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Just in time (JIT) investment system

Just-in-time inventory system is one of the recently development inventory management concepts,
which assumes that the purchase of inventory has to be just in time of use. Jit refers to process of
acquiring material (inventory) as they are needed. Jit reduces inventory by purchasing and storing
lower quantities of inventories as much as possible. The objective of jit is to maintain inventory as
low as possible. Sometimes, it may even be at zero level. Thus, under jit, the inventories are received
in time or purchased in time of use. It is only possible when the supplier can be relied from making
the delivery of goods on time without compromising the quality. Generally, in developed countries
where communication and transportation system are very efficient, the use of jit is common.
Advantages
The advantages of jit are as follows.
a. Just in time inventory system reduces the amount of money tied up in inventory of raw material
and finished goods.
b. This systems creates saving of space.
c. It does not required maintaining large inventory storage facilities.
d. Just in time inventory systems minimizes wastage.
e. It helps to improve the labor efficiency.
Disadvantages
a. The effectiveness of this system depends on the co-operation and faith with the supplier.
b. This systems works well when there is proper knowledge of quality and quantity of materials
needed.
c. There must be some alternative suppliers as the regular suppliers may not be able to dispatch the
material all the times.
Perpetual inventory system
Meaning of perpetual inventory system
The perpetual inventory system is the way of maintaining the record of inventory in such a ways that
the stock on hand can be ascertained at any time. It emphasizes the day to day checking of stock and
maintains the up to date record. It is a method of recording inventory after every receipt and issue to
facilitate regular checking and obviate the stocking. It provides the per

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cept stock control as we can easily find out and verify the level band position of stock lying in the
store at any moment by physical counting. Some definitions of perpetual inventory systems are given
below.
Chartered institute of management accountants (CIMA), London, "a system of records maintain
by the controlling department, which reflect the physical movement of stock and their current
balance."
Mr. Weldon, "it is a method of recording stores balance after every receipt and issue, to facilitate
regular checking and to obviate closing down for stock taking.
Perpetual inventory systems helps to ascertain the balance of each and every stock in terms of
physical quantity as well as monetary value held in store at all time. For this, a company may
maintain bin card, in which separate receipt and issue of material and balance of stock are recorded.
a. Bin card
A bin card is a document maintained by the storekeeper to keep the record of the receipt and issue of
inventory. It records the materials received, issued and balance in store in quantitative terms. Bin is a
place, rack or cupboard where materials are kept. A separate bin card is prepared for each item of
material and attached or hung on the shelf; rack of pigeonhole etc. bin card gives quantities
information about maximum level, minimum level and re-order level of material. It is a detailed
statement of material received, issued and balance.

b. Tow bin card


Under two-bin card system, two-bin (i.e. big bin and small bin) are maintained for every items of the
store. The bin card is used for regular transactions that records the inventories issued to different
departments. It is called the big bin. The bin that is used for recording the issues made from the
minimum stock or safety stock is called small bin. The issue from the small bin is made when there
is no sufficient stock in the big bin. The verification of stock is made through the regular bin.
c. Store ledger
It is the ledger that maintains the records of stock both in quantity and value. It is maintained by the
cost accounting department. It provides the information of material received, issued, returned and
balance. It is used for making decision regarding the inventory.

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The different between bin card and store ledgers are presented in the following table.

Advantages and disadvantages of perpetual inventory system


The advantages of the perpetual inventory systems are as follows:
a. Objective the necessity of physical verification of all items: it obviates the necessary for the
physical checking of all items of stores at the end of the year.
b. Easy to prepare final accounts: it is possible to prepare the profit and loss account and balance
sheet without checking the inventory because the figure of closing stock can be taken from the bin
cards or store ledger.
c. Reliable check: A perpetual inventory system is able to provide more reliable check on the store.
d. Up-to-data and accurate records: continuous stock taking will make the storekeeper and store
accountant more vigilant toward their work any make efforts to ensure that there is no leakage of the
stock.
e. Planning of production is easy: production planning can be done according to the availability of
material in stores since the management is constancy informed about the stores position.
f. Continuity in internal check: a system of internal check remains in operation all the times.
g. Easy to discover error and shortage of stock: error and shortage of stock are readily discovered
and efforts can be made to avoid the shortage of stock in future.
h. Control over capital investment in store: the capital investment is store can be controlled since
the actual can be compared with the maximum and minimum levels.
i. Control over capital investment in store: the capital investment in store can be controlled since

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the actual stock can be compared with the maximum and minimum levels.
j. Easy to make claim with insurance company: perpetual inventory system provides correct stock
figure for claim to made with the insurance company for loss of stock destroyed by fire or others.
The disadvantages of perpetual inventory systems are as follows:
a. It is possible maintaining stock control cards, bin cards and store ledger. So it is expensive.
b. Small level organization cannot use it.
c. In right time and in right place the information about actual stock of goods may not be available.
d. Accurate costing, measuring, counting and weighting are difficult regularly.
Inventory control system design
The process followed regarding the purchase, store and issue of material for controlling the
production cost is called the inventory control system design. The purchase process of material
includes the preparation of the requisition, selection of the suppliers, placing the purchase order,
receipt and inspection of materials and payment of bills. Under storing, the structure and location of
the store as well as recording of the inventory are included. Issue of material involves availing the
inventories, evaluating the inventories and recording the issue. The main objectives of the inventory
control systems design are as follow.
• To purchase the inventory by the authorized persons.
• To purchase the inventories according to the quality needed.
• To avail the suitable and facilities for store keeping.
• To stop the unauthorized use of materials.
• To ensure that the materials as per the records reconcile with the materials that actually exist in
store.

