Define job costing ?

 Job costing is an accounting method designed to help you

track the cost of individual projects and jobs. It involves
looking at direct and indirect costs, and it’s usually broken
into three specific categories: labor, materials and
overhead. Understanding costs for a job at this level will
help you better budget and plan for similar projects in the
future, and you may discover some ways to cut costs or
find items that should be billed to the customer.

What Is Job Costing?

 Job costing is a precise method of tracking all the costs
and revenue associated with a particular project. Projects
might include one-off customer undertakings,
manufacturing new products or delivering multiple
products that will be developed at the same time.
 Job costs are typically broken down into labor, materials
and overhead — though each of these elements can be
broken down further. For instance, labor costs might
include both employee wages and third-party vendor fees.
Material costs can include both direct raw materials that
appear in a finished product and the indirect materials
used to create the product, like equipment. Companies
must carefully account for and plan around each of these
elements to deliver their projects successfully and on time.
Why job costing important ?
 for a product, project or service. In service industries, where the
payrollcosts are often the largest line item, it can be especially
important to incorporate One of the most impactful decision a
business makes is what to charge job costing. It’s one of the most
important accounting practices for small businesses to reach gross
profit margin goals. Accurate job costing can improve profitability,
help you better manage employee scheduling and be a key
component of prompt financial reporting. Proper job costing leads
to better profitability, project estimating, management decisions
and timely financial reporting.
 Accurate job costing helps businesses strike a balance
between revenue and costs on any given project by carefully
analyzing each step of the job and using historical data to better
inform future projects. Meticulous job costing reduces the
likelihood of unexpected costs during the project life cycle, which
can quickly eat into profit margins and lead to disputes with
customers.
 Accountants and finance departments rely on job costing for back-
office processes and tax filing. For example, itemized costs help
accounting teams accurately analyze how project expenses can fit
into the company’s overall financial picture.

Features of job costing

 Using job costing, the cost of each job is ascertained
separately. This, in turn, helps in finding out the profit or
loss on each job.
 It enables management to detect those jobs which are
more profitable and unprofitable ones.
 Job costing provides the base for determining the cost of
similar jobs to be undertaken in future as a part of future
planning.
  Helps in managing and controlling costs, by comparing
the actual costs with the estimated cost. In short, the
calculation of variances. The job costing is applied by the
industries, * * * which are undertaken according the
requirements of customers. For example,
printing, machine tool manufacturing, foundries, repair
shops, garages and the like. These industries are known
as jobbing type industries.

Business using Job Costing

 Job costing is otherwise called as job order costing, job
cost accounting, specific order costing, production order
costing, job lot costing and lot costing. Job means a piece
of work done by the worker in an organization. Jobs are
undertaken according to the customer’s specifications.
 The job costing is applied by the industries, which are
undertaken according the requirements of customers. For
example, printing, machine tool manufacturing, foundries,
repair shops, garages and the like. These industries are
known as jobbing type industries. They applying job
costing method.

Features of Job Costing

The following are the features of job costing.
 The products are produced only against customer’s order
and not for maintaining stock for sale.
 The costs are accumulated to each job separately.
 A job is performed according to the customer’s
specifications.
 The job costing method falls under the category of specific
order costing.
 Each job is differentiated from others. The reason is that
the specification of one customer is differing from other.
 There is no continuous production.
  Each job requires special attention and skill for
completion.
 There is no large-scale production of goods.
 All the jobs are not passed through all the departments.
 The unit of measurement of each job is unique and special.
 There is no standardization of jobs.
 The costs incurred for a job is separately recorded and
maintained.
 A job is charged with its own costs.
 A separate cost sheet is prepared for each job.
 Work in progress at any time depends on the number of
jobs in hand at that time. A separate work in progress
record is maintained for each job.
 If a job involves number of operations for completion, job
tickets are issued to know the progress of completion of
job.
 The main object of job costing is ascertainment of profit or
loss of each job separately.
 All direct costs are charged to work in progress accounts.
 Manufacturing overheads are charged to departmental
accounts.
 A job may be specifically executed or an assembly type.

