Advantages And Disadvantages Of Inventory Control

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Advantages of Inventory Control

The following are suggested advantages:

1. Eliminates wastages in use of material.

2. It reduces the risk of loss form fraud and theft.

3. It helps in keeping perpetual inventory and other records to facilitate the preparation of accurate material reports management.

4. To reduce the capital tied up in inventories.

5. It reduces cost of storage.

Disadvantages of Inventory Control

Every firm has to maintain optimal level of inventories. It not the following will be the result in form of losses.

1. Opportunity cost: Every firm has to maintain inventory for that some investment isneeded it is known as opportunity cost and handle the investment in inventory are more the funds are blocks up with inventory.

2. Excessive inventories: It will lead to firm losses due to excessive carrying
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The chief advantage of the cost or net realizable value rule is that it is conservative. Hence the methods of valuation of inventory are quite independent of system of mincing.

In balance sheet closing stock is shown under current assets and it also credited to manufacturing or trading accounts. The inventories are valued on the basis as follows:

I) Cost of raw materials in stock may include freight charges and carrying cost. But such cost should not exceed market price.

II) Work - in - process is generally valued at cost, which includes cost of materials, labor. And the proportionate factory overhead, as it is reasonable according to degrees of completion.

III) Cost of finished goods wound normally to the total or full cost it includes prime cost plus appropriate amount of the overhead. Selling and distribution cost is deducted on the other hand work in progress may be valued at work in progress may be valued at work cost, marginal cost, prime cost or , even at direct materials.

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