## **Learning Outcomes**

By the end of this article, you will be able to explain core stock control procedures, calculate key inventory management figures such as reorder levels and economic order quantities, and describe how just-in-time (JIT) systems operate. You will recognise the advantages and drawbacks of traditional inventory systems and JIT, and identify practical controls to minimise discrepancies and losses.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand how inventory is managed for control and cost purposes, and how different systems are applied in practice. This article addresses:

- The procedures for ordering, receiving, and issuing materials
- The calculation and interpretation of ordering and holding inventory costs, including buffer inventory considerations
- The determination of optimal order quantities using Economic Order Quantity (EOQ)
- The setting and monitoring of reorder levels and safety inventory
- The operation and limitations of just-in-time (JIT) inventory management approaches
- Stock control procedures to minimise losses and discrepancies

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What factors are included in calculating the economic order quantity (EOQ) for an inventory item?
2. Explain the difference between buffer (safety) inventory and the minimum inventory level.
3. How does just-in-time (JIT) differ from traditional stock control, and what are its main requirements?
4. List two specific stock control procedures used to prevent discrepancies between ‘book’ and physical inventory.

## **Introduction**

Materials and inventory control ensures that sufficient resources are available for production or sales without holding unnecessary or costly surpluses. The right inventory procedures balance customer service, production flow, and cost minimisation. Efficient control also helps prevent losses, discrepancies, and waste.

> **Key Term: Inventory**
> Inventory refers to materials, components, work in progress (WIP), and finished goods held by an organisation for production or sale.

## STOCK CONTROL PROCEDURES

Effective stock control governs the systematic recording, ordering, issuing, and monitoring of inventory. Proper controls reduce costs, minimise waste and ensure production continuity.

### Documentation and Authorisation

Most organisations rely on a sequence of formal documents and authorisations to maintain tight control:

- **Purchase requisition:** Internal request for materials, usually issued by stores or production.
- **Purchase order:** Official external order to a supplier, generated by the purchasing department.
- **Delivery note:** Record of receipt, checked against the original purchase order.
- **Goods received note:** Confirms contents received and quality inspection.
- **Invoice:** Trigger for payment to supplier, reconciled to goods received.

This documentation trail ensures that only authorised purchases occur, correct quantities are received, and that delivered goods meet quality requirements.

> **Key Term: Purchase Requisition**
> An internal document used to formally request the purchase of materials or services.

### Computerised Inventory Systems

Modern businesses use computerised systems for real-time stock records, supplier management, and automatic ordering when levels fall below a set threshold. Inventory modules are often linked to wider accounting and production systems for seamless control.

### Stock Records

Perpetual inventory records automatically update the stock balance with every receipt or issue. Periodic stocktaking checks are used to verify physical quantities and identify discrepancies.

> **Key Term: Perpetual Inventory**
> An ongoing record system that continuously tracks the quantities and values of items held in inventory.

### Control Levels

A fundamental part of inventory control is defining key levels:

- **Reorder level:** The level at which a new order is placed to replenish stock.
- **Maximum level:** The upper quantity limit to avoid excess holding.
- **Minimum level:** The warning point that indicates urgent replenishment may be needed.
- **Buffer (safety) inventory:** Extra stock kept as a precaution against unexpected demand or supply delays.

### **Worked Example 1.1**

**A company uses 120 units of Material Q per week. Delivery from the supplier takes 3 weeks. What is the reorder level, assuming demand is constant?**

> **Answer:**  
> Reorder level = Usage per week × Lead time (in weeks)  
> = 120 × 3 = 360 units.  
> When stock falls to 360 units, a new order should be placed.

## ECONOMIC ORDER QUANTITY (EOQ)

Ordering too frequently raises administrative and delivery costs; ordering in large batches leads to high holding costs. The economic order quantity (EOQ) model calculates the optimal order size that minimises the total cost.

> **Key Term: Economic Order Quantity (EOQ)**
> The quantity of product to order that minimises the combined total of ordering and holding costs over a period.

### EOQ Formula

EOQ = √((2 × Order Cost per order × Annual Demand) / Annual Holding Cost per unit)

Where:

- Order Cost per order: Cost incurred each time an order is placed.
- Annual Demand: Total units required per year.
- Holding Cost per unit: Cost of storing one unit for one year.

### **Worked Example 1.2**

**A manufacturer uses 2,400 units of a material each year, ordering incurs \$30 per order, and annual holding cost per unit is \$2. Find the EOQ.**

> **Answer:**  
> EOQ = √((2 × 30 × 2,400) / 2) = √(144,000 / 2) = √72,000 = 268.3  
> EOQ should be about 268 units per order.
>
> **Key Term: Holding Cost**  
> The cost of storing inventory, including space, insurance, and the opportunity cost of tied-up capital.
>
> **Key Term: Ordering Cost**  
> The cost associated with placing and receiving stock orders, such as administrative time and delivery charges.