What is job costing explain?

 Job costing is defined as a method of recording the
costs of a manufacturing job, rather than process. With
job costing systems, a project manager or accountant can
 keep track of the cost of each job, maintaining data which
is often more relevant to the operations of the business.
 For example, Roy was once the curator of a large museum in the
United States. Connecting with the science community on many
levels, he has enjoyed his career. After some time, Roy decided
he would make a career change. He has since started
a company which provides maintenance work on historical
works which reside in museums.
 Roy has all the connections he needs for this business: other
curators, archaeologists, and the entire community in
his rolodex. After a little effort, he was able to connect with the
people who perform this work. Roy will take the role of
salesperson, but he needed to hire a team to perform operations.
Roy is quite successful. His one concern, an area of ignorance
for him, is how the bookkeeping will take place. So he hires
an accountant, sets a meeting, and begins to learn about how
his business will overcome this need.
 The accountant shares that job costing will be, probably, the
most efficient accounting methodology. Roy can keep track of
the costs for each of his contracts by implementing this type of
accounting. He will be able to find which items take more or
less time to maintain. Additionally, he can make sure to create

 

company profits by adding a margin on top of his costs. By

using a job costing software, bookkeepers can run the system
quite smoothly.
 Roy can rest at ease with this accounting method. Knowing he
can rely on his accountant, Roy begins to contact
prospect customers and former peers. He has confidence that
his business will be a success. He looks forward to gaining his
first customer.
 Job costing is just another way to know your economics or
financials. 

What is Batch Cost?

 Batch cost is the cluster of costs incurred when a group of
products or services are produced, and which cannot be
identified to specific products or services within the group.
 For cost accounting purposes, it may be considered necessary
to assign the batch cost to individual units within a batch. If
so, the total batch cost is aggregated and divided by the
number of units produced to arrive at a unit cost.
 Batch cost is the cluster of costs incurred when a
group of products or services are produced, and which
cannot be identified to specific products or services within
the group. ... If so, the total batch cost is aggregated and
divided by the number of units produced to arrive at a unit
cost.
What is batch costing with example?
 In this article we will discuss about:- 1. Introduction to
Batch Costing 2. Difference between Batch Costing and
Job Costing 3. Procedure of Batch Costing 4. Economic
Batch Quantity 5. Advantages of Batch Costing 6.
Disadvantages of Batch Costing.

Contents:
 Introduction to Batch Costing
 Difference between Batch Costing and Job Costing
 Procedure of Batch Costing
 Economic Batch Quantiting
 Advantages of Batch Costing
 Disadvantages of Batch Costing

Introduction to Batch Costing:

 Under Batch Costing Method, the cost is ascertained in
respect of a batch of goods or components manufactured.
There are certain products whose cost of production
cannot be ascertained in isolation. Examples of such
products are – hardware (such as bolts, nuts, screws, pins,
etc.), bakery products such as breads, biscuits, cakes, etc.
 So industries which manufacture products of this nature
make use of batch costing. Other examples of industries
which adopt batch costing are – readymade garments,
drugs and pharmaceuticals, spare parts and component
parts as in the case of automobiles, radios, TV’s,
refrigerators, machineries, etc.
 In order to know the cost of production of a batch of
articles, a batch cost sheet is prepared. The production
planning determines the batch of articles to be produced
depending upon the orders received or the potential
demand for such articles.
  The other factors considered in determining a batch of
articles to be manufactured are the capacity of machines,
flow of work, treatment of work-in-progress and such
other operation factors. The cost per article is obtained by
dividing the total cost of batch by the member of articles
manufactured in the batch. The units manufactured in a
batch are identical in nature.

