Inventory control is deciding how much of a certain good should be on hold. It allows companies to keep the correct amount of stock at the correct time. This includes everything a business owns, from raw materials to finished products. This helps to prevent overstocking or stock-outs. Improved cash flow and costs are achieved when companies get inventory control right. Doing so ensures smooth operations and timely availability of customer needs. Inventory control is more than counting items. It also means figuring out how much to buy, when to buy it and where to store it. A student must know what inventory control definition explains and how it is applied in reality. With this knowledge, they will do better in exam and interviews. In this article, we will discuss objectives of inventory control, inventory control methods and inventory control techniques. We will also study the types of inventory control and abc analysis in inventory control. You will know everything you need to know about the topic and how it is applied in the real world by the end of it.
What is Inventory Control?
Inventory is essential to any company’s operations. Examples of inventory include raw materials, finished goods, and spare parts. Bad management can result in huge losses. Companies would overproduce and lose money. Or maybe they’ll buy too little and lose customers. Inventory control is the process of controlling the movement and storage of goods. That includes keeping track of what comes in and what goes out and what stays in stock.
What is Inventory Control and Why is it Needed?
To define inventory control, it is the process of managing and organizing inventory in business, if you have to describe it. This encompasses ordering, storing, using, and selling goods. It is a key player in both manufacturing and trading. A good inventory control helps in:
- Reducing storage costs
- Avoiding stock shortages
- Increasing sales
- Improving delivery times
- Managing working capital
Having visibility into the quantity of stock helps a business make better decisions. This benefits profits and customer satisfaction. That is, inventory control meaning is related only to counting items. It concerns proper planning, tracking, and controlling of things.
Objectives of Inventory Control
Knowing the purpose helps understand the objectives of inventory control and its uses. All organizations, no matter big or small, want to thrive and keep the customers satisfied. This is where inventory comes directly into play. When students comprehend these points, they comprehend the enterprise success complete image of inventory. This is why it’s a wise choice to learn inventory control.
- Don’t Over-Stock and Don’t Under-Stock: If a company purchases too much, items may spoil or outdate. If it purchases too little, it might not fulfill consumer orders. Inventory management helps keep order in the chaos.
- Better Customer Service: People expect fast delivery. Inventory control makes sure that the right product is available at the right time.
- Smooth Production Process: Factories require raw materials in a timely fashion. Productive, break-free runs of production are guaranteed by an excellent inventory system.
- Cost Saving: This helps businesses save on storing, insuring, and wasting perishable products and materials by limiting unnecessary stock.
- Efficient Use of Resources: It helps in utilizing manpower, money, and storage space wisely.
- Accurate Records: Inventory management systems presents real time data. This keeps people and helps keep confusion from happening.”
Types of Inventory Control
That is a very good question asked by many students about types of inventory control because, several types suits best for different business needs. Businesses select based on what they want to sell, their size and sale frequency.
Common Types Used in Business
All these different types of inventory control assist a business in unique instances. It varies, depending on the nature of the business and what it is able to invest in systems.
- Periodic Inventory System: This system scans stock at certain intervals. So it is simple but not realtime. Retail shops often use this.
- Perpetual Inventory System: That involves tracking inventory as it moves, using software. It gives real-time updates. That seems to be a trend in large corporations.
- Just-In-Time (JIT): JIT holds very little stock. It does not order anything unless it is needed. This reduces space but requires significant support from suppliers.
- First-In, First-Out (FIFO): This last is first out of the stock system. It is most effective for short shelf life items.
- Last-In, First-Out (LIFO): The newest stock is sold first here. In India, this is very rare (due to tax rules) but nevertheless important to learn.
- Vendor Managed Inventory (VMI): In the Vendor Managed Inventory (VMI), the supplier manages the inventory at the buyer’s premises. This is both time-saving and more efficient.
