The inventory includes things that a firm keeps on property or goods sold to third parties, which are important for plant operations. The stock plays a main role in the smooth running of a commodity as a link between both the production and fulfilment of the customer orders. Corporate records can be viewed by the way of public contributions on the Investor Relations Website or the securities and exchange commission (SEC) portal.
Even though there is a segment in the balance sheet, which at the end of the year shows the inventory balance, the annotations in the annual report give the product specifics. Basically, these accounts describe how a company pays for the goods in sales records with various sub-categories and also about the actual balance sheets.
Benefits and Limitations of Inventory Analysis:
Benefits: Inventory analysis is a difficult and a time-consuming task and in order to carry out the task effectively, one must understand the benefits of carrying out inventory analysis. Some of the benefit of inventory analysis are as follows:
Inventory analysis allows the company to understand which resources are present in abundance while which resources are scarce in the company.
Inventory analysis allows the executives of the company to carry out effective inventory control.
Inventory analysis can be utilized by the company to construct a layout of the place where the inventory is to be stored.
Inventory analysis allows better allocation of the financial resources of the company. The company could invest more in the resources that are predicted to become valuable in the future.
Limitations: Apart from the benefits, there are a few limitations of inventory analysis as follows:
Even though the business may have an efficient inventory method, it cannot eliminate the entire business risk, it only helps in reducing the business risk .
The cost of implementing the inventory control is high and every business entity cannot afford that cost. Even sometimes it is very complex to operate.
The inventory analysis is partially based on predictions, if the trends predicted do not occur, then the company might have an abundance of some products that were thought to become valuable in the future.
Types of Inventory Analysis:
Although inventory analysis can be carried out by utilizing various methods, there are three most commonly used method of inventory analysis. The three methods are as follows:
ABC Method of Inventory Analysis:
This system analyses the categories of the items based on their periodic consumption both in terms of quantity and value. The ABC analysis is carried out on the Paretoâ€™s principle, which states that there is an unequal relationship between the inputs and the outputs. A product comprising 20 percent of the total inventory may contribute to more value of the inventory than a product comprising 80 percent of the total inventory.
Example: Consider an organization whose inventory consists of items A, B, and C, whose values in terms of items held and cost are as follows:
A: 5% of the total inventories contributing to 75% of the total inventory value i.e., expensive inventory.
B: 25% of the total inventories, which account for about 10% of the total inventory value.
C: 70% of the total inventories, which account for only 15% of the total inventory value i.e., low value items.
FSN Method of Inventory Analysis:
The FSN method of inventory analysis is based on the rate at which different products present in the inventory are consumed. Since the rate at which these products are consumed differ, the rate at which they are issued and the rate at which they are used differ as well. As per the FSN method of inventory analysis, the products present in the inventory are divided into three types as follows:
Fast-moving items are products which are consumed and issued at a high rate.
Slow-moving items are products which are consumed and issued at a slow rate.
Non-moving items are products which are not consumed and issued for a certain period of time.
VED Method of Inventory Analysis:
This method of inventory analysis in which the products are divided on the basis of their importance for the company. The products present in the inventory are divided into three main types as follows:
Vital: These products are of utmost importance to the company and scarcity of such products can lead to permanent losses. The losses from the scarcity of such products cannot be recovered.
Essential: These products are moderately important, and scarcity of such products can lead to temporary losses. The losses from scarcity of such products are recoverable.
Desirable: These products are of low importance to the company. The
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