Difference between Batch Costing

2.

and Job Costing:

 Batch costing does not differ much from job costing in
respect of accounting procedure. However, there are some
differences between batch costing and job costing.
They are:
  Under job costing, each job is treated as a cost unit. But
under batch costing, a batch of products is treated as a
cost unit.
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 Under job costing, production is undertaken only against

specific orders. On the other hand, under batch costing,
production is taken up to be held in stock and sold on
demand and also on receiving specific orders from
customers.

3. Procedure of Batch Costing:

 First, the size of the batch is determined. The size of
the batch is determined by the production planning
and control department. Each batch is given a batch
number in the same way as a job is given a job
number. Direct material cost, direct labour cost,
and direct expenses, which can be identified with
the batch, are directly charged to the concerned
batch. Overheads are apportioned among the
batches on one of the suitable bases as in the case of
job costing.
 When the production of the batch of articles is
completed, to ascertain the cost of production of the
batch of products, a batch cost sheet is prepared.
The cost indicated by that batch cost sheet is the
total cost of production of the batch of products.
The cost per unit of the batch of products is
ascertained by dividing the total cost of the batch by
the number of units produced in the batch.
4. Economic Batch Quantity:
The concept of economic batch quantity is quite similar to
economic order quantity. In batch costing, the determination of
economic batch quantity assumes more importance. In fact,
determining the size of the batch is a problem by itself under
batch costing. This is so because, if the batches are many, the
economies arising out of large scale production is not taken
advantage of.
 On the other hand, if batches are very large it involves
more of inventory and it has its own advantages.
Therefore, it is always necessary to determine the
optimum size of the batch before the production is started.
The economic batch quantity also helps in eliminating the
setting up time involved whenever batches of articles are
produced.
 Thus it can be said that the concept of economic batch
quantity is an example of the law of increasing returns and
takes advantages of economies of large scale production.
By producing the goods in an optimum batch, it reduces
the cost of production, thereby maximising the profit.
Factors Determining Economic
Batch Quantity:
 The Economic Batch Quantity (EBQ) is determined after
taking into consideration the certain factors.
They are:
 The machine capacity available in the factory.
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 The flow of work in the factory.

 Annual demand for the product.
 Cost of carrying inventory or storage of inventory.
 Interest on capital invested.
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 Production cost which includes getting up cost and loss of

time due to changes of work; wastage of materials,
increased supervision costs, etc.
 Importance of Economic Batch Quantity:
 In batch costing, determination of the E.B.Q.
assumes more importance, due to the following
reasons:
1 The economic batch quantity ensures the production of goods
in the required quantity to meet the demand.
(2) The economic batch quantity will help to reduce the
quantity of inventory.
(3) The economic batch quantity will reduce the machine
getting-up time.
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(4) The optimum batch size will reduce the machine set-up
costs.
(5) The economic batch quantity will also reduce the clerical
costs.
(6) The production of goods in batches is undertaken in
economic batch quantity, there will be the economies of large-
scale production. If goods are produced in a batch, there will be
reduction in cost of production per unit and more profits for the
concern.
Formula to Determine Economic Batch Quantity:
Generally the following formula is used for the
determination of economic batch quantity:

Where,
EBQ = Economic Batch Quantity
2 = It is a constant figure
U = Units to be produced in a year
S = Setting-up Cost per Batch
C = Carrying Cost per unit of Production per year
Where the rate of interest on capital invested is given, the
following formula may be used for the determination of
economic batch quantity –

Where,
EBQ = Economic Batch Quantity
2 = It is a constant figure
U = Units to be produced in a year
S = Setting-up Cost per Batch
I = Interest Rate per annum
C = Cost of Manufacture per unit

5. Advantages of Batch Costing:

Following are the main advantages of batch costing as
compared to job costing:
(1) Accounting work is reduced under batch costing because
costing is done in respect of a batch of product of homogeneous
jobs.
(2) It makes benefit of reduced cost of production arising out of
economic batch quantity or lot size.
(3) Under this method, supervision becomes easy and more
effective by means of spreading over the supervisor’s time over
all the units constituting the batch. Thus, the idle time of
supervisor’s as well as workers are eliminated.
(4) The loss of time under job costing arising out of inter-job
transfer of materials, labours and tools are minimised under
batch costing.
(5) There are the advantages of consistent cost of production of
every article produced in a batch under batch costing.

