A PROJECT REPORT ON

INVENTORY AND STORE MANAGEMENT OF

HERITAGE FOODS INDIA LIMITED INDUSTRIES
LIMITED
HYDERABAD
Project Report Submitted in
Partial fulfillment for the award of
MASTER OF BUSINESS ADMINISTRATION
SUBMITTED BY
SSK.REENA
Bearing Roll No.07E41E0043

Sree Datha Institute of Engineering & Science

(Affiliated to JNTU)
Hyderabad
(2007 09)

ACKNOWLEDGEMENT
Behind

every

successful

achievement

lies

great

contribution by those without whom that could have been

achieved to them, although more words of gratitude is
insufficient for their unlimited contribution, I take this
opportunity to revel my heart felt gratitude imprinted deep
within me. I am very much thankful to the finance manager
Mr. RAGHU and the staff of HERITAGE FOODS INDIA
LIMITED Industries for giving encouragement and their
kind cooperation. I am extremely grateful to Mr.
KALESHWAR RAO assistant general manager (IR &
HRD) of HERITAGE FOODS INDIA LIMITED; kindly
guiding me without whose kind help it would not have been
possible for me to complete this project work. I wish to
express my sincere thanks to (H.O.D) & Guide and also the
management and staff of my college for providing the
guidance and support.

SSK.REENA

DECLARATIONS

I here by declare that the enclosed project entitled

INVENTORY AND STORE MANAGEMENT done at
HYDERABAD in HERITAGE FOODS INDIA LIMITED
is submitted to JNTU, HYDERABAD in partial
fulfillment

of

MASTER

OF

BUSINESS

ADMINISTRATION, the project is an original work done

by me and to the best of my knowledge this work is not
submitted to any other university or college for award of
any other degree, diploma or fellowship.

SSK.REENA

ABSTRACT
One can readily visualize the determination of inventory
quantities by physical count or by use of perpetual inventory
records. When this quantity is determined it must be multiplied by
a unity cost in order to determine the in inventory value that is
used on financial statement.
Trade and quantity are to be excluded from unit cost since
these discount exist for the purpose of defining the true invoice
cost of merchandise. Cash discounts, on the other hand, have been
considered as a reward for early payment and a penalty for late
payment. The reward has often been interpreted as a loss rather
than a part of unit cost.
In financial parlance, inventory is defined as the sum of the
value of the raw materials, fules and lubricants to maintenance
consumable semi processed materials and finished goods stock at
any giving point of time. The operational definition of inventory
world be amount of raw materials, fuel and lubricants and semi
processed materials to be stock for the smooth running of the
plant / industry.

CONTENTS

TOPICS
CHAPTER- I

PAGE NO.
1-4

INTRODUCTION
NEED OF THE STUDY
OBJECTIVE OF THE STUDY
METHODOLOGY OF THE STUDY
LIMITATION OF THE STUDY
CHAPTER- 2

5-16

COMPANY PROFILE
CHAPTER- 3

17-54

CONCEPTUAL BACKGROUND
CHAPTER- 4

55-73

ANALYSIS AND ITERPRETATION

CHAPTER- 5
CONCULSIONS & SUGGESTIONS
BIBLIOGRAPHY

74-77

CHAPTER I

INVENTORY MANAGEMENT

INTRODUCTION:

Every enterprise needs inventory for smooth running of its

activities. It serves as a link between production and distribution
process. There is, generally, a time lag between the recognition of a
need and its fulfillment. The greater the time lag, the higher
requirements for inventory. It also provides a cushion for future price
fluctuations.
In a complex industry like HERITAGE FOODS INDIA LIMITED it
studied clearly of how the thing are being performed and what is the
real impact of these on industry and how effectively the inventory is
utilized is interested to be known by researcher because of its great
significance in the research.

NEED OF THE STUDY:

Every industry on average spends 70% on raw materials

(inventory). Therefore there is a need to know the raw material cost
and also there is great importance to understand the inventory
management system of this industry.

The study helps a log to various departments to take steps to

control the inventory process.

OBJECTIVES OF THE STUDY:

1.

To

examine

the

organization

structure

of

inventory

management in the stores of HERITAGE FOODS INDIA

LIMITEDs.
2.

To discuss pattern, levels and trends of inventories in

HERITAGE FOODS INDIA LIMITEDs.

3.

To understand the various inventory control techniques

followed by studies in HERITAGE FOODS INDIA LIMITEDs.

4.

To access the performance of inventory management of the

HERITAGE FOODS INDIA LIMITEDs by selected accounting
ratios.

5.

To know the inventory control techniques of HERITAGE

FOODS INDIA LIMITEDs.

METHODOLOGY OF THE STUDY:

The study is based on both primary and secondary data.

The primary data has been collected through structured

questionnaire reflecting inventory management practices of HERITAGE
FOODS INDIA LIMITEDs. The collected data is tabulated and suitable
interpretation had been made by considering the data collection
through secondary data like annual reports purchase registers, storage
records of the organization.

LIMITATIONS OF THE STUDY:

The study has the following limitations:

1.

The study is limited only for a period of 5 years i.e., from

2003 04 to 2007 08.

2.

The limitations of ratio analysis can be applicable of the

study.

3.

There may be approximation in calculating ratios and taking

the figures from the annual reports.

CHAPTER II

COMPANY PROFILE

COMPANY PROFILE
Heritage at a Glance:
The Heritage Group, founded in 1992 by Sri Nara
Chandra Babu Naidu, is one of the fastest growing Private Sector
Enterprises in India, with three-business divisions viz., Dairy, Retail and
Agri under its flagship Company Heritage Foods (India) Limited (HFIL),
one infrastructure subsidiary - Heritage Infra Developers Limited and
other associate Companies viz., Heritage Finlease Limited, Heritage
International Limited and Heritage Agro Merine Private Limited. The
annual turnover of Heritage Foods crossed Rs.347 crores in 2006-07
and is aiming for Rs.700 crores during 2007-08.
Presently Heritages milk products have market presence
in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharastra and
its retail stores across Bangalore, Chennai and Hyderabad. Integrated

agri operations are in Chittoor and Medak Districts and these are
backbone to retail operations.
In the year 1994, HFIL went to Public Issue to raise
resources, which was oversubscribed 54 times and its shares are listed
under B1 Category on BSE (Stock Code: 519552) and NSE (Stock Code:
HERITGFOOD)

About the founder:

Sri Chandra Babu Naidu is one of the greatest Dynamic,
Pragmatic, Progressive and Visionary Leaders of the 21st Century. With
an objective of bringing prosperity in to the rural families through cooperative efforts, he along with his relatives, friends and associates
promoted Heritage Foods in the year 1992 taking opportunity from the
Industrial Policy, 1991 of the Government of India and he has been
successful in his endeavour.
At present, Heritage has market presence in all the
states of South India. More than three thousand villages and five lakh
farmers are being benefited in these states. On the other side,
Heritage is serving more than 6 lakh customers needs, employing more
than 700 employees and generating indirectly employment opportunity
to more than 5000 people. Beginning with a humble annual turnover of
just Rs.4.38 crores in 1993-94, the sales turnover has reached close to
Rs.300 crores during the financial year 2005-2006.
Sri Naidu held various coveted and honorable positions including
Chief Minister of Andhra Pradesh, Minister for Finance & Revenue,
Minister for Archives & Cinematography, Member of the A.P. Legislative

Assembly, Director of A.P. Small Industries Development Corporation,

and Chairman of Karshaka Parishad.
Sri Naidu has won numerous awards including " Member
of the World Economic Forum's Dream Cabinet" (Time Asia ), "South
Asian of the Year " (Time Asia ), " Business Person of the Year "
(Economic Times), and " IT Indian of the Millennium " ( India Today).
Sri Naidu was chosen as one of 50 leaders at the
forefront of change in the year 2000 by the Business Week magazine
for being an unflinching proponent of technology and for his drive to
transform the State of Andhra Pradesh .

