Internal Control over Inventroy-Case Study

Topics: Inventory, Costs, Inventory control system Pages: 41 (13527 words) Published: April 6, 2011

1.1Background of the Study

As long as there is a production system, managers in the company with manufacturing facilities face the challenging task of producing high quality products of competitive level of costs. Inventory management is the one that is necessary to overcome these problems. Inventory management consists of planning, organizing and control activities that related with the flow of materials and inventory into the organization and from the organization. These related activities may include activities such as proper planning of inventory purchases, better management of costs associated with inventory items, and used for inventory system.

1.2 Background of the Company
Kangaroo PLast Foam Factory was established Dec.11, 1994. It is located in Akaki Kaliti sub- city Wereda 08 Keble 10 house No. 108.

It had a humble start with only ten workers, a few Foaming machines and with a paid up capital of birr 7million. Currently the total capital of the company is increased to birr 46.5million and employed 250 permanent and 50 contractual workers. It manufactures foam products such as, mattress of different size and thickness, high density of foam products for making sofa and chairs, pillows, cleaners, re-bonded foam and “Arabian Meglis” seats. Since the factory has installed the latest continuous foam making machine it is the leading one in manufacturing high quality foam products among the prevailing foam factories in the country and due to this the factory products have gained a great fame in the local market. The company has nine shops in the Addis Ababa region at different sub-city and two shops out of the Addis Ababa region.

The company has organizationally been structured into four departments with one General Manager at the top. These departments are: 1. Finance Department
2. Production & Technical Department
3. Commercial Department
4. Administration Department
Kangaroo Plast Foam Factory
Organizational structure

1.3 Statement of the Problem
Inventory management is very useful for any company or operation especially to manufacturing and merchandising activities. It emanate because of its importance in production management to any business firms because inventory needs (requires) a big deal of capital investment and affects delivery of goods to customer. An organization may have different types of inventories, which are produced inside the company or purchased (acquired) from any other firms. As a result finance of every firm concerned with over all financial picture of the organization including fund allocated to inventories and operations of inventories to assure smooth and efficient production.

However, different functions that are found in most company have different contracting objectives related to inventories. Finance function prefers to keep levels of inventories low to conserve capital but operation prefer to have adequate inventories for efficient and smooth employment level while marketing prefers high volume of Inventories to enhance the sales volume. Therefore, this makes organization to have an inventory management system that maintains a balance between such contradictions. Accordingly, Inventory management system is virtually important for almost every type of manufacturing and merchandising business organizations. Designing and establishing a proper inventory management system over inventory items also enables organizations to minimize unnecessary cost which result in maximizing profit.

On the other hand, absence of effective inventory management procedure or existence of poor inventory management, at a minimum may result in high inventory holding costs due to the absence of non-compliance to the policy of reorder level, high stock obsolescence and expiry due to poor warehousing and poor inspection , payment for undelivered/received inventories due to absence of clearly defined receiving and dispatching procedures, finally...
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