The three types of inventory are:
(1) raw materials, which are materials acquired from a supplier that will be used in the manufacture of goods;
(2) work-in-process, which is partially completed goods at the end of the accounting period; and
(3) finished goods, which are completed goods awaiting sale.
Inventory management involves a trade-off between the costs associated with keeping inventory versus the benefits of holding inventory. Higher inventory levels result in increased costs from storage, insurance, spoilage, and interest on borrowed funds needed to finance inventory acquisition.
However, an increase in inventory lowers the possibility of lost sales from stock outs and the incidence of production slowdowns from inadequate inventory. Further, large volume purchases will result in greater purchase discounts.
Inventory levels are also influenced by short-term interest rates. For example, as short-term interest rates increase, the optimum level of holding inventory will be reduced.
Inventory should be counted at regular, cyclic intervals because this provides the ability to check inventory on an ongoing basis as well as to reconcile the book and physical amounts. Cyclic counting has the following advantages:
1. It allows for an efficient use of a few full-time experienced counters throughout the year.
2. It enables the timely detection and correction of the causes of inventory error.
3. It does not require a plant shutdown, as does a year-end count.
4. It facilitates the modification of computer inventory programs if needed.
A quantity discount may be received when purchasing large orders. The discount serves as a reduction of the acquisition cost of materials.
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