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Methods of Inventory ControlDelaware Technical Community CollegePatricia Sensenig4/27/16Inventory is one of the top performers of a business. Customers come into a store or business usually to purchase inventory stocked on the shelf or inventory in the kitchen. The product is the #1 way to make profit in a business (one that is not a service business). Since the product is needed in order to make a profit, it is extremely important for companies to have methods of tracking this inventory. Discussed below are several inventory methods such as the ABC analysis, order-cycling system, perpetual inventory, min-max system, inventory turnover ratio, FIFO, LIFO, average weighted cost, two bin system, and the just in time method. All these methods help track inventory and help managers decide when to re-order. A commonly known method of inventory control is the ABC analysis. It stands for Always Better Control and classifies into three categories based on their materials value. The most expensive items got in group A which usually has the least number of items but carries the most valuable, Group B has items that are less expensive but carry more items than group A, and Group C has the most amount of items with the lowest monetary value CITATION Sch11 \l 1033 (Scholasticus, 2011). Each item has different priority and order/delivery time so categorizing them into ABC can help the accountant or inventory manager when ordering, stocking, and recording inventory. One method I am familiar with while working at Wawa is the order-cycling system. It is similar to the periodic inventory method. It allows inventory managers to do orders and inventory checks at certain time intervals. There are a few different orders we do at Wawa such as the bread order (daily) and then items such as boxes for sandwiches which are done every other day. Wawa is a fast moving store so we make orders constantly. This method appeals more to our inventory checks. We check our inventory at different time intervals. Ice cream isn’t a top selling item so we check that inventory every 6 months. It is often found that there are less units than there should be because people steal. Food items we serve such as bacon, chicken cheesesteak, and macaroni and cheese get checked monthly. When these items do not match what our inventory on hand should be, then we know employees are either over-portioning or under-portioning (usually employees tend to over portion). When customers order food on our computer screens, it sends it to computers located in front of us employees telling us exactly how many of each item to serve. For example, an order could pop up as follows: wheat roll, (3) American cheese, (3 scoops) of chicken cheesesteak, (6 slices) of bacon, lettuce, sweet peppers, and unions. In this case, our electronic inventory system tracks the 1 wheat roll, the 3 slices of American cheese, 3 spoodles of chicken cheesesteak, and 6 slices of bacon. It leaves items like lettuce, unions, and sweet peppers out of the count because it would be impossible tracking every single piece of shredded lettuce. The same goes for sweet peppers and onions because they are shredded, not big slices to count individually. When orders are made, they automatically get counted into the cycle count. At the end of the month, sometimes we end up with less bacon than we should because some employees don’t count every single slice as they should. Back to the order-cycling method, it is best effective when the ordering manager as a great understanding of how much will be sold or used before the next count. It can be risky because items might run out before the next order comes around. Wawa does orders very often but most stores make their orders less often.Wawa uses a periodic inventory system as described and also a perpetual inventory system which can track inventory at any time using scanners. These scanners can scan the barcode and tell us how many of each item we should have. Scanners are a way technology has helped with inventory control. A cool concept in Quickbooks is the Inventory On Hand Report because it lists what items should be in our inventory with a column to track what the inventory on hand actually is. It helps track shrinkage. Perpetual inventory is one of the most efficient way of controlling inventory because it is available at all times. Another method of inventory control is the Min-Max system. Using this method, inventory managers can set levels of stock according to how many items they sell and how long they can keep the item on hand before it spoils or becomes obsolete. As long as the inventory on hand is somewhere in between the predetermined minimum and maximum levels, then the inventory manager is doing a good job. Some more levels could be set with this method such as the danger level, average stock level, economic order quantity (EOQ) and the re-ordering level CITATION Cha15 \l 1033 (Chand, 2015). The danger level is below the minimum stock level and inventory should never fall to this level. The average stock