Inventory Control Methods
Whether it be a small Kirana store in India or a large online seller like Flipkart, the methods serve in efficient management of stock. All of these methods are common in every inventory control system and go hand-in-hand with other forms of inventory control methods. All the above information will help you in answering the questions from exams, which will also help you to perform well in actual jobs. Below, we’ll take a look at the most common types of inventory control methods.
Economic Order Quantity (EOQ)
EOQ is a classical and widely adopted method. It determines the order quantity so that ordering cost and holding cost is minimized.
How EOQ Works:
- The EOQ model calculates the ideal order size.
- It keeps itself from ordering too much or too often.
- This saves storage and lowers the risk of overstocking.
Example:
For example, an example of a stationery shop owner utilizes EOQ to purchase pens. If they overorder, they gather dust (pens, that is). If not enough, they run out quickly. EOQ gives them the best number of pens to purchase per order.
Why do Indian businesses make use of EOQ:
- It saves cost.
- Calculator, Excel etc. Friendly easy to use
- Useful for SME like FMCG articles and so on
Minimum Order Quantity (MOQ)
MOQ is the minimum quantity a supplier is willing to sell in a single order. It likewise allows businesses to obtain bulk prices and avoids small, expensive acquisitions.
How MOQ Helps:
- The supplier will have better relations with the customer.
- It means that buyers can be assured of good deals.
- Under the Minimum Order Quantity (MOQ), transport and handling charges are lower.
Example:
A wholesaler will give a discount if you order 500 T-shirts. That’s the MOQ. The buyer receives unit cost reductions and saves money.
MOQ and Indian businesses:
- Widely adopted in manufacturing and garment industry.
- This can lead to bulk purchasing during seasonal sales.
Reorder Point Method
This approach aids in determining when to stock-up on inventory. It establishes a certain volume, or extent known as the reorder point at which the company needs to make a new order.
How It Works:
- Lead time = reorder point / average daily use.
- Order is triggered when stock hits at this level.
Example:
A grocer sells 20 kg of rice in a day. In the example, if delivery inflow takes 5 days, then reorder point = 20×5 = 100 kg. Whenever the rice stock hits 100 kg, the system informs the store to order.
Why it is useful:
- Prevents running out of important things
- Effective with fast-moving items such as groceries.
Two-Bin System
This is the easiest way to use if you have small valuables. Businesses keep inventory in two bins. They then start using the second and reorder more stock when the first one gets empty
Benefits of Two-Bin System:
- Manageable by visual observation.
- No need for software.
- Ideal for small workshops, offices or repair units.
Example:
An IT service center has spare USB cables. First bin is emptied → they reorder. Second bin holds support until new blood comes in.
Useful for:
- Hardware shops
- Medical supply counters
- Local businesses having a small number of SKUs
ABC Analysis-Based Ordering
This approach is adapted from the abc method in inventory control. It organizes items into three categories based on value and usage.
A-items – High value, fewer of them
B-items – Lower value, higher quantity
C-items – Low value, high volume
How ABC-based method works:
- Review A-items weekly or daily
- High frequency of orders for C-items, but in bulk (once a month).
- Gets tighter control while C gets loose control.
Example:
Example: A mobile store keeps a record of iPhones (A), budget smart phones (B) and mobile covers (C). A-items require more checks; C-items are cheap and stocked in larger quantity.
Benefits:
- Saves time and money
- Focus on critical stock
- Reduces unnecessary storage
Cycle Counting
Cycle counting refers to examining a portion of inventory every day or week, as opposed to conducting a complete stock-taking once annually.
How Cycle Counting Helps:
- Reduces errors
- Keeps records fresh
- Saves time during audits
Example:
One pharmacy counts 20 different medicines each day. So in 15 days they put in 300 items. It is not year ending stock taking to shut the shop.
Perfect for:
- Pharmacies
- Supermarkets
- Electronics retailers
Just-in-Time (JIT)
Generally companies who wish to keep their inventories low use JIT. They only order goods as needed. It is useful to avoid unnecessary wastage that mostly happens in business.