6. Disadvantages of Batch Costing:

-The main disadvantages of batch costing are:
(1) Determination of a batch from various jobs often pose
problem. It is difficult to come across absolute homogeneity of
jobs.
(2) When quantity of goods to be manufactured differs from
customer to customer, again it becomes difficult to determine
the batch.
(3) If the production of a batch is wrongly undertaken, the
whole batch of the articles are to be discarded which will
become a great loss to the manufacturer.
Difference Between Job Costing and
Batch Costing

 Job costing method is mainly applied when the goods

are produced, or services are rendered as per customer’s
order. On the other hand, batch costing is a type of job
costing, in which goods are produced in a lot of similar
units, called as batches.
 Whether we talk about business or industry, costing
system is required everywhere to fix the price of products,
to ascertain cost associated with the product and so on.
However, a single costing system is not capable enough
to fulfill requirements of various industries. Hence,
different costing systems are designed, that businesses
can use as per the nature of products, operations, and
other parameters.
 Basically, costing methods are classified into specific
order costing and operation costing. Specific order costing
is one where the production comprises of separate jobs,
batches or contracts. So, it covers three costing methods,
i.e. job costing, batch costing and contract costing. This
article excerpt presents you all the important differences
between job costing and batch costing, have a glance.
Content: Job Costing Vs Batch Costing
 Comparison Chart
 Definition
 Key Differences
 Example
 Conclusion
Comparison Chart

BASIS FOR JOB BATCH

COMPARISO COSTIN COSTIN
N G G
Meaning Job costing Batch costing,
 BASIS FOR JOB BATCH
COMPARISO COSTIN COSTIN
N G G
refers to a is a form of job
specific costing costing, that is
method, used applied when
when the the articles are
production/work produced in
is carried out batches, i.e. a
according to the group of like
requirements of units are
customers. produced.

Production As per Mass

customer production
specification

Product Product have Products do not

an independent lose their
identity, as individual
each job is identity, as they
distinct from are
other jobs. manufactured in
continuum.

Cost unit Executed Job Batch

Cost ascertainment On the Ascertained for

completion of the whole batch
each job. and then per
unit cost is
determined.
Definition of Job Costing
Job costing is described as a costing method,
wherein customized production of goods or services are
rendered. The method of costing is used when jobs are
performed for different customers as per their orders. Under
this system, each cost unit is treated as a separate entity, for
costing purposes. Each job differs from another job in respect
of:

 Material used
 Labors required
 Special customer needs

In this system, on the receipt of an inquiry from the client, the

cost to be incurred is ascertained and based on the estimate,
the price is quoted. The cost of material, labor and overhead
incurred during the job is accumulated, and when the job is
accomplished, these are compared with the quoted price, so as
to determine the profit or loss of each job. It may extend
multiple accounting periods, and so they are not associated
with particular periods.

Definition of Batch Costing

 Batch Costing may be understood as a variant of job
costing. In this system, a group of identical units,
comprising of a batch is used as a cost unit, to estimate
cost. To ascertain the cost per unit, the total cost of the
batch is divided by the number of units produced in a
batch, as represented below:
  For each batch, a cost sheet is prepared and
maintained, by allotting a batch number. There is batch
wise preparation of material requisition note, engagement
of labor and recovery of overheads.
 This costing method is employed by firms to manufacture
a large number of similar items or components, as they
pass through the same process and so it is beneficial to
ascertain their cost of production collectively.

