What are the benefits of holding inventories, Financial Management

Assignment Help:

Q. What are the Benefits of Holding Inventories?

(1) Timing of Demand and Supply: - Requirement to hold inventory of raw materials arises because it isn't possible for a firm to procure raw materials whenever it is needed. If the firm is guaranteed of supply of raw material without delay at the rate it is used in its manufacturing process it need not to hold stock of raw materials. However in actual practice a time lag exists between demand of raw materials in manufacturing process as well as its supply. Provider of raw material to the firm mat as well is delayed because of such factors as transport problems, strike, short supply etc. Thus the firm must maintain adequate inventory of raw material to run its manufacturing process regularly. Likewise need to hold inventory of finished goods arises because the rate of manufacturing and the rate of sale don't match. A firm can't manufacture the goods immediately on demand by customers.

(2) Quantity Discounts: - Raw materials are necessary as and when production process is run. However instead of procuring raw materials in small quantities at the time of each production run firm may purchase large quantities of raw material in advance to acquire quantity discounts of bulk purchasing. This results in a important saving in costs.

(3) Expectancy of Price Rise: - Anticipation of price rise may as well necessitate purchasing and holding of raw material inventories.

(4) Reducing Ordering Cost: - These costs comprise the cost of preparing transporting cost, purchase orders, receiving costs, inspecting costs etc.

These cost raise in proportion to number of order placed. Thus a firm may purchase raw materials in excess of its immediate requirements by placing one bulk order to reduce the ordering costs. This as well results in accumulation of raw material inventory.


Related Discussions:- What are the benefits of holding inventories

Working capital, 5 Define risk. Examine the need for assessing the risks in...

5 Define risk. Examine the need for assessing the risks in a project.

Chain index numbers, Chain Index Numbers So far, we have constructed in...

Chain Index Numbers So far, we have constructed index numbers with a fixed base. Sometimes, comparison between the current/given year and the base year becomes meaningless once

Calendar studies, Calendar Studies These attempted to predict rates of ...

Calendar Studies These attempted to predict rates of return during a calendar year and examine if there is any particular observable pattern in the rates of return on the stock

Residual income, Residual Income This is used for external reporting pu...

Residual Income This is used for external reporting purposes. This term refers to the net income which is available for distribution to the firm's common stock holders. In mana

Effective rate of interest (eri), Question- Under a hire purchase deal str...

Question- Under a hire purchase deal structured by X Finance Ltd. for Y Corporation, the finance company has offered to finance the purchase of equipment that costs Rs. 200 lakh.

Net present value (npv), Net Present Value (NPV) : In this technique, f...

Net Present Value (NPV) : In this technique, future cash flows are discounted to the present and then compared with the investment outlay. The basic discount rate is generally

What is accumulated depreciation?, What is accumulated depreciation? De...

What is accumulated depreciation? Depreciation is the provision of an asset's initial cost over time.  Accumulated depreciation is the sum of all the depreciation expense that

Explain about the financial management, Explain about the Financial managem...

Explain about the Financial management Financial management is concerned with efficient use of a significant economic resource (input), namely, capital. It's, so, argued that p

Explain the relationship between growth and inequality, While poverty reduc...

While poverty reduction has become the main goal of development efforts, there is an on-going and sometimes heated debate about the elements that would be at the center of any sens

Orperating cycle, #discuss the applicability of an operating cycle in veget...

#discuss the applicability of an operating cycle in vegetable growing business in uganda..

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd