find the quality at which these costs are minimized. Controls required to put for best action of EOQ are as follows –
Once the above mentioned data are collected the EOQ shall be computed through using the formula –
Variance analysis is quantitative investigation to determine the difference among planned and actual behaviour. Variance analysis is used for maintaining control over the business. It is especially effective while the variance is reviewed based on the trend line so that any sudden change under variance level will be more apparent from month to month. It also involves the investigation of differences so that the outcome will indicate the reason of variance from expectation.
Advantages of variance analysis –
For instance, if material price variance = $ 10,000 and material usage variance is – $ 7,000, it indicates that material purchased were less than the standard material purchase quantity and material used were more as compared to to standard use. Therefore, the management may take steps to find the reason why material is used in more quantity.
Disadvantages of variance analysis –
If the above mentioned example is taken into consideration it can be stated that it is not always possible to find out the reason why material has been used more as compared to the standard quantity.
Generally, an entity produces report that contains information suitable for the the purpose of public consumption. The external reports can be used for disseminating the information that will assist in achieving the strategic objective. Characteristic of the externally reported information are as follows –
Manufacturing costs are the costs incurred for producing a product that is made for selling to the customer. It involves direct labour, direct material and the manufacturing overheads. Details of the manufacturing costs are as follows –
Example – Saudi Modern Factory will produce 1000 tables. It will require wood amounting to $ 12,000, wages to the carpenters will be $ 2,000, $ 500 will be paid for the security guard wages, $ 100 will be paid to purchase a bag of nails and $ 500 for will be paid as factory rent. Therefore, total manufacturing cost will be (12000 + 2000 + 100 + 500+ 500) = $ 15,100. Hence, the company incurred $ 15,100 for manufacturing 1000 tables or it incurred $ 15,100/100 = $ 15.10 per table (SMF 2018).
For assuring that the budget serves the effective technique for making managerial decision certain principles needs to be followed. These are – (i) management support – cooperation and support from top management is required for implementing the budget successfully. They shall not only take interest in setting up the targets and finishing up the budget it shall further be monitored continuously (ii) employee involvement – participation from the employees will assist in developing the budget in accordance with their preference and will motivate them to achieve the budget (iii) Flexibility – if basic assumption regarding the budget changes during the year the budget shall be restated accordingly (iv) sound system of accounting – company must have good system of accounting for generating reliable, precise, prompt and accurate information required for successful budget implementation.
Out of various budgeting principle methodologies top-down approach is most inspiring as it backed down from upper management to lower positioned people. Under this method the department estimates costs of higher level tasks and using those estimates constrains for the lower level tasks are calculated. This method helps the employees to understand their goal in better way (Vasu, Stewart and Garson 2017).
Capital budgeting techniques |
Project X |
Project Y |
Payback period |
3.73 Years |
4.89 Years |
Accounting rate of return |
1.09 |
1.04 |
Net present value |
$ 9,153 |
$ 4,247 |
Profitability index |
1.09 |
1.04 |
As the net present values of both the projects are positive and the payback period of both the projects are less than their useful life, both the projects are acceptable. However, if the projects are mutually exclusive and only one project is to be selected, Project X shall be selected. The reasons are as follows –
Therefore, Project X shall be chosen over Project Y.
4.
Phrase meaning –
Axiom is defined as universally recognized or self evident truth. Above mentioned 10 axioms associated with personal finance delivers a foundation through which the individual irrespective of their status in any level of financial cycle, can measure direction and soundness of personal financial lifestyle and planning (Danthine and Donaldson 2014). Keeping it mind the fact that at first glance these axioms may seemed to be simple or trivial, they provide the driving forces behind all those are followed. Further, these axioms weave together the techniques and concepts which in turn, allows to focus on underlying logic for practising financial management.
References
Adrian, T., Crump, R.K. and Vogt, E., 2015. Nonlinearity and flight to safety in the risk-return trade-off for stocks and bonds.
Agrawal, N. and Smith, S.A., 2013. Optimal inventory management for a retail chain with diverse store demands. European Journal of Operational Research, 225(3), pp.393-403.
Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V., 2016. Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), pp.28-45.
Bhandari, S.B. and Iyer, R., 2013. Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), pp.667-676.
Brunnermeier, M.K. and Oehmke, M., 2013. Bubbles, financial crises, and systemic risk. In Handbook of the Economics of Finance (Vol. 2, pp. 1221-1288). Elsevier.
Chen, S.C., Cárdenas-Barrón, L.E. and Teng, J.T., 2014. Retailer’s economic order quantity when the supplier offers conditionally permissible delay in payments link to order quantity. International Journal of Production Economics, 155, pp.284-291.
Danthine, J.P. and Donaldson, J.B., 2014. Intermediate financial theory. academic press.
Donadelli, M., Fasan, M. and Magnanelli, B.S., 2014. The agency problem, financial performance and corruption: Country, industry and firm level perspectives. European Management Review, 11(3-4), pp.259-272.
Giroud, X. and Rauh, J., 2015. State taxation and the reallocation of business activity: Evidence from establishment-level data (No. w21534). National Bureau of Economic Research.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Khataie, A.H. and Bulgak, A.A., 2013. A cost of quality decision support model for lean manufacturing: activity-based costing application. International Journal of Quality & Reliability Management, 30(7), pp.751-764.
Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.
Lucko, G., 2013. Supporting financial decision-making based on time value of money with singularity functions in cash flow models. Construction Management and Economics, 31(3), pp.238-253.
Mellor, S., Hao, L. and Zhang, D., 2014. Additive manufacturing: A framework for implementation. International Journal of Production Economics, 149, pp.194-201.
Raviv, T. and Kolka, O., 2013. Optimal inventory management of a bike-sharing station. IIE Transactions, 45(10), pp.1077-1093.
Skorin-Kapov, J., 2019. Financial Machinations and Ethical Perspectives. In Professional and Business Ethics Through Film (pp. 91-138). Palgrave Macmillan, Cham.
SMF., 2018. Wooden Furniture Manufacturing Company | Steel Furniture Manufacturers in Saudi Arabia – Saudi Modern Factory. [online] Available at: https://smf.com.sa/ [Accessed 25 Aug. 2018].
Špa?ková, O. and Straub, D., 2015. Cost?benefit analysis for optimization of risk protection under budget constraints. Risk Analysis, 35(5), pp.941-959.
Vasu, M.L., Stewart, D.W. and Garson, G.D. eds., 2017. Organizational Behavior and Public Management, Revised and Expanded. Routledge.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.
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