Key Differences Between Job Costing

and Batch Costing
The points given below are noteworthy so far as the difference
between job costing and batch costing:

 A costing system applied when the production is made as

per the customer’s needs and preferences are called as
job costing. On the other hand, batch costing implies a
costing method, generally adopted when the production is
made in small lots of identical units.
 In job costing is undertaken for the product produced by
separate orders. Conversely, batch costing is carried out
when there is mass production, and the units are
homogeneous.
 In job costing, each product has a unique identity, as each
job is distinct from other jobs regarding material used,
customer needs, hours of labor worked, etc. In batch
costing, products usually lose their identity, as they are
produced in the continuum.
 In job costing, the cost unit is the executed job, whereas,
in the case of batch costing, the cost unit is a particular
batch.
 In job costing, the cost is determined for each job after its
completion. However, in batch costing cost is ascertained
 for the entire batch, after which cost per unit is computed
by dividing the total cost by the number of units.

Examples
Job costing is employed in industries such as:

 Printing Press
 Shipbuilding
 Interior Decoration
 Furniture
 Heavy machinery

Batch Costing is employed in industries such as:

 Pharmaceuticals industry
 Ready made garments
 Manufacturing of tube & tyre.
 Manufacturing of electronic parts
 Manufacturing of toys

Conclusion
 Since batch costing is a type of job costing; the two closely
resemble one another in the sense that each batch has a separate
treatment like job and cost are ascertained for the whole batch.
However, there are significant differences between these two
costing methods. Moreover, job costing applies to both product
and service industry, but batch costing is only applicable to
product
NNNHHHHHHH

For what marginal costing is used

 Marginal cost is the cost of one additional unit of output. The
concept is used to determine the optimum production quantity
for a company, where it costs the least amount to produce
additional units.
 Marginal cost is the cost of one additional unit of output. The concept
is used to determine the optimum production quantity for a company,
where it costs the least amount to produce additional units. It is
calculated by dividing the change in manufacturing costs by the change
in the quantity produced. If a company operates within this "sweet
spot," it can maximize its profits. The concept is also used to determine
product pricing when customers request the lowest possible price for
certain orders.
 The marginal cost of customized goods tends to be quite high, whereas
it is very low for highly standardized products that are manufactured in
bulk. The reason for the difference is that the variable cost associated
with a customized product tends to be higher than for a standardized
product. A high level of standardization is usually achieved with more
automation, so the variable cost per unit is low and the fixed cost of
manufacturing equipment is high.
 Since marginal cost is only used for management decision making,
there is no accounting entry for it.

Example of Marginal Cost

 For example, a production line currently creates 10,000 widgets at a
cost of $30,000, so that the average cost per unit is $3.00. However, if
the production line creates 10,001 units, the total cost is $30,002, so
that the marginal cost of the one additional unit is only $2. This is a
common effect, because there is rarely any additional overhead cost
associated with a single unit of output, resulting in a lower marginal
cost.
 In rare cases, step costs may take effect, so that the marginal cost is
actually much higher than the average cost. To use the same example,
 what if the company must start up a new production line on a second
shift in order to create unit number 10,001? If so, the marginal cost of
this additional unit might be vastly higher than $2 - it may be
 thousands of dollars, because the company had to start up an extra
production line in order to create that single unit.

A more common situation lying between the preceding two alternatives is

when a production facility operating near capacity simply pays overtime to
its employees for them to work somewhat longer to manufacture that one
additional unit. If so, the marginal cost will increase to include the cost of
overtime, but not to the extent caused by a step cost.

What is inventory management?

 Inventory management is how you track and control your business’
inventory as it is bought, manufactured, stored, and used. It
governs the entire flow of goods — from purchasing right through
to sale — ensuring that you always have the right quantities of the
right item in the right location at the right time.

What is inventory?
 Inventory is the goods that your company handles with the
intention of selling. It might be raw materials that you buy and turn
into something entirely new, or it might be a bulk product that you
break down into its constituent parts and sell separately. It could
even be something completely intangible: software, for instance.