Forward looking statements:

We have grown, and intended to grow, focusing on
harnessing our willingness to experiment and innovate our ability to
transform our drive towards excellence in quality, our people first
attitude and our strategic direction.

Mission:
Bringing prosperity into rural families of India through
co-operative efforts and providing customers with hygienic, affordable
and convenient supply of " Fresh and Healthy " food products.

Vision:

To be a progressive billion dollar organization with a pan

India foot print by 2012.To achieve this by delighting customers with
"Fresh and Healthy" food products, those are a benchmark for quality
in the industry.
We are committed to enhanced prosperity and the
empowerment of the farming community through our unique
"Relationship Farming" Model.
To be a preferred employer by nurturing
entrepreneurship, managing career aspirations and providing
innovative avenues for enhanced employee prosperity.

Heritage Slogan:
When you are healthy, we are healthy
When you are happy, we are happy
We live for your "HEALTH & HAPPINESS"

Quality policy of HFIL:

We are committed to achieve customer satisfaction through
hygienically processed and packed Milk and Milk Products. We strive to
continually improve the quality of our products and services through
upgradation of technologies and systems.

Heritage's soul has always been imbibed with an unwritten

perpetual commitment to itself, to always produce and provide quality
products with continuous efforts to improve the process and
environment.
Adhering to its moral commitment and its continuous
drive to achieve excellence in quality of Milk, Milk products & Systems,
Heritage has always been laying emphasis on not only reviewing & redefining quality standards, but also in implementing them successfully.
All activities of Processing, Quality control, Purchase, Stores, Marketing
and Training have been documented with detailed quality plans in each
of the departments.
Today Heritage feels that the ISO certificate is not only
an epitome of achieved targets, but also a scale to identify & reckon,
what is yet to be achieved on a continuous basis. Though, it is a
beginning, Heritage has initiated the process of standardizing and
adopting similar quality systems at most of its other plants.

Commitments:
Milk Producers:
Change in life styles of rural families in terms of:

Regular high income through co-operative efforts.

Women participation in income generation .

Saved from price exploitation by un-organized sector .

Remunerative prices for milk .

Increase of milk productivity through input and extension

activities

Shift from risky agriculture to dairy farming

Heritage

Financial support for purchase of cattle; insuring cattle

Establishment of Cattle Health Care Centers

Supplying high quality Cattle feed

Organizing "Rythu Sadasu" and Video programmes for educating

the farmers in dairy farming

Customers:

Timely Supply of Quality & Healthy Products

Supply high quality milk and milk products at affordable prices

Focused on Nutritional Foods

More than 4 lakh happy customers

High customer satisfaction

24 hours help lines ( <10 complaints a day)

Employees:

Enhancing the Technical and Managerial skills of Employees

through continuous training and development

Best appraisal systems to motivate employees

Incentive, bonus and reward systems to encourage employees

Heritage forges ahead with a motto "add value to everything you

do"

Shareholders:
Returns:
Consistent Dividend Payment since Public Issue (January
1995)
Service:

Highest impotence to investor service; no notice from any

regulatory authority since 2001 in respect of investor service

Very transparent disclosures

Suppliers:
Doehlar: technical collaboration in Milk drinks, yogurts drinks
and fruit flavoured drinks Alfa-Laval: supplier of high-end machinery
and technical support Focusing on Tetra pack association for products
package.

Society:

Potential Employment Generation more than 3500 employees

are working with heritage more than 9500 procurement agents

got self employment in rural areas more than 5000 sales agents
associated with the company

Employment for the youth by providing financial and animal

husbandry support for establishing MINI DAIRIES

Producing highly health conscious products for the society

Qualities of management principles:

1. Customer focus to understand and meet the changing needs
and expectations of customers.
2. People involvement to promote team work and tap the potential
of people.
3. Leadership to set constancy of purpose and promote quality
culture trough out the organization.
4.

Process approach to assess the efficiency and effectiveness of

each process.

5.

Systems approach to understand the sequence and interaction

of process.

6. Factual approach to decision making to ensure its accuracy.

7. Continual improvement processes for improved business results.
8.

Development of suppliers to get right product and services in

right time at right place.

Product/Market wise performance:

The total turnover is Rs 341 Crores during the financial
year 2007-08 against the turnover of 292.02 Crores in 2006-07. Today

Heritage distributes quality milk & milk products in the states of A.P,
Karnataka, Kerala & Tamil nadu.
During

the year 2007-08 liquid

milk sales was

Rs.28329.79 lakhs against Rs.24525.23 lakhs in the previous year. The

sales of milk products including bulk sales of cream, ghee and butter
were recorded Rs 5781.59 lakhs against Rs 4677.21 lakhs.

Milk sales:
23% growth was recorded in AP 2.38 lakhs litres per day(LLPD)
in 2007-08 against 1.93 LLPD in 2006-07. 13% growth was recorded in
Tamilnadu-1.53 LLPD in 2007-08 against 1.35 LLPD in 2006-07. Over all
growth of 6% was recorded- 5.49 LLPD in 2007-08 against 5.16 LLPD.
Flavoured milk sales recorded a growth rate of 77% over 2006-07.
Butter milk sales have gone up by 45% over 2006-07.

Outlook:
Considering the growth potential in the liquid milk
market, the company has drawn plans to increase its market share in
the existing markets and to enter into new markets there by doubling
revenues in dairy business in the next 3 years. To achieve this object,
company is undertaking major expansion in dairy business by inverting
over Rs20 crores during 2007-08 and over Rs10 crores during the
current year to strengthen the milk procurement.

BRANCHES OF HFIL:
HFIL has 3 wings. They are
1. Dairy

2. Retail
3. Agribusiness

1. Dairy:
It is the major wing among all. The dairy products
manufactured by HFIL are Milk, curd, butter, ghee, flavoured milk,
paneer, doodhpeda, ice cream.

2. Retail:
In the retail sector HFIL has outlets namely Fresh@. In
those stores the products sold are vegetables, milk& milk products,
grocery, pulses, fruits etc.
In Hyderabad 19 retail shops are there. In Bangalore&
Chennai, 3&4 respectively are there. Totally there are 26 retail shops
are there.
Fresh@ is a unique chain of retail stores, designed to
meet the needs of the modern Indian consumer. The store rediscovers
the taste of nature every day making grocery shopping a never before
experience.
The unique&

distinctive feature of Fresh@ is that it

offers the widest range of fresh fruits and vegetables which are directly

hand picked from the farms. Freshness lies in their merchandise and
the customers are always welcomed with fresh fruits and vegetables
no matter what what time they walk in.

3. Agri Business:
In this business HFIL employees will go to farmers and
have a deal with them. Those farmers will sell their goods like
vegetables, pulses to HFIL only. And HFIL will transport the goods to
retail outlets.
The agricultural professors will examine which area is
suitable to import vegetables from and also examine the vegetables,
pulses and fruits in the lab. And finally they report to the HeadAgribusiness. Representatives as per the instructions given by the agri
professors will approach the farmers directly and make a deal with
them. It is the process of registering the farmers.

CHAPTER III

CONCEPTUAL BACKGROUND
The investment in inventories constitutes the most significant
part of current assets / working capital in most of the undertakings.
Thus, it is very essential to have proper control and management of
inventories.
The purpose of inventory management is to ensure availability
of materials in sufficient quantity as and when required and also to
minimize investment in inventories.

Meaning and Nature of Inventory:

In accounting language, inventory may mean the stock of

finished goods only. In a manufacturing concern, it may include raw
materials, work- in progress and stores etc.,

Inventory includes the following things:

a)

Raw Material: Raw material from a major input into the

organization. They are required to carry out production
activities uninterruptedly. The quantity of raw materials
required will be determined by the rate of consumption and
the time required for replenishing the supplies. The factors
like

the

availability

of

raw

materials

and

Government

regulations etc., too affect the stock of raw materials.

b)

Work in progress: The work in progress is that stage of

stocks which are in between raw materials and finished
goods. The quantum of work in progress depends upon the
time taken in the manufacturing process. The quantum of
work in progress depends upon the time taken in the
manufacturing process. The greater the time taken in
manufacturing, the more will be the amount of work in
progress.

c)

Consumables: These are the materials which are needed to

smoother the process of production but they act as catalysts.
Consumables may be classified according to their
consumption add critically. Generally, consumable stores doe
not create any supply problem and firm a small part of
production

cost.