How JIT Works:
- No extra stock kept
- Do you order only when the customer orders
- Needs strong supply chain
Example:
Similar to JIT, these are used by car companies like Maruti Suzuki. Before production can start, except you order components. This reduces storage costs.
Challenges in India:
- Bad roads or late suppliers can bring the whole system down
- Needs reliable vendors
Vendor Managed Inventory (VMI)
With VMI, the supplier tracks the inventory levels and delivers products when required. The supplier receives sales information from the buyer.
Why VMI is Growing in India:
- Less pressure on buyer
- Not on this: you need a strong relationship between buyer and supplier
- Used by modern retail chains
Example:
Reliance Smart, for example, shares its inventories data with certain biscuit companies. They supply stock based on data, not on demand.
Best for:
- Fast-moving consumer goods
- Auto parts
- In chains with multiple locations
Inventory Control Techniques
Inventory control techniques are tools and strategies used for monitoring and controlling inventory. As a result, these methods enhance stock levels, curtail waste, and assist with improved planning. These inventory management strategies are most effective when paired with software systems. They also assist in setting the clear inventory policies in the organizations.
Effective Techniques in Use
Effective inventory control techniques help businesses manage stock efficiently to reduce costs and meet customer demand. These techniques prevent overstocking or stockouts. They are key to smooth operations and higher profitability.
- ABC Data Classification in Inventory Management: The ABC method divides inventory into three classes:
A: Items of high value and low volume
B: Medium-value, medium-quantity items
C: low value high quantity items
This method allows you to tackle the important things first.
- VED Analysis: The abbreviation VED represents three words—Vital, Essential and Desirable. It prioritizes stock in importance to operations.
- FSN Technique: FSN means Fast moving, Slow moving, and Non-moving. It shows frequency of use of different items.
- HML Analysis: HML stands for High, Medium & Low cost. It sort of clusters inventory around the unit price.
- SDE Analysis: The three items are — Scarce, Difficult, and Easy to get. It assists in the planning of stock for rare or imported materials.
Inventory Control System
Tools, processes, and technology that is used in tracking and managing stock in an efficient manner are part of a good inventory control system. It allows businesses to maintain a competitive edge or keep up with demand without overstocking their suppliers. An inventory control system is a process of tracking, managing, and organizing stock for small businesses in real-time. It relies on software and diagnosis to maintain the accurate number of goods when they are needed to avoid surplus or absence of stock.
Key Features of Inventory Control System
This system enhances efficiency by automating stock records, reorder points, and reporting, which reduces costs and facilitates smooth business operations. Accounting software such as Tally, Zoho, SAP, etc; are used by most of Indian businesses to manage the inventory. Such tools significantly help time-saving and minimise human error. The key features are:
- Real-time stock tracking
- Automatic reorder alerts
- ️Reporting and forecasting tools
- Integration with sales and purchase processes
- Barcode and QR code scanning
The right system depends on:
- Business size
- Budget
- Industry type
- Staff skills
For Indian students, it can open up job opportunities for them in the supply chain, logistics, or operations field when they understand how these systems work.
Relevance to ACCA Syllabus
Inventory control is part of numerous ACCA papers MA (Management Accounting), PM (Performance Management) and FR (Financial Reporting). The important topics for ACCA students are inventory valuation methods, cost behavior, performance measurement, and inventory systems.
Inventory Control ACCA Questions
Q1: In times of increasing prices, which of the following inventory valuation methods results in the highest profits?
A. LIFO
B. FIFO
C. AVCO
D. Weighted Average
Answer: B. FIFO
Q2: In stock control buffer stock is used for:
A. Reduce cost of capital
B. Increase selling price
C. Prevent Stockouts During Delays
D. Maximize order quantity
Ans: C. Try to prevent stockouts in the events of delays.
Q3: All of these are benefits of effective inventory control except for which?
