Inventory Management

1. Raw Materials

• Basic inputs purchased from suppliers to be used in production.
• Example: Steel for a car manufacturer.

2. Work-in-Progress (WIP)

• Items currently in the production process but not yet finished.
• Includes labor and overhead costs added to raw materials.

3. Finished Goods

• Completed products ready for sale to customers.
• Held in stock until sold.

4. Maintenance, Repair, and Operating (MRO) Supplies

• Items used in production but not part of the finished product.
• Example: Lubricants, cleaning supplies.

1. First-In, First-Out (FIFO)

• Assumes oldest inventory items are sold first.
• Ending inventory reflects the most recent purchases.
• Often results in higher net income during inflation.

2. Last-In, First-Out (LIFO)

• Assumes newest inventory items are sold first.
• Ending inventory consists of older costs.
• Can reduce taxable income in inflationary periods (not allowed under IFRS).

3. Weighted Average Cost

• Inventory cost is averaged over all units available.
• Smooths out price fluctuations.

4. Specific Identification

• Tracks the actual cost of each specific item.
• Used for unique or high-value items.

1. Just-In-Time (JIT)

• Inventory arrives exactly when needed.
• Minimizes holding costs but requires reliable suppliers.

2. Economic Order Quantity (EOQ)

• Calculates optimal order size to minimize total inventory costs.
• Balances ordering costs and holding costs.

3. ABC Analysis

• Classifies inventory into three categories based on importance:
  • A: High value, low quantity.
  • B: Moderate value and quantity.
  • C: Low value, high quantity.
• Helps prioritize management focus.

4. Safety Stock

• Extra inventory held to prevent stockouts due to demand or supply variability.

1. Inventory on the Balance Sheet

• Classified as a current asset.
• Valued at the lower of cost or net realizable value (NRV).

2. Cost of Goods Sold (COGS)

• Calculated as:
  COGS = Beginning Inventory + Purchases – Ending Inventory
• Directly impacts gross profit.

3. Inventory Turnover Ratio

• Measures how many times inventory is sold and replaced over a period.
  Inventory Turnover = COGS / Average Inventory
• High turnover indicates efficient inventory management.

1. Periodic Inventory System

• Inventory counted at specific intervals.
• COGS calculated at period end.

2. Perpetual Inventory System

• Inventory records updated continuously with each transaction.
• Provides real-time inventory data.

To remember: Inventory management balances having enough stock to meet demand without incurring excessive holding costs, directly affecting a company's profitability and operational efficiency.