What Is Optimum Stock Levels;Maintain Optimum Level of Investment

Establishing optimum stock levels is of vital importance in controlling stock levels. The major objective of stock control is to establish and maintain the optimum level of investment in all types of stocks, from raw materials to finished goods. When establishing optimum stock levels, it is necessary to ensure that sufficient stocks are maintained so that production requirement and customer demand can be met. On the other hand, excessive stocks are to be avoided, since this will result in unnecessary money being tied up in stocks that could be used for other profitable purposes.

The storekeeper is responsible for ensuring that optimal stock levels are maintained for each item of material in stock, and it is necessary that he or she should maintain an accurate record of the quantity of material in stock for each stores item. The clerical record for collecting this information is called a bin card.

In most large organizations stock records will be kept on a computer rather than on bin cards, and the storekeeper merely presses a few keys on a visual display unit to obtain details of a particular stock item. The storekeeper will normally be responsible for informing the purchasing department when to purchase various materials. If records are maintained manually, the storekeeper must examine each bin card to find the items that need to be re-ordered.

A computerized system will provide this information at the touch of a key. When items of materials have reached their re-order point, the storekeeper makes out a purchase requisition requesting the purchasing department to obtain the re-order quantity from the appropriate supplier. In a computerized system the computer will automatically print a purchase requisition when stocks reach their re-order point.

 Optimum Stock Levels;How To Maintain Optimum Level of Investment.

Purchase of materials.

When the purchasing department receives a copy of the purchase requisition, the purchasing officer will select the appropriate supplier based on the department’s expert knowledge, and then complete a purchase order requesting the supplier to supply the materials listed on the order. A copy of the purchase order is sent to the receiving department for checking with the goods when they arrive.

Receipt of materials.

When the goods are received by the stores department, they are inspected and checked with the supplier’s delivery note and a copy of the purchase order. The stores department then lists the materials received on a goods received note (GRN) and enters details in the receipts column of the appropriate bin card. Copies of the GRN are passed to the purchasing department and to the accounts department. The purchasing department will record that the order has been completed, and the accounts department will check the GRN with the supplier’s invoice to ensure that payment is only made in respect of goods actually received.

The supplier’s invoice will normally arrive several days after the goods have been received, and the accounts department uses this invoice to price each of the items listed on the GRN. The items on the GRN are then entered in the respective column of the appropriate stores ledger account An example of a stores ledger account can be seen in Exhibit 3.2. You will notice from this example that it is merely a record of the quantity and value of each individual item of materials in store. In most organizations these records are now stored on a computer.

Issue of materials.

The production control department is responsible for maintaining scheduled production in accordance with the production budget and the planned stock levels. The formal procedure for authorizing production is for the production trol department to issue a production order to the appropriate production department. Production control also determines the quantity of materials necessary to fulfil a production order and lists the required materials on stores requisitions, which are attached to the production order.

When the departmental foreman receives the production order, he gives the requisitions to the storekeeper in exchange for the appropriate materials. The storekeeper then enters the details from the stores requisitions in the issue column of the appropriate bin cards (remember that a separate bin card is maintained for each of the items of material held in stock). He then forwards the stores requisition to the accounts department. For an example of a typical stores requisition.

When the accounts department receives the stores requisition, it will price each of the items listed on the requisition. This information is obtained from the receipts column in the stores ledger account for each item of material issued. (Remember that there is a separate stores ledger account for each individual item of material in stock.) The information on the stores requisition is transferred to the quantity and value columns in the various stores ledger accounts, and a balance of the quantity and value for each of the specific items of materials is calculated. In many organizations this clerical routine is carried out by a computer.

For example, details of materials received and issued will be entered via a computer terminal and documents such as bin cards, stores requisitions and stores ledger cards may exist only in the form of computer records. Details of receipts, issues and balances for each stores items can be obtained by appropriate keys on a visual display unit.

by Abdullah Sam
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