Motives for holding inventories, Managerial Accounting

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MOTIVES FOR HOLDING INVENTORIES

If production and delivery of goods were instantaneous, there would be no need for inventories. However in reality, the manufacturing and purchasing processes do not function quickly enough to avoid the need for having inventories. Hence inventories must be maintained so that he or she does not turn to another source of supply. In turn, production operations cannot flow smoothly without having inventories of direct materials, work-in-progress, supplies, etc. In other words inventories must be viewed as cushions:

(1) To absorb planning faults and unforeseen fluctuations in demand and supply. (i.e. preventive motive).
(2) To facilitate smooth production and marketing operations.

Note: The fundamental questions to which answers are required are:

a. How much should the company order (when stocks are re-ordered)?
b. When should the company reorder?
c. How much should the company produce, and when (if internal production is involved).

Accordingly regardless of their complexity, all inventory planning models focus on the twin problem of size and timing.


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