There

can

be

instances

where

these

materials may account for much value than the raw materials.
The fuel oil may form a substantial part of cost.

d)

Finished goods: These are the goods, which are ready for
the consumers. The stock of finished goods provides a buffer
between production and market, the purpose of maintaining
inventory is to ensure proper supply of goods to customers.
BENEFITS OF HOLDING INVENTORIES
Although holding inventories involves blocking of a firms and

the costs of storage and handling, every business enterprise has to be

maintain certain level of inventories of facilitate un interrupted
production and smooth running of business. In the absence of
inventories a firm will have to make purchases as soon as it receive
orders. It will mean loss of time and delays in execution of orders which
sometimes may cause loss of customers and business.
A firm also needs to maintain inventories to reduce ordering
cost and avail quantity discounts etc.
There are three main purpose of holding inventories.
1.

The

transaction

motive:

Which

facilitates

continuous

production and timely execution of sales order.

2.

The precautionary motive: Which necessitates the holding of

inventories for meeting the unpredictable changes in demand
and supplies of materials.

3.

The speculative motive: Which induces to keep inventories

for taking advantage of price fluctuations, saving in re ordering
costs and quantity discounts?
RISK AND COSTS OF HOLDING INVENTORIES
The holding of inventories involves blocking of a firms funds

and incurrence of capital and other costs.

The various costs and risks involved in holding inventories are:

Capital costs: Maintaining of inventories results in blocking of
the firms financial resources. The firm has therefore to arrange for
additional funds to meet the cost of inventories.
The funds may be arranged from own resources or from
outsiders. But in both the cased, the firm incurs a cost. In the former
case, there is an opportunity cost of investment while in the later case;
the firm has to pay interest to t he outsiders.
1.

Storage and Handling Costs: Holding of inventories also

involves costs on storage as well as handing of materials. The
storage of costs include the rental of the godown, insurance
charges etc.

2.

Risk of Price decline: There is always a risk of reduction in the

prices of inventories by the supplies, competition or general
depression in the market.

3.

Risk of Obsolescence: The inventories may become absolute

due to improved technology, changes in requirements, change in
customer tastes etc.

4.

Risk Determination in quality: The quality of materials may

also deteriorate while the inventories are kept.

Objects of Inventory Management

Definition of Inventory Management: Inventory Management is

concerned with the determination of optimum level of investment for
each components of inventory and the operation of an effective control
and review of mechanism.
The main objectives of inventory management are operational
and financial.
The operational objective mean that the materials and should
be available in sufficient quantity so that work is not disrupted for want
of inventory.
The financial objective means that inventory should not remain
idle and minimum working capital should be locked in it.

The

following

are

the

objectives

of

inventory

management:
1.

To ensure continuous supply of materials, and finished goods so

that production should not suffer at any time and the customers
demand should also be met.

2.

To avoid both over stocking and under stocking of inventory.

3.

To maintain investment in inventories at the optimum level as

required by the operational and sales activities.

4.

To keep material cost under control so that they contribute in

reducing the cost of production and overall costs.

5.

To eliminate duplication in ordering or replenishing stocks. This

is possible with the help of centralizing purchases.

6.

To minimize loses through deterioration, pilferages, wastages

and damages.

7.

To ensure perpetual inventory control so that materials shown in

stock ledgers should be actually lying in the stores.

8.

To ensure right quality goods at reasonable prices. Suitable

quality standards will ensure proper quality of stocks. The price
analysis, the cost analysis and value analysis will ensure
payment of proper prices.

9.

To facilitate furnishing of data for short term and long term

planning and control of inventory.
FOODS AND TECHNIQUES OF INVENTORY MANAGEMENT
A proper inventory control not only helps in solving the acute

problem of liquidity but also increases profit and causes substantial

reduction in the working capital of the concern.
The following are the important FOODS and techniques of
inventory management and control.
1.

Determination of stock levels:

Carrying of too much and too little of inventory is detrimental

to the firm. If the inventory level is too little, the firm will face frequent
stock outs involving heavy ordering cost and if the inventory level is
too high it will be unnecessary tie up of capital.
An efficient inventory management requires that a firm should
maintain an optimum level of inventory where inventory costs are the
minimum and at the same time there is no stock out which may result
in loss or sale or shortage of production.

a)

Minimum stock level:

It represents the quantity below its stock of any item should not

be allowed to fall.
Lead time: A purchasing firm requires sometime to process
the order and time is also required by the supplying firm to execute the
order.
The time in processing the order and then executing it is know
as lead time.
Rate of Consumption: It is the average consumption of
materials in the factory. The rate of consumption will be decided on the
basis of past experience and production plans.
Nature of materials: The nature of material also affects the
minimum level. If a material is required only against the special orders
of the customer then minimum stock will not be required for such
material.
Minimum stock level can be calculated with the help of
following formula.
Minimum stock level Re ordering level (Normal
consumption x Normal re order period)

b)

Re ordering Level:

When the quantity of materials reaches at a certain figure then

fresh order is sent to get materials again. The order is sent before the
materials reach minimum stock level.
Re ordering level is fixed between minimum level maximum
level.

c)

Maximum Level:
It is the quantity of materials beyond which a firm should not

exceeds its stocks. If the quantity exceeds maximum level limit then it
will be over stocking.
Overstocking will mean blocking of more working capital, more
space for storing the materials, more wastage of materials and more
chances of losses from obsolescence.
Maximum stock level Reordering Level + Reorder Quantity
(Maximum Consumption x Minimum reorder period)
d)

Danger Stock Level:

It is fixed below minimum stock level. The danger stock level

indicates emergency of stock position and urgency of obtaining fresh

supply at any cost.
Danger Stock level = Average rate of consumption x
emergency delivery time.
e)

Average Stock Level:

This stock level indicates the average stock held by the

concern.
Average stock level = Minimum stock level + x reorder
quantity.
2)

Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated increase in

usage. The demand for materials may fluctuate and delivery of

inventory may also be delayed in such a situation the firm can be face
a problem of stock out.
In order to protect against the stock out arising out of usage
fluctuations, firms usually maintain some margin of safety stocks.
Two costs are involved in the determination of this stock that is
opportunity cost of stock outs and the carrying costs.
If a firm maintains low level of safety frequent stock outs will
occur resulting into the larger opportunity costs. On the other hand,
the larger quantity of safety stocks involves carrying costs.

3)

Economic Order Quantity (EOQ):

The quantity of material to be ordered at one time is known as

economic ordering quantity.

This quantity is fixed in such a manner as to minimize the cost
of ordering and carrying costs.
Total cost material = Acquisition Cost + Cost + Carrying Costs
+ Ordering Cost.

Carrying Cost:
It is the cost of holding the materials in the store.
Ordering Cost:
It is the cost of placing orders for the purchase of materials.
EOQ can be calculated with the help of the following formula
EOQ = 2CO / I
Where C = Consumption of the material in units during the
year
O = Ordering Cost
I = Carrying Cost or Interest payment on the capital.

4)

A B C Analysis: (Always better control analysis):

Under A B C Analysis. The materials are divided into 3

categories viz., A, B and C.

Almost 10% of the items contribute to 70% of value of
consumption and this category is called A category.
About 20% of the items contribute about 20% of value of
category C covers about 70% of items of materials which contribute
only 10% of value of consumption.
5)

VED Analysis : (Vitally Essential Desire)

The VED analysis is used generally for classified as Vital(V),

Essential (E) and Desirable (D).
The vital spares are a must for running the concern smoothly
and these must be stored adequately. The E type of

are also

necessary but their stocks may be kept at low figures. The stocking of
D type may be avoided at times. If the lead time of these is less, then
stocking of these can be avoided.