level is taking the midpoint between minimum and maximum levels to find a healthy center. This helps managers figure out what the inventory count should be. The economic order quantity is a formula to help figure out how much of each item should be ordered according to how much sells, cost of placement and cost of carrying the item. Re-ordering level simply determines when is the right time to make another order. Using these levels guides managers when doing their inventory orders. Inventory Turnover Ratio is a great way of tracking inventory. It is a formula used to indicate how fast an item sells. It is calculated using the following formula: Inventory Turnover Ratio = Cost of goods consumed/sold during the period/Average inventory held during the period CITATION Cha15 \l 1033 (Chand, 2015). The higher the sum, the faster the item sells. An item with a low turnover ratio would indicate a slow selling item. Thus giving the manager an understanding of when to re-order the item and also an understanding of how fast items are selling.Three methods all accountants know are FIFO, LIFO, and average cost method. FIFO stands for First-In-First-Out and follows as such. Whatever items are shipped first, are sold first. It is the most efficient and common method and works best with food. Food items like milk and bread are rotated on a First-In-First-Out basis to ensure items are being sold according to their expiration date. Then, managers can just check if the expiration date is close and spoil the item accordingly. LIFO stands for Last-In-First-Out and is basically the opposite. The most recent item shipped is the first to be sold. This method is most useful with electronics such as new televisions and new cell-phones. Using this method, businesses can sell the most expensive items coming in first, then sell whatever else is left after they already made the max profit. The weighted average cost method assumes businesses sell all items at the same time without regard to when they were received. The total number of units, total price of all units, and total value of all units are calculated to come up with an average cost per unit. LIFO is popular in the United States where a lot of other countries banned LIFO and only use FIFO and average weighted cost.One last method is the two-bin method which includes a main bin and a backup bin of products CITATION Loc10 \l 1033 (Lockhard, 2010). The main bin is the one normally used and the other bin as a backup. The main bin is the most stocked while the other serves as a backup if the other runs out and can be used while the new order is being placed and shipped. Keeping a close eye on the stock level of these bins can be an easy indicator as to when to place an order for new product. In this case, there are always spare products but sometimes having spare products can cause spoilage. Spoilage is an expense that all businesses have to take into effect. The cost of spoilage is deducted from gross profit ultimately lowering net profit so it is important for companies to keep spoilage to a minimum. The last method to be discussed is the Just In Time (JIT) method. It works just like it sounds. Inventory is ordered just in time for the old inventory to run out. Exact quantities are shipped, usually the warehouse being located close to the store for fast shipping. A writer from the website for small business says “JIT inventory control is highly dependent on the ability of the company and suppliers to deliver on demand” CITATION Hamnd \l 1033 (Hamlett, n.d). This method works best with small businesses because bigger businesses have so many items so it is hard to keep track of each item so precisely.According to the NASP, 1 out of 11 people are shoplifters which can definitely wreak havoc on inventory counts so it is important to track individual units CITATION Shond \l 1033 (Shoplifting Statistics, n.d). When businesses fail to track inventory, they end up losing profits in the long run. Tracking inventory can also find mistakes within the business. As stated earlier, some Wawa employees commonly over-portion meals which results in inventory being understated. When companies can find these mistakes, they can correct them and result in higher profits. All these methods are effective in controlling inventory on hand and in a system and also can be a key indicator when ordering more inventory. Inventory control is just another major part of accounting because in business, products as a whole are the #1 seller and result in a good portion of profits.Reference PageChand, S. (2015). 6 Most Important Techniques of Inventory Control System. Retrieved from Your Article Library: , K. (n.d). Methods for Inventory Control. Retrieved from Small Business Chron: , R. (2010, October 4). 4 Inventory Control Methods You Need to Know. Retrieved from Inventory Systems Software: , K. (2011, September 26). Inventory Control Methods. Retrieved from Buzzle: Statistics. (n.d). Retrieved from National Association for Shoplifting Prevention: ................
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