INVENTORY CONTROL AS AN EFFECTIVE TOOL FOR COST CONTROL IN AN ORGANIZATION

INVENTORY CONTROL AS AN EFFECTIVE TOOL FOR COST CONTROL IN AN ORGANIZATION

This study examines the effect of inventory control as an effective tool for cost control in an organization.

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CHAPTER ONE

• BACKGROUND TO THE STUDY

In general, inventory control and cost control techniques have become a household name in the business of manufacturing firms, that boast of the possession of goods or stocks, that hope to sell when the demand arises. It is so important to them, such that their survival as a corporate entity, hinges on how they are able to coordinate and control their applications. Inventory is a term that has been explained in various ways by various scholars, inventories are stocks of the product a company is manufacturing for sale and components that makes up the product. They are raw materials, work in progress, and finished goods and they constitute various forms of inventory in a manufacturing firm. In the past, inventory management was not seen to be necessary. In fact, excess inventories were considered as an indication of wealth. Management by then considered overstocking benefits. But today firms have started to embrace effective inventory control. The goal of effective inventory control is to be sure that optimum levels of inventory are available that there are minimal stockouts, (i.e running out of stock), and that inventory is maintained in a safe place and is always readily accessible to the proper personnel.

The scope of inventory management concerns the fine lines between the replenishment lead time, carrying cost of inventory asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management replenishment, returns, and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs to shift and react to the wider environment. Inventory management involves the monitoring of material moved into and out of stock room locations and the reconciling of inventory balance. Management of inventories with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling cost. Policies relate to what levels of inventories are to be maintained and which vendors will be supplying the inventory. How and when inventories will be replenished, how inventory records are created, managed, and analyzed, and what aspect of inventory management will be outsourced are also an important component of proper inventory management. On the other hand, cost control refers to steps taken by management to assure that all segments of the organization function in a manner consistent with its policies. For effective cost control, most organizations use a standard cost system, in which the actual cost is compared against the standard cost for performance evaluation and deviations are investigated from remedial actions. Cost control is also concerned with feedback that might change any of all the future plans, the production method, or both. From the foregoing, it can be categorically asserted that how strategic a firm manages its stocks or inventories will define its cost control techniques and budgets. It is, therefore, the focus of this research study to carry out an assessment of inventory control as an effective tool for cost control in an organization, using the inventory and cost control techniques.   

• STATEMENT OF PROBLEM

Since inventory constitutes a major segment of total investment, it is crucial that good inventory management is practiced to ensure organizational growth and profitability. Inventory management of a business can go a long way in determining the success or the failure of the business. Ineffective inventory management therefore can lead to stock out which will definitely lead to loss of customer and goodwill, which will make the profit of the business decrease and result in the ultimate collapse of the organization.

Managers are aware of the vital roles inventory plays in the activities of organizations. In most organizations, direct materials represent up to 50% of the total product cost, as a result of the money entrusted on inventory, thereby affecting the profitability of the organization. Organizations at times do not control their inventory holding, resulting in under stocking and causing the organizations to stay off production, thereby resulting in organizational ineffectiveness.

As against this, if management proves inefficient in inventory management, it results in a higher inventory conversion period, high costs of inventory, leading to reduced recycling of funds, ultimately effecting profitability and liquidity of the enterprises. A large number of business failures have been attributed to the inability of business managers to plan and control properly the inventory conversion period and inventory levels of their respective firms based on their business strategies. In Nigeria, very little has been done concerning inventory management practices in manufacturing firms. Keeping this in view and wider recognition of the potential contribution of the manufacturing sector to the economy of Nigeria, it motivates us to attempt to fill this gap by empirically analyzing the effect of Inventory Management.

• AIM AND OBJECTIVES OF THE STUDY

The overall objective of this study is to examine the effect of inventory control as an effective tool for cost control in an organization. The specific objectives include the following:

1. To determine the effect of economic order quantity on budgetary control in an organization.
2. To ascertain the extent to which FIFO affect budgetary control in an organization.
3. To evaluate the impact of economic order quantity on standard costing in an organization.
4. To examine how FIFO affects standard costing in an organization.