6)

Inventory Turnover ratio:

Inventory turnover ratios are calculated to indicate whether

inventories have been used efficiently or not.

The inventory turnover ration also known as stock velocity is
normally calculated as sales / average inventory of cost of goods sold /
average inventory.
Inventory conversion period may also be calculated to find the
average time taken for clearing the stocks. Symbolically.
Inventory Turnover Ratio

Cost of goods

sold

__________________________
Average
inventory at cost
Or

Net sales
_____________________
(Average)

Inventory

And, Inventory conversion period

Days in a

year

______________________
Inventory Turnover
ratio

7)

Classification and Codification of Inventories:

The inventories should first be classified can then code

numbers should be assigned for their identification. The identification

of short names are useful for inventory management not only for large
concerns but also for small concerns. Lack of proper classification may
also lead to reduction in production.
Generally, materials are classified accordingly to their nature
such as construction materials, consumable stocks, lubricants etc.
After classification the materials are given code numbers. The coding
may be done alphabetically or numerically. The later method is
generally used for coding.

The class of materials is assigned two digits and then two or

three digits are assigned to the categories of items divided into 15
groups. Two numbers will be category of materials in that class.

8)

Valuation of inventories Method of valuation:

FIFO method
LIFO method
Base Stock method
Weighted average price method

CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall objective of the inventory system is to minimize the cost to the
firm at the risk level acceptable to management, the more proximate criteria for judging
the inventory system are:
Comprehensibility
Adaptability
Timeliness
Area of improvement:
Inventory management in India can be improved in various ways. Improvements
could be affected through.
Effective Computerization: Computers should not be used merely for accounting
purpose but also for improving decision making.
Review of Classification: ABC and FSN classification must be periodically reviewed.
Improved Coordination: Better coordination among purchase, production, marketing
and finance departments will be help in achieving greater efficiency in inventory
management.

Development of long term relationship:

Companies should develop long term relationship with vendors. This would help
in improving quality and delivery.
Disposal of obsolete / surplus inventories:
Procedures for disposing obsolete / surplus inventories must be simplified.

Adoption of challenging norms:

Companies should set benchmarks with global competitors and use ideals like JIT
to improve inventory management.
Inventory cost an overall view
Introduction:
In financial parlance, inventory is defined as the sum of the value of the raw
materials, fuels and lubricants maintenance consumable semi processed materials and
finished goods stock at any giving point of time. The operational definition of inventory
would be amount of raw materials, fuel and lubricants, and semi processed materials to
be stock for the smooth running of the plant / industry.
Need of Inventory:
Inventories are maintained basically for the operational smoothness which they
can be affected by uncoupling successive stages of production, whereas the monetary
value of the inventory serves as a guide to indicate the size of the investment made to
achieve this operational convenience. The materials management departments primary
function is to provide this operational convenience with a minimum possible investment
in inventories. Materials department is accused of both stock outs as well a large
investments in inventories. The solution lies in exercise a selective inventory control and
application of inventory control techniques. Inventories build to act as a cushion between
supply and demand. It is sufficient to take care of the requirements of demand till the next

supply arrives. It is sufficient to take care of probable delays in supply as well as probable
variations in demand.

The size of the inventory depends upon the factors such as size of industry internal lead
time for purchase, suppliers lead time, vendor relations availability of the materials,
annual consumption of the materials. Inventory coat can be controlled by applying
Modern Techniques viz., ABC analysis, SDE, ESN, HMC, VED etc. These techniques
can be used effectively with the help of computerization.
What is meant by inventory cost:
A.

The total value of stores and spares and capital spares.

B.

Stores in transit and under inspection and

C.

Stock of finished products.

Normally, there are certain problems in maintaining optimum level of

inventory. Problems of inventory can be resolved by the cost implications. Costs which
are relevant for consideration are discussed in the following lines;

Basically there are four costs for consideration in developing and inventory
model.
1.

The cost of placing a replenishment order.

2.

The cost of carrying inventory.

3.

The cost of under stocking and

4.

The cost of over stocking.

The cost of ordering and inventory carrying cost are viewed as the supply side

costs and help in the determination of the quantity to be ordered for each replenishment.
The under stocking and over stocking costs are viewed as the demand side costs
and help in the determination of the amount of variations in demand and the delay in
supplies which the inventory should withstand.

Whenever an order placed for stock replenishment, certain costs are involved,
and, for most practical purpose it can be assumed that the cost per order is constant. The
ordering cost may vary depending upon the type of items, for example raw material like
steel against production component like castings in steel plants, support materials in the
case of coal industry.
The cost ordering includes:
1)

Paper work costs, typing and dispatching an order.

2)

Follow up costs the follow up, the telephones, telex and postal bills etc.,

3)

Costs involved in receiving of the order, inspection, checking and handling in

the stores.

4)

Any set up cost of FOODS charged by the supplier, either directly indicated in
quotations or assessed through quotations of various quantities.

5)

The salaries and wages of the purchase department.

Cost of Inventory carrying:

This cost in measured as of the unit cost of the item. This measure gives basis for
estimating what is actually costs a company to carry stock.

This cost includes:

1)

Interest on capital.

2)

Insurance and tax charges.

3)

Storage costs labour costs, provision of storage area and facilities like bins,
racks etc.,

4)

Transport bills and hamali charges.

5)

Allowance for deterioration or spoilages.

6)

Salaries of stores staff.

7)

Obsolescence.
The inventory carrying cost varies and a major portion of this is

accounted for by the interest on capital.

Under stocking cost:

This cost is the cost incurred when an item is out of stock. It includes cost of lost
production during the period of stock out and the extra cost per unit which might have to
be paid for an emergency purchase.
Over stocking cost:
This cost is the inventory carrying cost (which is calculated per year) for a
specific period of time. The time varies in different contexts it could be the lead time of
procurement of entire life time of machine. In the case of one time purchases, over cost
would be = Purchase Price Scrap Price.
INVENTORY VALUATION AND COST FLOWS:
What is the cost of inventory?
One can readily visualize the determination of inventory quantities by physical
count or by use of perpetual inventory records. When this quantity is determined, it must
be multiplied by a unity cost in order to determine the inventory value that is used on
financial statements.
Trade and quantity discount are to be excluded from unit cost since these discount
exist for the purpose of defining the true invoice cost of merchandise. Cash discounts, on
the other hand, have been considered as a reward for early payment and as a penalty for
late payment. The reward has often been interpreted as a loss rather than as a part of
unit cost. Thus it would not be difficult to find difference of opinion as to whether invoice
cost includes or excludes cash discount.
When the current repla FOODS cost of material on hand at the close of a year
is less than the actual cost, the inventory value is reduced to repla FOODS cost (current
market price). Thus the acceptable basis inventory valuation is the lower of cost or
market or more properly the lower of actual cost or repla FOODS cost.
The determination of inventory values is very important from the point of view of
the balance sheet and the income statement since costs not included in the inventory (the
balance sheet) are considered to be expensive and are thus included in the income
statement.

Valuation of inventories methods of determination:

Although the prime consideration in the valuation of inventories is cost, there are
a number of generally accepted methods of determining the cost of inventories at the
close of an accounting period. The most commonly used methods are first in first out
(FIFO) average, and last in first out (LIFO). The selection of the method for
determining cost for inventory valuation is important for it has a direct bearing on the
cost of goods sold and consequently on profit. When a method is selected, it must be used
consequently and cannot be changed for year to year in order to secure the most favorable
profit for each year.
THE FIFO METHOD (FIRST IN FIRST OUT METHOD)
Under this method it is assumed that the materials or goods first received are the
first to be issued or sold. Thus, according to this method, the inventory on a particular
date is presumed to be composed of the items which were acquired most recently.
The value inventory would remain the same even if the perpetual inventory
system is followed.

Advantage:- The FIFO method has the following advantages.

1)

It values stock nearer to current market prices since stock is presumed to be

consisting of

2)

The most recent purchases.

3)

It is based on cost and, therefore, no unrealized profit enters into the financial
accounts of the company.

