Role OF Inventory Management in Cost Accounting
Inventory management in cost accounting is a very important aspect that deals with managing and controlling all the inventory levels and enhancing the balance between the cost and the customer service levels.
It is also called a stock control sensor that ensures that the right amount of supply is available in any company.
Inventory control requirements include purchases, shipping, warehouse storage, reorders, raw materials, work in progress, and finished goods.
In detail; let us go through the different phases and other factors of inventory management in cost accounting.
What is cost accounting?
Cost accounting focuses on the construction of the business. It involves the cost of the products, services, projects, and other financial-related activities.
With cost accounting, you will be able to track your spending structure and the loss and gain of it.
This process can improve your company's profits and efficiency. Inventory controls are considered in cost accounting to maintain a balance of the finances for better workability and competence.
What is inventory costing?
Inventory costing is a process whose sole purpose is to ensure that the right amount of financial supply is in the company.
Calculating the internal production and also the control of it, measures are taken to meet the company’s customer demand.
This process will enable your organization to attain profits from your services with customer satisfaction.
Inventory management allows your company to access assets, balances, and financial statements. It also has a lot of perks that we will discuss as we go further.
The role of inventory management in cost accounting
Inventory management plays a major role in cost accounting. It can have a substantial influence on the company’s profit and productivity.
The following are some of the factors that regulate and specify the role of inventory management in cost accounting:
- Reducing the carrying costs
Carrying costs include storage, insurance, and other important business expenses. With inventory management, these particular expenses can be minimised to meet customer satisfaction and demand.
- Progress in the cash flow
Inventory management gives a good cash flow through proper management that can improve the business expenses' efficiency.
- Boosting the customer service
With the right products that are readily available to reach the customers, inventory management increases customer gratification. This particular trust of the customer can boost the company's cost savings and proficiency.
- Developing the efficiency of the production
With the growing efficiency and the optimisation of the production through inventory management, it can lead to reduced cycle times which results in improved efficiency of the company.
- Leveling up the profits of the company
As discussed in all the above factors, inventory management improves cash flow, reduces costs, and increases proficiency with customer satisfaction. This results in the ultimate profit of the organisation.
How to get started with inventory management in cost accounting:
There are various things to be considered before going with the inventory management process in cost accounting.
Some of the ways to get started with inventory management are as follows;
- Getting equipped with an essential control plan
The inventory control plan should address your orders from the production until the purchase to the selling of the items. It should also account for other things like reducing the wasted warehouse space by ordering supplies and setting up vendor relationships.
- Making a proper plan
Always plan first inventory management and control are continuous, and it does not just tall at the warehouse level. It would be best if you keep updating your plan and putting it into practice. Make sure to track all your expenses for the past few months and also forecast the future month. And finally, with a proper plan, you can do good execution.
- Make sure to have a critical stock all the time
Always determine which stock is critical despite any category. And ensure that those items never go out of this stock. Inventory control will help you in this matter.
- Review all the shipments with proper care
Tracking your shipments in carefully reviewing them regarding any products for damaged packing slips will help you easily recover any loss that can affect your business.
- Hire the right members for the role of the inventory management team
The staff you assign in the inventory control process should be the right people for this job. They should be able to perform the task in time with accurate calculations.
- Find a good balance between inventory costs and having stocks on hand
An effective inventory control system is attained when there is the right balance between the cost of making and storing the products by avoiding stockouts. With knowledge of your business, you will be able to choose the right methods and forecasting techniques. Looking into your stocks and including factors like warehousing costs and demand for the stocks can give you the right balance.
- Monitor all areas of the business
Monitoring all the other areas of your business, even if they are small, can help you gain pastor control over your inventory.
- Always have a backup plan
Besides the high-tech software or greatly implemented process, always ensure you have a backup plan for all power outages, theft, or fraud. Always cloud computing rather than a local server.
Ways to control inventory
Now that you got familiar with the ways to get started with inventory control, let us go through the ways to control inventory;
For better inventory management, you should get equipped with a stock book where you can manually enter and track with a pen and paper what comes in and goes out. Startups or small businesses can use this type of system. This system is challenging because it is an actual record that can't be used for planning purposes.
