MAC3701
Q U E S T I O N S A N D A N S W E RS
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,MAC3701
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, MODULE:
MAC3701
PLANNING & CONTROL
OF INVENTORY
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, 1
THE MANAGEMENT OF STOCKS
Almost every company carries stocks of some sort, even if they are only stocks of consumables such as
stationery. For a manufacturing business, stocks (sometimes called inventories), in the form of raw
materials, work in progress and finished goods, may amount to a substantial proportion of the total assets of
the business.
Some businesses attempt to control stocks on a scientific basis by balancing the costs of stock shortages
against those of stock holding.
The ‘scientific’ control of stocks may be analysed into three parts.
- The economic order quantity (EOQ) model can be used to decide the optimum order size for stocks which
will minimise the cost of ordering stocks plus stockholding costs.
- If discounts for bulk purchases are available, it may be cheaper to buy stocks in large order sizes so as to
obtain the discounts.
- Uncertainty in the demand for stocks and/or the supply lead time may lea a company to decide to hold
buffer stocks (thereby increasing its investment in working capital) in order to reduce or eliminate the
risk of ‘stock-outs’ (running out of stock).
Stock costs
Stock costs can be conveniently classified into four groups:
- Holding costs comprise the cost of capital tied up, warehousing and handling costs, deterioration,
obsolescence, insurance and pilferage.
- Procuring costs depend on how the stock is obtained but will consist of ordering costs for goods
purchased externally, such as clerical cost, telephone charges and delivery costs.
- Shortage costs may be:
the loss of a sale and the contribution which could have been earned
from the sale;
the extra cost of having to buy an emergency supply of stocks at a high
price;
the cost of lost production and sales, where the stock-out brings an entire process to a halt.
- The cost of the stock itself, the supplier’s price or the direct cost per unit of production, will also need to
be considered when the supplier offers a discount on orders for purchases in bulk.
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Q U E S T I O N S A N D A N S W E RS
LATES EXAM PACK
LATEST
EXAM PACK
2 0 2 3
,MAC3701
EXAM PACK
Downloaded by: Mardorette |
Distribution of this document is illegal
, MODULE:
MAC3701
PLANNING & CONTROL
OF INVENTORY
Downloaded by: Mardorette |
Distribution of this document is illegal
, 1
THE MANAGEMENT OF STOCKS
Almost every company carries stocks of some sort, even if they are only stocks of consumables such as
stationery. For a manufacturing business, stocks (sometimes called inventories), in the form of raw
materials, work in progress and finished goods, may amount to a substantial proportion of the total assets of
the business.
Some businesses attempt to control stocks on a scientific basis by balancing the costs of stock shortages
against those of stock holding.
The ‘scientific’ control of stocks may be analysed into three parts.
- The economic order quantity (EOQ) model can be used to decide the optimum order size for stocks which
will minimise the cost of ordering stocks plus stockholding costs.
- If discounts for bulk purchases are available, it may be cheaper to buy stocks in large order sizes so as to
obtain the discounts.
- Uncertainty in the demand for stocks and/or the supply lead time may lea a company to decide to hold
buffer stocks (thereby increasing its investment in working capital) in order to reduce or eliminate the
risk of ‘stock-outs’ (running out of stock).
Stock costs
Stock costs can be conveniently classified into four groups:
- Holding costs comprise the cost of capital tied up, warehousing and handling costs, deterioration,
obsolescence, insurance and pilferage.
- Procuring costs depend on how the stock is obtained but will consist of ordering costs for goods
purchased externally, such as clerical cost, telephone charges and delivery costs.
- Shortage costs may be:
the loss of a sale and the contribution which could have been earned
from the sale;
the extra cost of having to buy an emergency supply of stocks at a high
price;
the cost of lost production and sales, where the stock-out brings an entire process to a halt.
- The cost of the stock itself, the supplier’s price or the direct cost per unit of production, will also need to
be considered when the supplier offers a discount on orders for purchases in bulk.
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