4)

The method is realistic since it takes into account the normal procedure of
utilizing or selling those materials or goods which have been longer longest in
stock.

Disadvantages:- The method suffers from the following disadvantages.

1)

It involves complicated calculations and hence increases the possibility of

clerical errors.

2)

Comparison between different jobs using the same type of material becomes
sometimes difficult. A job commenced a few minutes after another job may
have to bear an entirely different charge for materials because the first job
completely exhausted the supply of materials of the particular lot.
The FIFO method of valuation of inventories is particularly suitable in
the following circumstances.

I.

The materials or goods are of a perishable nature.

II.

The frequency of purchases is not large.

III.

There are only moderate fluctuations in the prices of materials or goods

purchased.

IV.

Materials are easily identifiable as belonging to a particular purchase lot.

The LIFO method (Last in First Out method)

This method is based on the assumption that last item of materials or goods
purchased are the first to be issued or sold. Thus, according to this method, inventory
consists of items purchased at the earliest cost.
Advantages:- This method has the following advantages:
1)

It takes into account the current market conditions while valuing materials
issued to different jobs or calculating the cost of goods sold.

2)

The method is base on cost and, therefore, no unrealized profit or loss is made
on account of use of this method.
The method is most suitable for materials which are of bulky and non
perishable type.

Base Stock Method:

This method is based on the contention that each enterprise maintains at all times
a minimum quantity of materials or finished goods in its stock. This quantity is termed as
base stock. The base stock is always valued at this price and its carried forward as a fixed
asset. Any quantity over and above the base stock is valued in accordance with any other
appropriate method. As this method aims at matching current costs to current sales, the
LIFO method will be most suitable for valuing stock of materials or finished goods other
than the base stock. The base stock method has advantage of charging out material /
goods at actual cost. Its other merits or demerits will depend on the method which is used
for valuing materials other than the base stock.

Weighted average price method:

This method is based on the presumption that once the materials are put into a
common bin, they lose their identity. Hence, the inventory consists of no specific batch of
goods. The inventory is thus priced on the basis of average priced on the quantity
purchased at each price.
Weighted average price method is very popular on account of its being based on
the total quantity and value of materials purchased besides reducing number of
calculations. As a matter of fact the new average price is to be calculated only when a
fresh purchase of materials is made in place of calculating it every now and then as is the
case with FIFO, LIFO methods. However, in case of this method different prices of
materials are charged from production particularly when the frequency of purchases and
issues/sales in quite large and the concern is following perpetual inventory system.

Valuation of inventories impact on the flow of costs:

As should be quite evident, the different methods of calculating inventory values
will all have their impact on the flow of costs through the balance sheet into the income
statement. The dollars that are paid to acquire inventory are always divided between the
balance sheet (inventories) and the income statement (cost of goods sold), there is not
other place to put them. Thus if the different methods of calculating inventory produce
differing inventory values, they will also produce differing cost of goods sold figures, and
the differing cost of goods sold figures will naturally produce differing profit figures.
In order show the impact of inventory valuation on cost flows, the preceding
exhibits are summarized. Each method produces a different figure for the transfer of raw
materials to work in process. These differences appear small, but the only reason for this
is that the dollar amounts have been kept small to make the illustration workable.
With the transfer of materials to work in process, the cost flow or transfer with
have its impact on the work in process inventory and the transfer of completed
merchandise to finished gods. Ultimately when goods are sold; the varying methods of
valuing inventories will have their impact on cost of goods sold and these profits. The
effects of the cost flows on cost of gods sold and profits can be accentuated further it the
differing methods of valuing inventories are applies to work in process and finished
goods.

Evaluation of methods What causes the differences?

The differences in inventory values and flows for each of the method illustrated
result from only one factor, that it, changing purchases prices or unit costs. If purchase
prices had remained stable or unchanged, each method would have produced the same
inventory value and cost flow.

Cost flows and inventory are exactly the some under stable prices. With a falling price
level, the LIFO method produces the highest cost flow and the lowest inventory. With a
falling price level, the LIFO method produces the lowest cost flow and highest inventory.
The cost flow under LIFO follows the price level, LIFO produces larger cost flows when
prices are rising and smaller cost flows when prices are falling. A final item to consider is
that the average method produces results which fall between the extremes of LIFO and
FIFO.
Evaluation of methods can we justify the differences?
The best method of inventory valuation might be specific identification, that is,
the units in inventory should be identified with the specific invoices and thus specific unit
costs to which they apply.
Fortunately, the FIFO method constitutes a very useful approximation to the
specific identification method if on can reasonably assume that the actual flow of
materials is first-in first-out. This assumption is not unreasonable and thus we have stated
the main argument for the FIFO inventory scheme, that is, the physical flow of materials
would match the flow of costs under the first in first out method.
When the units in inventory are identical, interchangeable and do not follow any
specific pattern of physical flow, the average cost system would seen to appropriate.
The primary difference between the FIFO and average methods is centered on the
physical flow since both methods could involve identical and interchangeable units. The
FIFO method fits a first-in first-out physical flow. The average method fits a system
which has no specific pattern of physical flow. Finding a situation where there is no
specific pattern of physical flow should be quite difficult because of the fact that most
inventory items are subject to deterioration by instituting a person would attempt to
reduce such deterioration and any reasonable person would attempt to reduce such
deterioration by instituting a physical flow approximating first-in-first-out. The major
reason for the use of the average method is something other than the lack of specific
physical flow.

Ordinarily the LIFO method cannot be justified on the basis of the physical flow
of materials. Under conditions of changing prices, the advocate of LIFO says that the
only method which matches costs and revenues is the LIFO method. The LIFO method
assumes that the latest item is the first item out, and thus the current costs of materials are
matched with the other hand, assumes that the first item in is the first item out, and thus
the non-current costs of matching current costs with current revenues is the essence of the
argument for the LIFO method.

As can be seen by the above comments, there is no one best method of valuing
inventories. The method chosen should fit the situation. A physical flow pattern
comparable to FIFO would force one to consider the FIFO method. The lack of a
discernible physical flow pattern would force one to consider the average method.
Concentration on cost flows, as distinct from physical flows, would force to consider the
LIFO method especially where there appears to be a discernible trend towards rising
prices (or falling prices) as has been the case in our economy during recent years.

Inventories valued at standard cost:

A very useful method of valuing inventories is at a standard cost. With a standard
cost system is no need of spending a great deal of time and money tracing unit cost
through perpetual inventory record.

PERPETUAL INVENTORY CARD UNDER A STANDARD COST

SYSTEM
Perpetual inventory Plant: Standard cost:
Location: Order Quantity:.....
Date

Description

On order

Order Point: ..
Available
Received Issued
On order On hand

As shown above, there is need only for physical quantities since the inventory
values is the physical quantity multiplied by the standard cost. With the cost and value
columns disposed off, a perpetual inventory card can include additional data such as
quantities on order, quantities reserved, and quantities available. These additional data are
very useful for inventory and production control purpose. On the basis of a few
calculations concerning into inventories on a FIFO, a LIFO, or an average cost basis.
Inventory of Obsolescence:
Absolvent inventories cannot be used or disposed off at values carried on the
books. Frequent reviews should be made of all inventories, and when obsolescence is
indicated a request for revaluation should be prepared for approval by management. The
difference between original and obsolete value should be recorded by a change to an
operating account. Inventory obsolescence, and a credit to inventory. If the material is
scrapped, this will be for the full inventory value or used in areas where it will be work
less than its original value, the entry would be only for the amount of write down. Some
companies carry a solvage inventory and transfer to it materials which may be sold or
used at reduced values.
Where this is done, the entry would be:
Dr. Solvage inventory
Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies inventory.
Inventory cost in relation HERITAGE FOODS INDIA LIMITEDs shall to
classifieds follows:

