r later sale; or (3) held for current consumption in the production of goods and services . . . for sale."3
In real world situations, inventories may be comprised of tangible goods, such as aircraft component parts, or of intangible services, such as airline tickets. What is significant, in this context, is that the goods and services be owned by the entity possessing the inventories.
Inventory management and control is an important managerial function. There are many factors providing significance to the inventory management and control function. Among the more significant of these factors are the following:
1. It costs money to maintain inventories. This fact is a seemingly simple and obvious one; however, it is one which is often overlooked. If a firm's cost of capital is 15 percent, the annual capital cost of carrying an inventory valued at $100,000 is $15,000, while it could cost $150,000 in interest
2M. A. Peters, Operations and Production Management, 3rd ed. (Boston: Duxbury Press, 1991), 7.
3W. B. Meigs, and R. F. Meigs, Financial Accounting, 5th ed. (New York: McGraw Hill Book Company, 1988), 120.charges per annum to carry an inventory valued at $1,000,000. Additionally, it costs money to store, handle, and maintain an inventory. In this context, it is desirable to maintain inventories at the lowest feasible levels.
2. It costs money to maintain inadequate inventories. If a firm is "out" of an item desired by a customer at the time the item is desired by the customer, the firm may well lose a sale. In this context, an inadequate inventory results in an opportunity cost to a firm. Thus, in this context, it is desirable to maintain inventories at levels sufficient to support demand.
3. Inventories are subject to obsolescence. Products and materials maintained in inventory may become obsolete. Therefore, to avoid losses through obsolescence, it is desirable to have materials management and ...