Glossary
Economic Order Quantity
Holding an optimum inventory level is vital for any business because there are disadvantages to overholding and underholding inventory. Holding excessive inventory results in increased costs. However, with a shortage of inventory, one cannot meet the customer demand on time. Thus, any business aims to have just the right quantity of inventory. But the question […]
FIFO Inventory Valuation
What is inventory valuation, and why is it important? Inventory valuation is to assign a monetary value to the inventory. Based on this, a company records costs against its sales and calculates its year-end stock. This helps determine its profits and tax outflow. There are various inventory valuation methods. The three major ones are FIFO […]
Backflush
What is backflush? Backflush is an accounting system for product costing. Under this system, a company records costs only after production is complete. At the end of the production process, the company assigns costs to the produced goods. It does this in a single entry. This system is contrary to the standard approach, where the company […]
Backorder
Is it possible to sell something without having it? Yes, it is… Introducing the concept of ‘Backorder.’ Let us understand this concept in more detail. What is a backorder? A backorder means to sell a product that is not available currently in stock with the seller. However, the seller expects to receive it […]
The Bullwhip Effect
The Bullwhip effect refers to volatility in inventory levels created in response to customer demand. This volatility increases as we move upwards in the supply chain. This concept was named based on an effect created when a person moves a whip. When someone drives a whip, small movements are created near to the handle. However, […]
ABC Analysis
What is ABC analysis? ABC analysis is a prioritization technique based on the Pareto Principle or the 80/20 rule. This rule suggests that 80% of the total output is generated only by 20% of inputs. Similarly, in a business, maximum output (sales) is generated by a few critical inputs (inventory). ABC analysis categorizes items based […]
What is Kanban?
Kanban is a concept to manage workflow in a system and improve its efficiency. The name ‘Kanban’ is meant ‘signboard’ in Japanese. The concept of Kanban was first introduced by Toyota in Japan to achieve Just-In-Time (JIT) manufacturing. Under JIT, a company aims at keeping inventory at a minimal level. This is done by producing only that […]
Just-In-Time Inventory
What is ‘Just-In-Time’ concept? Just-in-Time or JIT means ‘ordering and receiving things only at a time when they are needed and only in the quantity in which they are needed’. Under the JIT inventory management, a company orders and receives materials only when needed in the manufacturing process and only in the quantity required to […]
What is Dead Stock?
Every business wants to achieve maximum ROI. However, dead stock is the biggest threat to their revenue. Dead stock is an inventory that doesn’t sell and takes space in a storeroom or warehouse. This takes up valuable space and threatens business viability, impacting revenue and cash flow. Moreover, dead stock also refers to dead or […]
LIFO Inventory Valuation
What is inventory valuation, and why is it important? Inventory valuation is the act of assigning a monetary value to the inventory on the balance sheet. Also, it is a critical component to calculate the cost of goods sold by the company, which ultimately determines its profitability and tax outflow. The three widely used inventory […]