Inventory can be classified as capital and revenue certain items through titled as
capital in nature. Hence, due care is to be take whole drawing the material.
Materials which are to be imported from other countries have to be planned well
in advance nearly about 24 months are to initiate the proposals for procurement.
Similarly some of the items do not require any lead time some they are available
in the local market.
FOODS is highly energy intensive industry, the inputs like power and coal are the
major part of the variable cost since Government controls the coal & fuel sector, and
increase is rates adversely effects the FOODS industry.
HERITAGE FOODS INDIA LIMITED has it own power plant and through which
it saves energy consumption. By this the cost since Government controls the coal & fuel
sector, any increase rates adversely effects the FOODS industry.
Inventory cost of any organization also adversely affects by retaining obsolete / scrap and
inventory costs can be reduced by management with an advance planning of procurement
of materials, periodical reviews of existing spares with reference to the fast consumption,
ascertaining the information regarding the availability of in other areas. Holding of extra
inventory will be an additional financial burden to the company due to payment of
interest charges on the materials purchased, diminishing value of materials purchased,
diminishing value of materials by keeping them in stores for a log time, handling charges,
etc.,
The inventory of HERITAGE FOODS INDIA LIMITED mainly includes Foods, ,
CNC FOODS, Dairy. Inventory in HERITAGE FOODS INDIA LIMITED during 2003
04 to 2007 08 are as follows: (Units in m.t)

Years

2005 06

2006 07

2007 08

2008 09

2009-10

Foods

1051620

96465

966540

958620

1209536

HFIL
Agro
Merine
Dairy

44637

45267

42871

43151

65960

22142

19602

20705

22011

36567

4756

9022

16201

32607

149255

The value of the above raw materials for the year 2003 08 are as follows: (Value in Rs.)

Years

2003 04

2004 05

2005 06

2006 07

Foods

118261591

12544982

13544920

140120920 195410120

HFIL

31884665

28967991

29067890

23487760

32551176

18513002

16100572

16100772

18799582

46061197

27102

555475

676115

2647958

20111502

Agro
Merine
Dairy

2007-08

Value of imported and indigenous raw materials, stores, and components

consumed during the year:

Imported
Years

2003 04

2004 05

2005 06

2006 07

Raw Materials

94753497

493005633 766180015

451229526

521577053

511577057

121624112

Finished
Goods

76345208

2007
08
15542
36987
41178
038

Indigenous

Years
Raw Materials

2003 04

2004 05

2005 06

2006 07

2007 08

1085786879 2995878412 3457765427 4107605228 7806531617

Finished
Goods

508106545

881880956

179159560

1264674286 3776712867

FOODS FACTORY RUNS WITH VARIOUS EQUIPMENTS:

I.

II.

TECHNICAL DEPARTMENT
1.

FOODS

2.

MATERIAL

3.

PRODUCTION

COMMERCIAL DEPARTMENTS
1.

STORES

2.

PURCHASE

3.

ACCOUNTS

TO RUN THE PLANT AND MAINTAIN EQUIPMENTS DEPARTMENTS REQUIRE

FOR SUCH REQUIREMENT OF RAISE INDENTS AND SEND THE INDENTS TO
PURCHSE DEPARTMENT THROUGH STORES.
INDENTS:
1. ANNUAL INDENTS FOR CONSUMABLE ITEMS (STORES ITEMS).
2. REGULAR INDENTS RAISED BY CONSUMING DEPARTMENTS.
3. ANNUAL REQUIREMENT OF RAW MATERIALS PROMOP & QC.

ENQUIRIES:
1)

ENQUIRES WILL BE SENT APPROVED SUN CONTRACTORS.

ORDER PROCESSING FORM:

1)

RECEIVING QUOTATIONS FROM SUB CONTRACTORS.

2)

ENTER THE PRICE DETAILS OF ENQUIRY SENT IN THE

ORDER PROCESSING FORM.

3)

SELECTION OF PARTY ON MERIT BASIS.

PURCHASE ORDER:
1)

PREPARE PURCHSE ORDER ON SELECTED PARTY.

2)

SEND PURCHASE ORDER COPIES TO PARTY, STORES AND

DEPARTMENTS.

GOODS RECEIPT NOTE:

1)

RECEIVING GOODS RECEIPT NOTE FROM STORES.

PURCHASE DEPARTMENT:
ACTIVITY RECEIVING INDENTS:
FLOW CHART:
Receipt of annual indents for consumable items / stores items from stores
department.
Checking of indent number an authority of item, delivery time consumption
period.
In case of any deficiency, send the information to concerned department for
clarification.
Segregation of indents for attending at C.P.D. and Hyderabad Office.
Sent the Hyderabad indents to Hyderabad Office.
Enter the indents details in indent register.
PURCHASE DEPARTMENT
PURCHASE ENQUIRY
Ms.
Sl.
No.

Material Code

Department

Quantity

Unit

When
Required

ACTIVITY: FLOATING ENQUIRIES:

FLOW CHART:

Checking indented items and equipment name.

Taking previous suppliers information form previous supply. If new

equipment / item, information to be taken from concerned department or from
competitors / journals / yellow pages.

Prepare enquiry to approved sub contractors through enquiry format.

If emergency requirement, send the enquiries through fax / e-mail.

Enter the details of enquiries sent in order processing form.

PURCHASE DEPARTMENT
ORDER PROCESSING FORM

Sl.

Indent

No.

Ref

Material
Code
No.

Description Size Qty 1 2 3 4 5 6 Remarks

ACTIVITY : PREPARATION OF ORDER PROCESSING FROM

FLOW CHART:

Receiving quotation against enquiries sent.

Enter price and other of the quotation received from sub contractors in the
order processing from.

Mention the earlier purchase details of indented items against each item in the
order processing form if available.

Put up the processing from with enquiry and quotations to head (purchase).

Examine order processing from with decide the sub contractor to whom
purchase order to be placed.

PURCHASE DEPARTMENT
PURCHASE ORDER
Sl. No.

Indent

Item

No.

Code

Description

Qty

Rate

Unit

Amount

ACTIVITY: PREPARATION OF PURCHASE ORDER

FLOW CHART:

Prepare purchase order after finalization of price and other technical terms
mentioning the following details.
1. Material code
2. Indent number
3. Material specification & part number
4. Quantity
5. Rate
6. Payment and other terms & conditions

Stipulation of terms of test certificate / ibr / manufactures certificate where

applicable.

Fill in and attach the purchase order review proforma to purchase order.

Send the prepared purchase order to head (purchase) and competent authority
for approval.

Send the purchase order to identified approved sub contractor.

Send the purchase order copies to store and concerned departments.

Enter the details of purchase order in purchase order register.

PURCHASE DEPARTMENT
AMENDMENT / CANCELLATION OF ORDER

Material Code

Material

Price / Quantity

Amended Price /

as per Order

Quantity

ACTIVITY: ORDER AMENDMENT, ORDER FOLLOW UP AND INFORM THE

SUPPLIER FOR THE REJECTIONS / DAMAGES / SHORTAGES:
FLOW CHART:

Issue of amendments in case of modification to purchase order.

Review the pending order and follow up the pending order for breakdown
requirement.

Send regular reminders to suppliers against pending purchase order every

month.

Receive shortage / excess / damages report from stores for the material
received.

Information the supplier for the rejections / damage / excess / shortage.

PURCHASE DEPARTMENT
ACTIVITY: IMPORTS:
FLOW CHART:

Receipt of indents for import items from stores department.

Taking previous / item, information to be taken from concerned department or

from competitors / journals / Yellow pages.

Send enquiry to overseas supplier.

Receiving quotations against enquiries sent.

Enter price and other terms of the quotations received from overseas supplier
in the order processing form.

Examine order processing form and decide the sub contractor to whom
purchase order to be placed.

Prepare purchase order after finalization of price and other technical terms
mentioning the following details.

1) Material code
2) Indent number
3) Material specification & part number
4) Quantity
5) Rate
6) Payment
7) Insurance and other terms and conditions.

Send the prepared purchase order to head (purchase) and competent authority
for approval.

Send the purchase order to overseas supplier.

Send the purchase order copies to stores and concerned departments.