A. Reduced holding costs
B. Increased wastage
C. Improved order efficiency
D. Better production planning
Answer: B. Increased wastage
Q4: AVCO method computes the cost of the inventory as follows:
A. Historical purchase price
B. Replacement cost
C. Latest unit price
D. Average cost of units available
Answer: D. Average cost of available units
Q5: An organisation that performs a physical stock count at the end of every quarter uses:
A. Perpetual system
B. Periodic system
C. FIFO method
D. JIT method
Answer: B. Periodic system
Relevance to US CMA Syllabus
Inventory control is among the core topics under CMA’s Part 1 – Financial Planning, Performance, and Analytics. It relates to cost accounting, production efficiency, and working capital optimization.
Inventory Control US CMA Questions
Q1: What is the best approach to reduce the total cost of ordering and holding?
A. LIFO
B. EOQ
C. ABC
D. FIFO
Answer: B. EOQ
Q2: What does safety stock do?
A. To reduce profit
B. For discount management from supplier
C. To prevent stock-outs related to lead-time variation
D. To inflate demand figures
Answer: C. To prevent stockouts due to differences in lead time
Q3: ABC analysis helps in:
A. Calculating reorder point
B. Classification of stock based on value usada
C. Calculate asset depreciation
D. Managing overhead costs
Ans: B. You classify stock based on the usage value.
Q4: What does a high inventory turnover ratio typically represent?
A. Overstocking
B. Slow-moving goods
C. Smooth Inventory administration
D. Large warehouse space
Answer: C. Efficient inventory management
Q5: Which of the following is most significant in Just-in-Time (JIT) systems?
A. Maximum stock availability
B. Regular stock counting
C. Timely supplier delivery
D. Higher buffer stocks
Answer: C. Timely supplier delivery
Relevance to US CPA Syllabus
CPA candidates learn inventory as part of both FAR (Financial Accounting & Reporting) and BEC (Business Environment & Concepts). Topics include inventory valuation, cost flow assumptions, audit testing of inventory, and inventory disclosures.
Inventory Control US CPA Questions
Q1: What inventory method is permitted under U.S. GAAP but not IFRS?
A. FIFO
B. AVCO
C. LIFO
D. Specific Identification
Answer: C. LIFO
Q2: A perpetual inventory system:
A. Count at year-end only
B. Assigns purchases rather than sales
C. Continually updated inventory
D. Is relevant to only big companies
Answer: C. Updates inventory in real time
Q3: In periods of inflation, which inventory method would result in the lowest net income reported?
A. FIFO
B. AVCO
C. LIFO
D. JIT
Answer: C. LIFO
Q4: Which section of the balance sheet does inventory fall under?
A. Current assets
B. Fixed assets
C. Intangible assets
D. Other liabilities
Answer: A. Current assets
Q5: What inventory control method requires physically tagging and scanning products?
A. Reorder level method
B. Barcode system
C. Two-bin system
D. EOQ method
Answer: B. Barcode system
Relevance to CFA Syllabus
Level I Financial Reporting and Analysis (FRA) covers inventory topics. For example, CFA candidates study the effects of inventory on income statements, balance sheets, cash flows, and financial ratios.
Inventory Control CFA Questions
Q1: Which of the following financial ratios is affected by inventory valuation?
A. Return on Equity
B. Current Ratio
C. Interest Coverage Ratio
D. Net Profit Margin
Answer: B. Current Ratio
Q2: IFRS does not allow any inventory method?
A. FIFO
B. Weighted Average
C. Specific Identification
D. LIFO
Answer: D. LIFO
Q3: An increase in the non-product assets leads to:
A. Cash inflow from operating activities (indirect method)
B. Decline in cost of goods sold
There is no cash inflow from the operating activities.
D. No impact on financials
Answer: C. Cash from operations decrease
Q4: Which inventory valuation method gives you the latest cost of goods sold?
A. FIFO
B. LIFO
C. Average Cost
D. Specific Identification
Answer: B. LIFO
Q5: A company wants to use FIFO during depletion. This leads to:
A. Lower net income
B. Higher cost of goods sold
C. An increased tax liability on income
D. No impact on cash flow
Answer: C. Increase in income tax liability
