STUDENTS' CORNER - 75
Now we move to Manufacturing Inventory as another component of Logistics. Manufacturing inventory refers to the list of goods or materials you need to manufacture your product and these necessary materials must be in stock so that they are readily available when needed. In fact, they are often needed since production depends on them.
We have already seen the important points about inventory while discussing production planning. Ensuring optimum inventory is one of the elements of production planning, we have seen that.
The manufacturing inventory must be continually updated so that the stock of the required materials to meet the needs for manufacturing is maintained all the times. Inventory management is a crucial business strategy.
Under the inventory account, three important components have to be looked into; they are raw materials, work in progress and finished goods. Raw materials are basic needs for production. For example, metal is inevitable raw material for car production; steel is for ship building and food ingredients for catering, food production companies.
Work in progress includes those goods already used in the manufacturing process which is not complete; half-built car or half-built ships incomplete food preparation--- these represent work in progress. Work has started on the goods but it has not been completed; therefore, work is still in progress.Finished goods, as the name itself suggests, manufacturing is complete; raw materials subject to work have been converted into products. Car manufacturing is completed and it is ready for sale. The retailers buy the goods and sell them back and usually, goods are called in this context as ‘merchandise’.
Production requires, most importantly, money which means there is production cost. The manufacturing inventory has cost value; that is, how much money has been put into those three components of manufacturing inventory. The raw materials demand cost; when the car manufacturer buys metal in tons with a price for a ton of metal, he calculates the cost of the raw materials. When you come to work in progress, there is the additional cost of the labour which alone can convert raw materials into finished products. Not only that; suppose electricity is used in the work in progress, the cost of the electricity also becomes a vital part of the manufacturing cost.Listing different kinds of cost under different headings is generally called in the accounting terminology as overheads. For the company, we say cost to the company which the company has to bear in the production of its products.