Types of inventory
There are lots of different types of inentory, and which ones you’ll deal
with depends on the goods you sell. Here’s an overview of some of the
types you’re more likely to encounter:
 Finished goods/for-sale goods: The products you sell to your customers
 Raw materials: The inventory you use to make your finished goods
 Work-in-progress: Essentially, unfinished goods — inventory that is
part-way through the manufacturing process
 MRO goods: MRO stands for maintenance, repair and operating. This
is the inventory you use to support the manufacturing process
 Safety stock: The additional inventory you keep in store to deal with
supplier shortages or surges in demand

How does inventory management work?

 At a basic level, inventory management works by tracking

products, components and ingredients across suppliers, stock on

hand, production and sales to ensure that stock is used

as efficiently and effectively as possible. It can go as deep as

you need it to: for example, by examining the difference between

dependent and independent demand, or forecasting sales to plan

ahead. But at the end of the day, it all goes back to your stock.

Example: Sam’s chairs

 Sam decides to set up a business selling her handcrafted dining
chairs. Each chair she makes requires 6 different sizes of wood,
plus a cushion. She goes to her supplier and buys 10 planks of
each size of wood she needs, plus 10 cushions. These are all now
included in her business’ inventory.
 As she turns raw materials into chairs, then sells them, Sam’s
inventory levels will change. She’ll need to keep track how much of
each material she has at any one time, how many chairs she can
make, how fast she can make them, where her materials are, how
many chairs she is selling and much more. This is all inventory
management.
 Don’t worry if that seems daunting — inventory management is
much easier to digest once you break it down into the 5 key stages
that your goods will go through.

Inventory management process:

5 key stages
  The inventory management process involves tracking and controlling
stock as it moves from your suppliers to your warehouse to your
customers. There are five main stages to follow:
1. Purchasing: This can mean buying raw materials to turn into
products, or buying products to sell on with no assembly required
2. Production: Making your finished product from its constituent parts.
Not every company will get involved in manufacturing — wholesalers,
for instance, might skip this step entirely
3. Holding stock: Storing your raw materials before they’re
manufactured (if required), and your finished goods before they’re
sold
4. Sales: Getting your stock into customers’ hands, and taking payment
5. Reporting: Businesses need to know how much it is selling, and how
much money it makes on each sale

 Continuing with our example from earlier, here’s how Sam’s

company utilizes each stage of the process:

Inventory management vs. inventory control

 While they may sound similar, inventory control is a key part of
inventory management, but it isn’t the same thing.
What is inventory control?
 Inventory control is how you manage the stock you currently have
in storage. This involves knowing your stock inside and out — how
much is available, where it is and what condition it is in. It’s also
about ensuring that you are storing stock efficiently, keeping
inventory costs down and minimising the time spent counting and
controlling inventory.
Learn more about inventory control.

Learn more about inventory control.

Which comes first — management or control?

 Inventory management is much broader than control: it takes your supply
chain, manufacturing, fulfilment, sales and reporting into account. Almost
any business will have to get an inventory management system in place
before they drill down to control. Otherwise, you’ll have no way of
managing suppliers, production or sales.
  After that, there are countless methods for storing and selling your
products better. Whether you focus on optimising purchasing, control,
production or sales is up to you. You might, for instance, want to plan
improvements based on previous operating experience — say, by
changing how you count stock. Or you might want to tweak processes to
reflect product and order profile changes, customer gains and losses or
shifts in demand.

Why is inventory management important?

 Inventory management dictates how you run your business, serve your
customers and grow sales. For businesses based around selling products –
from craft breweries to big wholesale distributors – managing inventory
efficiently is crucial. Here are three key reasons why.

Run your business smoothly

If your business doesn’t manage its inventory properly, it will quickly fall

apart.
Find out more:
 Typical inventory mistakes

 Sam, for instance, needs to match her supply of materials and production
to customer demand. If she makes more chairs than she can sell, she’ll
need to find somewhere to store the excess: which could end up cutting
into her margin. On the other hand, if she runs out of any one of her raw
materials, production will cease entirely until she restocks.
  Many small businesses rely on manually counting stock to track
what’s in store. But stock counts are disruptive and time-consuming,
taking time away from making and selling products. So putting a system
in place that doesn’t require stocktakes for accurate figures is imperative.
Find out more:
 Matching product supply to demand
 Inventory management and quality control
 The effects of stockouts on a business
 Three signs that it’s time to rethink your stock control  
Keep customers happy

Inventory management dictates:

 How quickly you can get your products to your customers
 How reliably you can fulfil orders
 How much visibility you can give your customers

Customers will be much more likely to come back for more if they know your
organisation can consistently deliver orders on time and let them know what’s
available. This is especially true when it comes to business-to-business
transactions. For a consumer, a missed deadline might mean an inconvenience.
For a business, it can mean lost sales and profits.

