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A raw materials inventory is the amount of raw materials that are in the possession of the owner during a specific accounting period. The assessment of this type of inventory may occur at the beginning of the period or at the end. Identifying the beginning and ending balance of the inventory during the period can help identify the amount of usage of raw materials that occurred during the period, and thus influence the process of ordering those materials for future periods.
As with most types of inventories, the maintenance of a raw materials inventory is essential to the continued operation of any type of manufacturing operation. Ideally, the business will find the perfect balance between having enough materials on hand to maintain the most efficient rate of production, while also keeping the inventory as low as possible, thus reducing the amount of taxes that are assessed on the inventory. In order to accomplish this goal, monitoring the receipt and issuance of materials from that inventory is essential.
In terms of maintaining the accounting records of a raw materials inventory, new shipments of materials received are noted as a debit in the records. When any of the raw materials are issued from the inventory, most often for use in the manufacturing process, this disbursal is noted as a credit, thus decreasing the total number of units and the general worth of the inventory. Many companies record these debits and credits to the raw materials inventory on a real-time basis, although it is still customary in some businesses to record the transactions on a daily or even a weekly basis.
Structuring the ordering process helps to keep the raw materials inventory at a level where there is enough to support the continued operation of the plant, but not so much that a significant amount of the inventory remains untouched for extended periods of time. By monitoring how frequently materials are issued from the existing inventory, and comparing that with how long it takes for the supplier to process and deliver a new order of raw materials, it is possible to establish specific guidelines for placing orders in a timely manner. Continual monitoring of the inventory makes it possible to adjust the frequency and size of those orders so the inventory is kept within reasonable size, thus eliminating the need to pay additional taxes on an inflated inventory. While this process was once done manually, modern inventory software can easily be configured to track the activity within the inventory and automatically place orders when and as necessary.
I worked at a retail store when I was going to college, and I always dreaded the times when we had to do inventory.
Not only were we expected to put in extra hours at odd times, but the store was also a mess while we were doing the inventory.
This was in the day before most of the inventory was done by computer. I remember actually going through and counting everything by hand.
There are a lot of inventory planning computer programs that are available today that would make this job much simpler than it was years ago.
I am always amazed at the amount of inventory that many car dealerships have on their lots. There are several large car dealerships where we live and each of them have hundreds of cars for sale.
I have always wondered how much their whole lot of inventory is worth. It would probably be mind boggling just to know how much they spent on taxes on this inventory.
This must be one of the reasons so many of them have year end sales to get rid of a lot of their excess inventory.
It doesn't seem like they really cut down very much, because they just replace them with new models.
@golf07 - My son has a friend who owns his own motorcycle repair shop, and it sounds like he is much like your sister.
He keeps saying he can't financially afford to hire someone to help him keep track of his inventory. I keep saying, he can't afford not to.
He is a very good motorcycle mechanic and very good with customers, but his office area is an absolute mess.
Part of his problem is he thinks he can remember everything in his head. This is impossible, and he has no idea what he has ordered and what he is still waiting for.
Many times my husband will go in after a part that should have come
in, and they can't find it. I also think because he is so unorganized there is a lot of theft going on, and that is another reason he is losing so much money.
If you are going to have a thriving business, you have to stay on top of your inventory accounting. I hope this man figures that out before he ends up losing his business because of it.
I believe that accurate inventory management and control is crucial for a business to be successful.
My sister had a clothing store and while she was very good at knowing what would sell well and what wouldn't, she wasn't good at keeping track of inventory.
Keeping track of inventory and paperwork was not her strength, and as a result, her business suffered.
When she finally hired someone who was very organized and efficient with that type of work, it made a big difference in how profitable her business was.
This also gave her the freedom to concentrate on what she was good at. By making sure she had the right amount of inventory on hand when needed, she also had satisfied customers who kept returning.