Inventory – Meaning, Definition, Features, Objectives and Importance

Inventory 

Inventory means all the materials, parts, supplies, expense tools and in-process or finished products recorded on the books by an organization and kept in its stocks, warehouses or plant for some period of time. An inventory consists of usable but idle resources such as men, materials or money. When the resource involved is a material, the inventory is also called ‘stock’. Inventory is an essential part of an organization. Every business/ manufacturing origination however big or small has to maintain some inventory. Without it no business activity can be performed, whether it is a service organization like a hospital or a bank or it is a manufacturing or trading organization. If an enterprise has no inventory at all, on receiving a sales order it will have to place an order for the raw materials, wait for the receipt and then start production. The customer will have to wait for a longer period for the delivery of the goods and may turn to other suppliers resulting in loss of business for the firm.

Definitions

1. According to The International Accounting Standard Committee

           An inventory is tangible property

• Held for sale in the ordinary course of business.
• in the process of production for such sale, or
• to be consumed in the production of goods or services for sale.

2. Inventory is detailed list of those movable items which are necessary to manufacture a product and to maintain the equipment and machinery in good working order. The quantity and value of every item is also mentioned working order. The quantity and value of every item is also mentioned in the list.

Features/Characteristics of Inventory

1. Inventories serves as cushions to absorb shocks. An organization has to deal with several customers and vendors who are not necessarily close to there works. But due to their unpredictable behavior, there are always fluctuations in demand or supply of the items which disturbs the schedule of an organization. Inventories absorbs these fluctuations and helps in maintaining undisturbed production and stable employment rates.
2. Inventories for any organization is a necessary evil. Inventories require valuable space and consumes taxation and insurance charges. This leads to considerable investment and causes considerable opportunity loss. This capital invested in inventories remains idle till items present in stocks are not used. On the other hand no organization can work without maintaining some inventory i.e. it is a necessity. It is observed hat costs of not having inventories are usually greater than the costs of having them. Thus inventories are necessary evil.
3. Inventories are the result of many interrelated decisions and policies within an organization. The behavior of inventories is the direct result of diverse policies and decisions within a company. Marketing, production, finance and purchasing decisions directly influence the level of inventory.
4. Inventory provides production economies. Stock brings economy in purchase of various inputs due to discounts on bulk purchase. This also minimize ordering, transportation and other costs. They also reduce the number of setups.

Objectives of Inventory

1. To maintain independence of operations
2. To meet variations in demand
3. To allow production schedule flexibility
4. To provide safeguard for variations in raw materials deliveries
5. To take advantage of economic purchase order size.

Importance/Nessessity of Inventory

1. It provides service to the customer at a short notice. Timely deliveries can fetch more goodwill and orders.
2. It enables smooth flow of goods through the production process.
3. In the absence of inventory, the enterprise may have to pay high prices because of piecemeal purchasing. Maintaining of inventory may earn price discount because of bulk purchasing. It also take s advantage of favorable market.
4. Ensures a reasonable utilization of equipment and labour.
5. It reduces product costs since there is an added advantage of batching and long, uninterrupted production runs.
6. It acts as buffer stock when raw materials are received late and shop rejections are too many.
7. It helps in maintaining economy by absorbing some of the fluctuations when the demand for an item fluctuates or is essential.
8. Bulk purchases will entail less orders and therefore less clerical costs. This applies to goods produced within the organization as well. Less orders as a result of larger lots, will entail lesser machine setups and other associated costs.