- Stock cards
Stalkers or bin cards are a slightly more complex method. A stock card records all the unit prices, sale prices and the inventory count of every product. It also tracks sales, purchases, returns, withdrawal stock, and other promotional withdrawals. Additional notes can also be made on the stock card regarding the problems associated with the particular item. In the case of stock cards, it is very effective but needs constant updates. It would be best if you also recorded the unusual stock pulse to avoid inaccurate information risk.
- Simple spreadsheets
Spreadsheets are a great way to track inventory. It can be a Microsoft Excel or Google spreadsheet, which is used to capture product data. With constant updating, you can ensure that you have current stock levels and statistics available. You should be acknowledged of the way how the sheet works.
- Basic inventory software
This type of software is targeted at small or medium size businesses. The simple automation of cloud-based systems is to generate real and automatic stock updates. You can also cause the comparison to create your orders and identify the best and the worst selling products to the details of the customer patterns.
Types of inventory systems
After getting to know about all the ways to get started and be established with the different ways of inventory management,
let us now decide which method will be suitable to implement inventory management in your organisation.
Some of the various methods of inventory management are as follows;
- The periodic inventory system
Suitable for small businesses. Periodic inventory management deals with accounting based on business needs that you don't track continuously daily basis. You simply record all purchases to the purchase account. In this, you shift the balance account to the inventory account after you conduct the physical inventory. As a whole, you match both the inventory and the cost of the ending stock.
- Barcode inventory management
The Barcode inventory management method is suitable for both perpetual and periodic inventory management. This deals with the stock management system. A barcode is assigned to every stock item to sell. This particular barcode includes the product details like dimensions, weight, available number, tracking of location, and other data-based information.
- The perpetual inventory system
This system is more expensive than other systems to implement because of its complex equipment and software necessities. It updates the inventory numbers constantly and instantly. This way, you will always have accurate stock on hand and avoid stockouts. You can also achieve minimal employee contact with goods.
- RFID inventory management
Also known as radio frequency identification is a system that conveys the identity of any product of the firm in the form of a unique serial number to track the items and provide the required information. This process can increase the inventory's visibility and ensure the safe recording of the delivery of the item.
Importance and benefits of inventory control:
Inventory management can result in great efficiency of the company and hence can be an important factor in the organisation.
- In a balance sheet, inventory control has the highest portion of the current assets that use up a lot of working capital.
- It can help you to avoid any cost-related strains of buying too much inventory.
- You can find expansions and profits with low inventory
- You can also bring up the profits and sales of your business
- Inventory control can be used to enhance your warehouse, stock room, and supply room to cut costs and make better management.
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In a nutshell, inventory management is a necessity in cost accounting for better efficiency and productivity of the business.
This process includes many methods and gathering accurate data to perform the control proficiently.
Inventory management is used to control a business’s inventory. This process will make you sure of the stocks and their cost details.
Inventory management plays a crucial role in cost accounting by ensuring that a company's inventory levels are optimal, resulting in reduced costs and increased profitability.
Effective inventory management helps a company minimize the costs of carrying excess inventory, such as storage, insurance, and obsolescence, while ensuring that the necessary amount of inventory is available to meet customer demand.
Inventory management also plays a role in determining the cost of goods sold (COGS), which is a significant component of a company's cost accounting system.
FAQs Related to ROLE OF INVENTORY MANAGEMENT IN COST ACCOUNTING
1. What are different inventory control processes?
Inventory control processes are the actions to measure the gaps and opportunities in the ordering and production of relative goods. Some of the categories in the inventory control are as follows;
- Safety stock
- Excess and obsolete
2. What is the purpose of inventory control?
Inventory can be a bit expensive for business but has many perks. Inventory control aims to achieve an enhanced inventory so that you are not overstocked or lack stock, for that matter.
3. What is inventory visibility?
Inventory visibility refers to the ability of a business to have real-time information about the quantity, location, and status of its inventory throughout its supply chain. This information can include the amount of inventory available, the location of the inventory within the supply chain, and the status of the inventory, such as whether it is in transit, in storage, or available for sale.
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