Prepare IC documents and submit to bank for onward transmission to overseas

supplier.

Receive shipping documents from overseas supplier and send same to clearing
agents for collection of the material.

STORES DEPARTMENT

ACTIVITY: RECEIPTS AND UNLOADING MATERIAL

Receiving of Goods through Trunk / Personnel Delivery.

Entry of vehicle at Gate Office.

Stamping on Dispatch Advise / Delivery challan by Gate Office.

Checking of challans / Dispatch Advise with purchase order.

Unloading of Goods at allotted place or in case of urgency direct at works site.

All safety precautions are taken while unloading of material like workers
should wear safety shoes, helmets, leather head gloves, noise respirator, nose
mask.

Training is given to workers for unloading Heavy & Bulky material by using
chain pulley Blocks, Wire Rope Ceilings, Fork Lift. After UIL receipt
acknowledgement given to driver maintaining Lorry receipts register.

STORES DEPARTMENT

ACTIVITY: PREPARATION OF RECEIPT AND APPROVAL BOOK FOR

GENERAL MATERIAL / D.C. ENTER OF BLOCK, AND STATIONARY
MATERIAL MANUALLY IN REGISTER

Sorting of Delivery challans as below:

a) General
b) Stationery
c) Block

Checking with P.O. and mentioning Material Code, Party Code, Indent No.
Department Name on each & every challans.

Creation of D.C. entry in system for general materials.

Preparation of identification tags for General Materials through system.

Preparation of Receipt & Approval Book for General materials.

Manual entry of block, stationery, Preparation of intimations for block,

stationery, repair materials.

STORES DEPARTMENT
ACTIVITY: PHYSICAL VERIFCATION OF GOODS:

All D.C. handed over to stores assistant physical verification like measuring,
counting and tallying with D.C.s Quantity / Description of the materials by
the Stores Assistant.

Identification tags to be attached to the verified material. Shortage / Excess /

Damages if any found to be noted on challans and inform to section incharge.

Preparation of Shortage / Excess / Reports if any sending to parties under

copy to purchase / bills sections.

STORES DEPARTMENT

ACTIVITY: APPROVAL OF MATERIAL AND PREPARATION OF GOODS

RECEIPT NOTES:

Intimation is be sent to all the concerned departments. Showing materials to

concern person.

Taking approval of the material in receipt & approval book.

Preparation general material in receipt & approval book.

Preparation general material GRNs through system and stationery / block /

repairs GRNs manually.

Forwarding true copy to issue section of GRN for general material forwarding
true copy to issue section of GRN for General material forwarding true copy
of block / Repair / Stationery GRN to issue section and copy to purchase
department.

STORES DEPARTMENT
ACTIVITY: REJECTED MATERIALS

Rejected materials kept in allotted area of rejected materials.

Packing of rejected materials.

Preparation of gate passes for rejected materials.

Sending back to suppliers through our Hyderabad Office.

Sending consignee copy to party vide Register Letter for booking of Register
goods to partys other than.

STORES DEPARTMENT
ACTIVITY: EXCISE GATE PASSES

Sending duplicate for transport copy of excise invoice from suppliers delivery
challans.

Mentioning A.B. Sl. No. and named of concerned department.

Duplicate for transport copy of excise invoice over to bills section for sending
the same to Excise Department.

Corresponding with supplier. If the Excise Invoice is not found with delivery
challans.

STORES DEPARTMENT
ACTIVITY: RECEIPTS OF MEDICINES

Physical verification of Medicines as per Invoices.

Verification of expiry date on medicines.

Verification of MRP.

Sending shortage / excess note if any found.

Taking approval of Medical Officer.

Sending Rejection notes if any medicine is rejected.

Issuing to dispensary.

Bills forwarding to Account Department vide IOM for making the payment.

CHAPTER IV

RATIO ANALYSIS
The investment on raw materials over a period of 5 years from 2000 to 2008 is
presented in the following table.
1.

Investment on Raw Materials:

Year

Investment on Raw Material (in crores)

2002 2003

12226.70

2003 2004

13498.80

2004 2005

50975.78

2005 2006

51686.81

2006 2007

42925.25

2007 2008

87905.86

Interpretation:
1)

From the above table it can be understood that the inventory of HERITAGE
FOODS INDIA LIMITED was recorded at 12226.70 during the year 2002 03
and it is increased to 87905.86 during the year 2006 07.

2)

It shows that there is on increase in the inventory to the more extent of 87905.86.

3)

The average inventory of HERITAGE FOODS INDIA LIMITED was recorded at

Rs52454.75

4)

The highest investment in inventory was recorded in the years 2007-08

2.

Trend Analysis:
Trend analysis technique is applied to know the growth rate in investment of raw

material of HERITAGE FOODS INDIA LIMITED over the review period which is
shown in the following table.
Trend Analysis:

Year

Raw Material (in

2002 2003

Lacks)
12226.70

2003 2004

13498.80

2004 2005

50975.78

Trend %
98%
94%
385%

2005 2006

51686.81

295%

2006 2007

42925.25

313%

2007 2008

87905.86

799%

Interpretation:
1)

The investment on investment has increased in the year 2006 08. And the lost
year investment has declared continuously. The percentage in 2003 04 was
295% as compared to years 2004 05 to 2007 08.

2)

The trends in inventories show that inventory have been more in the year 2007
08 and then it has shown a downward trend and again it increased to some extent.

3)

The investment in inventories has shown fluctuating trend is initial years and then
it raised to 799% and again showing fluctuating trend.

3.

Inventory Turnover Ratio:

This ratio indicates the number of times the stock has been turned over during the

period & evaluates the efficiency with which a firm is able to manage its inventory. This
ration is calculated by applying the following formula.
Cost of goods sold
Inventor turn over ration

_________________
Average inventory

Inventory turn over ration:

yrs

Cost of goods sold

2002 2003

59225.45

2003 2004

58022.22

2004 2005

110221.21

2005 2006

120522.68

2006 2007

125492.78

2007 2008

309266.98

Interpretation:

Avg. Inventory

Ratio

6900.22

8.58

36225.20

1.58

96075.65

1.14

11490.07

10.48

12223.99

10.26

150025.22

2.06

1.

From the above table 2002 it can be observed that (1) inventory turn
over ratio is 8.58 during 2002 2003 and it gradually decreased to 1.58 during
2003 2004.

2.

In the year 2004 05 it is clear that the ratio is very less i.e., he stock
is not turned into sales quickly.

3.

As compared to all the years the ratio is very less in 2004 05.

4.

The average inventory turn over ratio was recorded at6.3 times during
the review period.

4.

Inventory conversion period:

It may also be of interest to see average time taken for clearing the stocks. This
can be possible by calculating inventory conversion period. This period is calculated by
dividing the number of the days by inventory turn over.
This formula may be as:
Days in a year (360 days)
Inventory conversion period

_____________________
Inventory turnover ratio

Inventory conversion period: (in crores)

Year

Cost of

2002 2003

goods sold
59225.45

2003 2004

58022.22

2004 2005

110221.21
120522.68

2005 2006
2006 2007

125492.78

2007 2008

309266.98

Avg.
inventory

Ratio

ICP (Days)

6900.22

8.58

42

36225.20

1.58

230

96075.65

1.14

26

11490.07

10.48

33

12223.99

10.26

32

150025.22

2.06

271

Interpretation:
From the above table it can be identified the following observations:
1)

The inventory conversion period was 230 days during the year 2003 04 but it
declined to 204 during 2004 - 05, which indicates that the stock has been very
quickly converted into sales which mean the company is managing the inventory
efficiently.

2)

The lowest inventory conversion period was recorded at 26 days in the year 2004
05 and the highest inventory conversion was recorded at 271days in the year
2007 08.

3)

The average inventory conversion period was recorded at 107 days during the
review period.

5.

