Wednesday, February 12, 2014

Inventory Control - Interview Questions and Answers (Retail Industry)

What is Inventory Control ?
  • Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply.
  • It can also be referred as an accounting procedure or system designed to promote efficiency. Or we can say that it assures the implementation of a policy or safeguard assets or avoid fraud and error etc.
        In Economics, Inventory Control helps in reducing the overhead cost without hurting sales.
  In the field of Loss Prevention, Retail Inventory Control management helps in preventing shoplifting and other issues.

What is Cycle Count?

A cycle count is an inventory auditing procedure, which falls under inventory management, where a small subset of inventory, in a specific location, is counted on a specified day. Cycle counts contrast with traditional physical inventory in that a full physical inventory may stop operation at a facility while all items are counted at one time.

It helps to see the difference between Actual stock and Book Stock. Book Stock is the stock available in the system. 


What is ABC Analysis?

It is an inventory categorization technique often used in Materials Management. It is also known as Selective Inventory Control. 

A ITEMS: very tight control and accurate records.
B ITEMS: less tightly controlled and good records.

C ITEMS: simplest controls possible and minimal records.

The ABC analysis suggests that inventories of an organization are not of equal value. 

Example of ABC class are: 
(1)
‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the items.
‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the items.
‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the items.
(2)
"A" approximately 10% of items or 66.6% of value
"B" approximately 20% of items or 23.3% of value
"C" approximately 70% of items or 10.1% of value

What is Opening Stock and Closing Stock ? 

At the beginning of a reporting period, or after a cycle count, the stock available in your inventory account is the Opening Stock. It is also called as Beginning Inventory.


So, there's an Opening Stock. Then, lots of transactions happens - Items are purchased and Sold. And finally Closing Stock is calculated.


Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period. This includes raw materials, work-in-process, and finished goods inventory. The amount of closing stock can be ascertained with a physical count of the inventory. It can also be determined by using a perpetual inventory system and cycle counting to continually adjust inventory records to arrive at ending balances.


Closing Stock is an asset. In Inventory Account, it is under debit. In trading Account, it is under credit. Because, it is still not traded. 


What is COGS (Cost Of Goods Sold) formula ? 


For manufacturers, “cost of goods sold” (COGS) is the cost of buying raw materials and manufacturing finished products.


For retailers, it’s the cost of obtaining or buying the products sold to customers.

Opening Stock (Beginning inventory) + Purchases – Closing Stock (End Inventory) = COGS

If the company is in a service industry, COGS is the cost of the service it offers.


COGS can help companies work out how much they should charge for their products and services, and the level of sales they need to sustain in order to make a profit.


The price paid for products is particularly crucial to retailers, as it is often their greatest area of expenditure. But all businesses can benefit from an analysis of COGS, as it can highlight ways of improving efficiency and cutting expenditure. 


What is FOB Price and Landed cost?


In garment exporting, pricing of garments are mostly quoted on FOB (Free On Board). 
Free on board(freight on board) price means a price which includes goods plus the services of loading those goods onto some vehicle or vessel at a named location which i put in parenthesis. FOB (Source port) does not includes the shipping charge and Insurance. Where as FOB(destination) includes shipping charges and insurance cost. 

Landed Cost is the total cost of a product once it has arrived at the buyer’s door. This list of components that are needed to determine landed costs include the original cost of the item, all brokerage and logistics fees, complete shipping costs, customs duties, tariffs, taxes, insurance, currency conversion, crating costs, and handling fees. Not all of these components are present in every shipment, but all that are must be considered part of the landed cost.  


Clearly it is advantageous to reduce the cost of each or any component of landed cost. Each one will allow the seller to lower the final selling price or increase the margin associated with that sale.


Last Cost = FOB + Costs levied on landing.

Margin taken = Sales Cost - Last Cost.

What is Weighted average Cost ?


A weighted inventory average determines the average cost of all inventory items based on the inventory items' individual cost basis and the quantity of each item held in inventory.


When a business purchases items for inventory, the business may pay different prices for the inventory items. This price differential can apply to both different inventory items and the same inventory items purchased at different times.



The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory.

Weighted Average Unit Cost = Total Cost of Inventory / Total Units in Inventory

For Ex: 
Lets say, we buy item A for 10 AED. We have 10 qty of Item A.
Therefore, total cost of Item A is 10 x 10 = 100 AED.
In that we sold 3 items. 7 qty left in stock. Total cost of those 7 items = 7 x 10 = 70 AED.

After 3 months, item A cost is reduced to 8 AED. And then we bought 10 more for 8 AED.

Therefore, total cost = 8 x 10 = 80 AED. 

Now, we have 7 items bought for 10 AED and 10 items bought for 8 AED.

Total 17 items.

Therefore  total cost = 70 AED + 80 AED = 150 AED.


Now, when we calculate the weighted average cost of the 17 items which are to be sold = 150 AED/17 = 8.82 AED.


What is Shrinkage Calculation in Inventory ?

In financial accounting, the term inventory shrinkage is the loss of products between point of manufacture or purchase from supplier and point of sale. The term shrink relates to the difference in the amount of margin or profit a retailer can obtain. If the amount of shrink is large, then profits go down which results in increased costs to the consumer to meet the needs of the retailer.

In retail terms, shrinkage refers to a company's percent loss resulting from damage, product expiration and theft of unsold products. Retail shrinkage can happen anywhere along the production and sale chain, including at the factory, in transit or at the retail location. 

You can calculate retail shrinkage by dividing the value of goods lost to shrinkage by the total value of goods that are supposed to be in the inventory.

Shrinkage = 
( Total value of the goods that you are supposed to have in your inventory - Total value of the goods that is physically stocked in your inventory ) 
/ Total value of the goods that you are supposed to have in your inventory.

i.e. Shrinkage =  (Book stock - Actual Stock) / Book Stock
                   = Total Value of goods lost / Total value of the goods that you are supposed to have in your inventory

Causes of shrinkage include:

·         Employee Theft or Shop lifting
·         Administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods.
·         Cashier or price-check errors in the customer's favor.
·         Damage in transit or in the store.
·         Paperwork errors.
·         Perishable goods not sold within their shelf life.
·         Vendor fraud.

Supplier Credit Notes:

The supplier credit notes are issued for the variance in the shipment received. 
Let's say, the supplier invoice says 1000 qty and what received here is 900 qty. So there's a variance of 100 qty. It is noted in inventory module. Therefore, a credit note is required for 100 qty from Supplier. 

Devolution:

At the end of a season, sometimes, the outdated goods are returned to the supplier. Some are sent to warehouse. This is devolution. Depending on the agreement with the supplier, the devolution cost is calculated. 
Last Cost - FOB = Devolution Cost

OAR - Order Availability Report :

There are several types of reordering systems; in this module we discuss three. 

1. The fixed order quantity uses fixed quantities of goods ordered at various order points to replenish inventory. 
2. The fixed order period use fixed times of reorder with various order quantities to replenish inventory to preset levels. 
3. Just in Time uses a constant flow of goods to match the level of demand.