• RESEARCH QUESTIONS

1. How does economic order quantity on budgetary control in an organization?
2. To what extent does FIFO affect budgetary control in an organization?
3. How does economic order quantity influence standard costing in an organization?
4. To what extent does FIFO affect standard costing in an organization?

• RESEARCH HYPOTHESES

HO₁: There is no significant effect on the economic order quantity and budgetary control in an organization.

HO₂: There is no significant influence on FIFO and budgetary control in an organization.

HO₃: There is no significant effect on the economic order quantity and standard costing in an organization.

HO₄: There is no significant influence FIFO and standard costing in an organization.

• SIGNIFICANCE OF THE STUDY

Prior to the eighteenth century, possessing inventory was considered a sign of wealth. Generally, the more inventories you had, the more prosperous you were. As at then, inventory existed in stores of wheat, herd of cattle, and rooms full of pottery and other manufactured goods. While these inventories were been kept, their effective cost objective was also being defined at the same time, in order to allow the firm to achieve its objectives.

Based on this, when this research study is completed, it will be beneficial to:

Management of Organizations: It will essentially help to bring out how relevant inventory control and effective cost control are to their organizations if well manipulated. It also let them see how important it is to take stock and evaluate it correctly.

Students: it will allow the student to have an insight into what the practice of inventory control is outside the school environment. It will also provide them with information for further study.

• SCOPE OF THE STUDY

The scope of the study will be discussed from the following perspectives: Geographical, Content and Unit scope

Geographical Scope: The geographical scope of this research work is limited to Nigeria.

Content Scope: The research will be premised on the effect of Inventory Control as an effective tool for cost control in an organization.

Unit of Analysis: The data used to analyze the variables would be obtained from questionnaire administration.

• LIMITATIONS OF THE STUDY

1. Lack of concise material owing to the fact that much research work has not been carried out in the domain relating to organizations.
2. Access as most banks does not give out information as regards the topic due to confidentiality by organization policy.

• DEFINITION OF TERMS

Inventories: These are stock of materials or finished goods which a company keeps in anticipation of demand or consumption. They constitute a sizeable portion of the total assets of many firms.

Inventory management:  Is the process that integrates the flow of supplies into, through, and out of an organization to achieve a level of service.

Raw material Inputs into the production process that will modify or transform into finished goods.

Work in progress: Semi-finished products found at various stages in the production operation.

Stock level:  One of the most objectives of a stock control system is to ensure that “stock-out” does not carry occur and that surplus stock is not carried.

Stockout: Occurs when there is insufficient stock to meet production demands and this can lead to loss of customer goodwill, reduced profit, etc

Minimum stock level: The minimum stock level is below which stock should not be allowed to fall. If stock so below this level there is a danger of stock out.

Costs: This is the measure of supply or use of scarce or constrained resources to achieve a specific outcome. It could be money, time, labor required for the production of service or product.

Cost Centre: It refers to a company’s subunit, such as a work center or department for which costs may be ascertained and used for the purpose of control.

Cost Control: This implies various actions taken in order to ensure that the costs do not rise beyond a particular level. It is a continuous process and it involves the setting of standard budgets and creation of responsibilities center with clearly defined authorities.

Cost Management: Are a philosophy, an attitude, and a set of techniques to create more value at a lower cost. It meets the need for both accurate costs and other relevant information for decision-making.

• ORGANIZATION OF STUDY

Chapter one entails introduction; background to the study, statement of the problem, aims and objectives of the study, research questions, research hypothesis, the significance of the study, the scope of the study, limitations to the study, operational definition of terms, and organization of the study.

Chapter two reviews the related literature of the study which includes the conceptual, theoretical, and empirical framework. And end with the highlight of the relevant knowledge gap to be filled by the study.

Chapter three examines the method of study, it comprises of the research design, sources of data collection, and discusses the procedures used to obtain the data, the data, the reason for the reliability and the validity of the study, population and sampling procedures used to obtain the data and techniques model specification and the method of data analysis of the regression result.

Chapter four entails the presentation of data, which employees a quantitative approach to analyzing the employed data for the study, which entails regression analysis. While chapter five ends the research work with a discussion of findings, the conclusion showing the heuristic knowledge derived the study and policy recommendations and areas of further research. It discusses managerial implications and provides a conclusion to this study.