## STOCK LEVELS AND BUFFER INVENTORY

Maintaining appropriate minimum, maximum, and buffer stock levels is critical for service reliability while managing costs.

### Key Calculations

- **Reorder level:** Maximum usage × Maximum lead time
- **Minimum level:** Reorder level – (Average usage × Average lead time)
- **Maximum level:** Reorder level + Order quantity – (Minimum usage × Minimum lead time)

Buffer inventory provides security against uncertainties in lead time or demand, but must be balanced against higher holding costs and the risk of obsolescence.

### **Worked Example 1.3**

**Given weekly usage fluctuates between 150-200 units, and lead time varies between 2-5 weeks, find:  
a) Reorder level  
b) Minimum stock level  
c) Maximum stock level.  
Order size: 600 units.**

> **Answer:**  
> a) Reorder level = Max usage × Max lead time = 200 × 5 = 1,000 units  
> b) Minimum level = Reorder level – (Average usage × Average lead time)  
> = 1,000 – (175 × 3.5) = 1,000 – 612.5 = 387.5 ≈ 388 units  
> c) Maximum level = Reorder level + Order size – (Min usage × Min lead time)  
> = 1,000 + 600 – (150 × 2) = 1,000 + 600 – 300 = 1,300 units

## STOCKTAKING AND LOSS PREVENTION

Regular physical and cycle (continuous) stocktaking verifies that recorded ('book') and physical quantities match. Differences may arise due to:

- Recording or data entry errors
- Theft, pilferage, or accidental loss
- Damage, spoilage, or obsolescence

Reconciling and promptly investigating discrepancies helps prevent bigger losses.

> **Key Term: Stocktaking**
> The periodic process of counting and verifying the physical quantity of inventory and comparing it with accounting records.

### Loss Controls

Preventive controls include restricted access, frequent counts of valuable or fast-moving items, segregation of ordering and receiving functions, and standardised authorisation procedures.

## JUST-IN-TIME (JIT) SYSTEMS

Just-in-time (JIT) is based on receiving and using materials only as they are needed in the production process, aiming to hold little or no inventory.

> **Key Term: Just-in-Time (JIT)**
> A management system that strives to achieve zero inventory by synchronising material deliveries with production or sales demand.

### Core Features of JIT

- Materials are purchased and arrive only when required for immediate use.
- Production schedules are closely tied to customer orders ('pull' rather than 'push').
- Strong partnerships with reliable suppliers are essential.
- High quality and rapid response are critical; there is little margin for error or delay.
- Minimal or no buffer inventories are maintained.

### JIT Advantages

- Lower investment in materials, releasing cash for other use
- Reduced storage and handling costs
- Less risk of obsolescence or deterioration
- Enhanced focus on quality and responsiveness

### JIT Risks and Challenges

- Supply chain disruption can halt production rapidly
- Requires highly dependable suppliers and robust logistics
- Increased vulnerability to demand volatility
- High coordination and information-sharing requirements

### **Worked Example 1.4**

**A factory operates under JIT. If a supplier misses a scheduled delivery by one day, what is the likely consequence?**

> **Answer:**  
> With no buffer inventory, production may stop for one day, resulting in lost output and potential customer dissatisfaction.

### **Exam Warning**

> Relying on JIT without assessing supplier reliability or production flexibility can leave operations exposed to severe disruption. Be prepared to discuss both the benefits and limitations in the exam.

## LIMITATIONS OF STOCK CONTROL SYSTEMS

All inventory systems require reliable information on usage, lead times, and costs. Inaccuracy in demand estimation or process discipline can lead to:

- Excess inventory and high costs, or
- Stockouts and production delays

JIT offers major cost savings but does not suit industries with highly volatile demand, unpredictable supplier performance, or where minimum delivery quantities must be met by law or regulation.

## **Summary**

Efficient materials and inventory control combines clear procedures, accurate records, and cost calculations, with practical controls to reduce losses. EOQ helps identify the best ordering policy, while control levels minimise shortages and excess stock. JIT systems aim to minimise or eliminate inventory entirely, but require exceptional supplier reliability and organisational discipline. Physical counts and strong internal controls reduce discrepancies and support accurate reporting.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The procedures and documentation required for effective stock control
- How to calculate reorder levels, minimum, maximum, and buffer inventory
- Determining the economic order quantity (EOQ) and interpreting holding and ordering costs
- Key controls and stocktaking methods to prevent losses and discrepancies
- Principles, advantages, and drawbacks of just-in-time (JIT) inventory systems
- The limitations and risk considerations of different inventory management approaches

## **Key Terms and Concepts**

- Inventory
- Purchase Requisition
- Perpetual Inventory
- Economic Order Quantity (EOQ)
- Holding Cost
- Ordering Cost
- Stocktaking
- Just-in-Time (JIT)

Materials and inventory control - Just-in-time and stock control procedures