Purchasing procedures
Material is a major component for any organization since it affects the production, quality of
products, priced and sales. Thus, a systematic process is developed for the purchase of materials;
purchase includes the identification of the material to be purchased, selection of the appropriate
suppliers, sending the purchase order, examination of the materials to ensure that they are as per
purchase order and payment of bills. The department involved in the purchase of material is called
the purchase department. The purchase procedures are mentioned below:

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The purchase department performs the following activities.
• To avail the materials regularly.
• To purchase qualitative materials in harmonized conditions.
• To purchase the materials in economic order quantities and remove the over and under stocking of
materials.
• To maintain a cordial relationship with the suppliers.
• To update and avail the information on supply, quality, price, purchase procedures, terms of
payments, carriage process etc.
Receiving purchase requisition
The first step of a purchase procedure is receiving the purchase requisitions. It is a request made by
various departments to the purchase department for purchase the requirement materials. Such
purchase requisition is verified by the chief of the concerned department in which the details about
the materials like quantity, codes etc are mentioned. The specimen of the purchase requisition is
given below:

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Selection of suppliers
The second step of the purchase procedure is the selection of the appropriate suppliers. To look for
the possible suppliers, quotations or tenders are invited. A tender involves the price, quality and other
terms and conditions related to the materials. The from developed to get the required information
regarding the materials to be purchased is called the tender form.

After analysing the tender forms received from all the probable suppliers, analysis is made to select
the suppliers intending to supply the materials at the lowest price and the most favorable conditions.
Beside these, the financial soundness, capacity to supply, reliability and continuity of the suppliers
are also considered to select a supplier.

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Sending purchase order
After selecting the suitable suppliers, purchase order is sent to get the needed materials. It is a
required made to the suppliers to send the material as per the stated price and quantity. The specimen
of purchase order is as below.

Each purchase order is made is 5 copies. The first copy is send to the suppliers, the second to the
person or department demanding the purchase, the third to the department receiving the materials,
the fourth to the accounts department and the final copy is kept purchase department itself.

Receiving and inspecting materials


The fourth step of a purchase procedure is to received and inspect the materials send by the supplier.
It has to be ensured that the materials are as per the purchase order and there is no damage during the
carriage. After inspecting the materials, a report is prepared and the first copy of such report is send
to the purchase department, the second to the account department and the third to the department
receiving the materials. The specimen of an inspection form is as under:

Before storing the materials, a statement of the materials received is prepared which is called the
goods receipt note in which the code, price and quantity of the materials are mentioned.

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Passing bill for payment
This is the last process of a purchase procedure. The final approval for the bill of materials to be paid
to the suppliers and eventually the account section makes payment of the same.

4. What do you mean by ABC analysis? Write any three advantages of ABC analysis.
ABC analysis is a way of categorizing the material on the basis of the quantity of consumption and
their relative values' some materials might be consumed in lower quantities but their price may be
very high. Such materials are kept in group 'A'. Similarly, some materials may be consumption in
large quantities but their values may be lower. Such materials are kept in group 'C'. In between these
two some materials may be concurred in moderate quantity within the moderate price. Such
materials are kept in group 'B'. Under ABC analysis, very little control is excreted over the materials
in group 'C'.
a. Strict control: under ABC analysis, strict control can be exercised to the materials in group 'A'
that have higher value.
b. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in
lower quintiles as much as possible with this, the effort to reduce the delivery period is possible.
With this, effort to reduce the delivery period is also made. Those in turn help to reduce the
investment in material.
c. Minimum storage cost: since the material from group 'A' are purchase in lower quantity as much
as possible, it reduces the stories cost as well.
5. What do you mean by JIT? What are its advantages?
JIT rebus to process of acquires materials (inventory) as they are needs. JIT reduces inventory by
purchase and storing lower quantity of inventory as much as possible. The objectiv3e of JIT is to
maintain inventory as low as possible. Thus, under JIT, the inventory as low as possible thus, under
JIT, the inventories are received in time or purchased inn time of use. It is only possible when the
supplier can be relied for making the delivery of goods on time without compromising the quantity.
a. Just in time inventory system reduces the amount of money tied up in inventory of raw materials
and finished goods.
b. This system creates saving of space.
c. It does not require maintaining large inventory storage facilities.
d. Just in time inventory system minimizes wastage.
e. It helps to improve the large labor efficiency.
6. What do you mean by perpetual inventory system? Write any three advantages of it.
The perpetual inventory system is the way of maintaining the record of inventory in such a ways that
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the stock on hard can be ascertained at any time. It emphasizes the day to day checking of stocks and
maintains the update record. It is a method of recording inventory after every received and issue to
facilities regular checking and obviate the stocktaking. It provides the perfect stock control as we
can easily find out and verify the level and position of stock lying in the store at any moment by
physical counting.

The advantages of the perpetual inventory system are as follows:


a. Obviates the necessity of physical verification of all items: it obviates the necessary for the
physical checking of all items of stores at the end of the year.
b. Easy to prepare final accounts: it is possible to prepare the profit and loss balance sheet without
checking the inventory because the figure of closing stock can be taken from the bin card or store
ledger.
c. Reliable check: perpetual inventory system is able to provide more reliable check on the ledger.
d. Easy to make claim with insurance company: perpetual inventory system provides correct stock
figures for claim to be made with the insurance company for loss of stock destroyed by fire or others.
7. Mention the procedures of purchasing inventory.
Material is a major component for any organization since it affects the production, quality of
products, price and sales, thus, a systematic process is developed for the purchase of materials. The
department in the purchase of material is called the purchase department.
The purchase procedures are mentioned below:
a. Receiving purchase requisition
b. Selection of suppliers
c. Sending purchase order
d. Receiving and inspecting materials
e. Passing bill for payment.

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