Managing Inventory Control and Procurement
Read this chapter. It uses the food service industry as a case study because of the different types of raw material inventory food establishments need to consider. As you read the section on Three Ways to Increase Your Value, can you recommend a fourth or even a fifth to help these businesses?
BASIC INVENTORY PROCEDURES
Pricing and Costing for Physical Inventory
The cost of items purchased can vary widely between orders. For example, cans of pineapple might cost $2.25 one week, $2.15 the second week, and $2.60 another week. The daily inventory reports will reflect the changes in price, but unless the individual cans have been marked, it is difficult to decide what to use as a cost on the physical inventory form. There are several different ways to view the cost of the stock on the shelves if the actual cost of each item is difficult to determine. Most commonly, the last price paid for the product is used to determine the value of the stock on hand. For example, if canned pineapple last cost $2.60 a can and there are 25 cans on hand, the total value of the pineapple is assumed to be $65 (25 x $2.60) even though not all of the cans may have been bought at $2.60 per can. Another method for costing assumes the stock has rotated properly and is known as the FIFO (first-in-first-out) system. Then, if records have been kept up-to-date, it is possible to more accurately determine the value of the stock on hand. Here is an example showing how the FIFO system works.
Example
The daily inventory shows the following:
Opening Inventory 15 cans @ $2.15 = $32.25
Received on 8th of month 24 cans @ $2.25 = $54.00
Received on 15th of month 24 cans @ $2.15 – $51.60
Received on 23rd of month 12 cans @ $2.60 – $31.20
If the stock has rotated according to FIFO, you should have used all of the opening inventory, all of the product received on the 8th, and some of the product received on the 15th. The 25 remaining cans must consist of the 12 cans received on the 23rd and 13 of the cans received on the 15th. The value of these cans is then
12 cans @ 2.60 = $31.20
13 cans @ 2.15 = $27.95
Total = $59.15
As you can see, the choice of costing method can have a marked effect on the value of the stock on hand. It is always advisable to use the method that best reflects the actual cost of the products.
Key Point – Once a method is adopted, the same method must be used consistently or the statistical data generated will be invalid.