Percentage of Inventory over current assets:

In order to know the percentage of inventory over current assets the

Ratio of inventory to current assets is calculated and which is presented in the

following table.
Inventory over current assets ratio =

Inventory
__________ X 100
Current assets

Percentage of Inventory Over current assets:

Year
2002 2003

Inventory
14286.75

Current Assets

Ratio (%)

25129.23

56%

2003 2004

11780.77

2004 2005

50925.70

2005 2006

43950.76

2006 2007

47077.45

2007 2008

94605.76

29780.68

39%

54073.55

94%

46000.22

94%

50722.25

92%

87111.59

108%

Interpretation:
1)

From the above table it can be understand that the % of inventory over current
assets ratio was showing a declining trend for two years 2002 - 2003.

2)

However from the year2007 08 it is showing an increasing trend.

3)

The lowest inventory over current assets ratio was recorded at 39% during the
year 2003 04 and the highest inventory over current assets ratio we recorded at
108% during 2007 08.

4)

The average inventory over current assets ratio was recorded at 85%.

6.

Percent of Inventory Over total current assets & fixed assets:

Inventory / Current + Fixed assets
Year

Inventory

2002 2003

14286.75

2003 2004

11780.77

2004 2005

50928.70

2005 2006

43950.76

2006 2007

47077.45

Current Assets

Ratio (%)

88122.55

16.21%

89133.25

13.21%

118900.79

42.83%

114659.62

38.33%

114769.56

41.01%

2007 2008

94605.76

199340.25

47.45%

Interpretation:
1)

During the year 2002 03the ratio was 16.21% on it declined to

13.21% in the year 2003 04

2)

From the year 200405 it is showing fluctuating trend but as compared to above 2
years it is increasing.

3)

The lowest inventory over total assets ratio was recorded at 13.21% during the
year 2003 04and the highest inventory ratio was recorded at 42.83% during the
year 2007 08.

4)

The average inventory to total assets ration was recorded at 38.33% during the
review period.

7.

Percentage of Inventory over current liabilities:

In order to know the percentage of inventory over current liabilities the

ration of inventory to current liabilities is calculated and which is presented in

the following table.
Inventory
Inventory over current liabilities ratio

= __________________ X 100
Current liabilities

Percentage of Inventory Over current liabilities:

Year

Inventory

2002 2003

14286.75

2003 2004

11780.77

2004 2005

50925.70

2005 2006

43950.76

2006 2007

47077.45

2007 2008

94605.76

Current
liabilities

Ratio (%)

7900.21

18%

8101.11

145%

17202.41

296%

17800.42

246%

18728.24

257%

37257.22

253%

Interpretation:
1)

From the above table it can be understand that the % inventory over current
liabilities ratio was showing a declining trend for two years 2002 03.

2)

During the year 2003 04 the ratio was it gradually increased to 145 and there is a
net increase to the extent of 128.

3)

The lowest inventory over total amounts ratio was recorded at 18 during the year
2002 03.

4)

The highest inventory to current liabilities ratio was recorded at 296 during the
year 2004 05.

5)

The average inventory to current liabilities ratio was recorded at 221 during the
review period.

8.

Current Ratio:
In order to know the current ratio the percentage of current assets to current

liabilities is calculated and which is presented in the following table.

Current assets
Current Ratio

= _____________________
Current liabilities

Calculation of Current Ratios:

Year

Inventory

Current
liabilities

Ratio (%)

2002 2003

25272.33

2003 2004

29769.79

2004 2005

54077.69

2005 2006

46600.02

2006 2007

50714.25

2007 2008

87899.25

8000.12

3.15%

8042.70

3.70%

17299.15

3.12%

17900.15

2.60%

18600.25

2.72%

37256.42

2.35%

Interpretation:
1)

From the above table it can be interpreted that the % of current assets over
current liabilities ratio i.e., current ratio was showing a decreasing trend from
year 2003 04.

2)

In the year 2002 03 the ratio was 3.15% and has increased to 3.70% in the
year 2003 04.

3)

The lowest current ratio was recorded at 2007 08 which is 2.35% and the
highest current ratio was recorded at 3.70% during the year 2003 04.

4)

The average current ratio was recorded at 3.09% during the review period.

9.

Quick Ratio:
The quick ratio is the relationship between quick to current liabilities quick assets

is more rigorous test of liability position of a firm it is computed by applying the

following formula.
Quick ratio

Quick assets / Current Liabilities

Where Quick assets = Current Assets Inventory

Year

Inventory

2002 2003

9787

2003 2004

17460

2004 2005

3216

2005 2006

3500

2006 2007

3701

2007 2008

3203

Current
liabilities

Ratio (%)

6828

1.43%

9042

2.12%

15202

0.21%

17202

0.20%

17204

0.21%

37256

0.08%

Interpretation:
1)

From the above table it can be understand as that the % of quick assets to
current liabilities i.e., the quick ratio was 0.002% in 2004 04 and from that
year it is showing increasing trend.

2)

The highest quick ratio was recorded at 2.42% during the year 2003 04 and
the lowest quick ratio was recorded at 0.21% during the year 2004 05.

3)

The average quick ratio was recorded at 0.56 during the review period.

CHAPTER V

CONCLUSIONS;
1)

Over all the inventory of HERITAGE FOODS INDIA LIMITEDs is up to the

mark.

2)

The production of clinker and FOODS during 2004 2005 was 6,74,634 and
6,87,092 respectively which is higher as compared to 2007 2008 which is
5,97,374 and 6,57,756.

3)

Investment on raw material is 95605.89 lakhs which very high as compared to

2007 08 which is only 560700.56 lakhs.

4)

The inventory turn over ratio shows that the stock has been converted into
sales is only 1.02 times.

5)

In the year 2004 05 the stock was cleared within 27 days whereas it took
230 days in the year 2003 2004 which took more days for clearing stock.

6)

Year 2004 05 is not showing sample profits. This is because of FOODS

prices have been continuously under pressure due to persistent mismatch
between supply and demand.

7)

The quantity of dairy in the year 2007 08 is 8,98,240 and its value
is12,94,24,815 but whereas in the year 2006 07 the quantity was 8,92,560
and the value is 12,10,71,545.

8)

In purchase department for want of any item it should go through several

process. This may include receiving indents, floating enquiries, preparation of
order processing form, preparation of purchase order and order follow up
inform the supplier. Most of the time was spent in accounts payable.

9)

In this type of process, it requires more number of employees and supplier

should also wait for until the accounts are matched.

10)

This process takes an input, adds value to it and provides an output to an

internal or external customer.

SUGGESTION:
1)

Though the production is higher is the year 2004 05 and the sales were very
high i.e., as per inventory conversion period it took 270 days. This shows that
there is demand for FOODS and the funds unnecessarily tied up. So, proper
demand forecasting should be done and according to that it may be
manufactured.

2)

The investment on raw material should be made as per the requirement.

Unnecessary investment may block up the funds.

3)

Neither too high nor too low inventory turnover ratios may reduce profit and
liquidity position of the industry. So, proper balance should be made to
increase profits and to ensure liquidity.

4)

The raw material should be acquired from the right source at right quality and
at right cost.

5)

The process that was being used by HERITAGE FOODS INDIA LIMITEDs
with the purchasing department should undergo changes, so that, it seeks
enhance the celerity of the delivery of a product without compromising its
quality by improving the utilization of materials, labour and equipment.

6)

To reduce the work, the purchasing department may enter the purchasing
order into database and did not send a copy to any one. When the merchandise
arrived, the receiving clerk would enter the database and determine whether
the order agreed with the electronic purchase order.
If it did, payment was authorized to be made at the appropriate

time. If it didnt match, the order would be returned until if it is agreed by the
HERITAGE FOODS INDIA LIMITED.
If it institutes Invoice less purchasing where the supplier did not need to send an
invoice to be paid.
This generally simplifies the process for all concerned. As a result, it would able
to reduce the work of its accounts payable department.

BIBLIOGRAPHY
1.

Financial Management

By IM Pandey

2.

Financial Management

By Prasanna Chandra

3.

Total Quality Management

By K. Shridhara Bai

4.

Companys Stores Manual

5.

Companys Annual Reports