Grow your company

As businesses grow in complexity, their inventory management needs get more

complex as well. When Sam adds new product lines, hires staff, opens new
production facilities and grows her customer base, the organization of materials
and stock will get harder.

That makes it important to get control over your physical inventory from day
one if you plan on scaling. Rapid growth tends to bring a lot of time consuming
tasks: hiring staff, moving to bigger premises and negotiating with new
suppliers. So putting an effective stock system in place early is key. The later
you leave it, the longer it will take — and you’ll have less time to do it.
But these aren’t the only advantages of inventory management. It can
also bring several direct benefits to your business’ bottom line:
 Make it easy to add new products and channels, analyse performance and
empower salespeople with up-to-date product information, so you can grow
sales revenue
 Eliminate the inefficiencies that lead to lost stock, overstocking, and
stockouts — reducing holding costs and growing margins
 Reduce the time and manpower spent on inventory admin, saving on staff
costs
Find out more about inventory management strategy here.
How to improve inventory management
1. Focus on your needs

A warehouse full of inventory can be a daunting task. One way of making

managing it all easier is to identify the items that are the most important and
focus on them first. It’s highly unlikely that every item in your warehouse will
have the same demand from customers. Keep the top-selling items in stock, and
you’ll have made a great start at keeping your customers happy.

2. Engage with suppliers

In any stock-based business, it is crucial to manage supplier relationships well.

Developing constructive relationships with your business’ key suppliers is
important to secure reliable supply, unlock competitive pricing and to
understand emerging trends that may impact your business.

3. Develop an inventory management system

How your business deals with order quantities, replenishment cycle times,
safety stock, forecasts, seasonality and more is important. Tweak each operation
according to your specific business — making sure to keep track of what works
and what doesn’t. Making a dramatic improvement in one area can be
better than a few small improvements across the board.

4. Utilise real-time data

Information is a powerful tool, but only when it’s accurate and up to date. Real-
time data and analytics — from layered inventory tracking right through to
forecasting data, automatic ordering and individualised safety stock — can
make a real difference to your business. For the most accurate data, consider
using perpetual inventory management software, as it is the best way to ensure
the information you need is always at your fingertips.

5. Go mobile

Mobile technology has revolutionised inventory management. Barcode

scanning, for example, makes receipting and tracking goods far faster — and
helps eliminate unnecessary errors. Sales apps, meanwhile, empower
salespeople with inventory data on the road. You no longer need to be tethered
to a computer in your warehouse. You can keep track of key business processes
from home, on holiday, or wherever you are.

6. Develop an inventory management system

Managing your inventory on an ad-hoc basis will only ever get you so far. To
really keep on top of your stock, you’ll need an inventory management system.
Every company will have its own unique needs, so picking a system that
matches your business is important. In the early days of her company, for
example, Sam might be able to manage her inventory using spreadsheets. But a
global stock-based business like Amazon requires a bespoke, multifaceted
solution that caters to the huge number of orders processed every single day.

8 common inventory management techniques

No matter the size of your business, employing some of these common

inventory management techniques can be a great way to take control of your
stock. Here are a few to consider:
 Just-in-time (JIT) inventory. JIT involves holding as little stock as
possible, negating the costs and risks involved with keeping a large amount
of stock on hand
 ABC inventory analysis. This technique aims to identify the inventory
that is earning you profit, by classifying goods into different tiers
 Dropshipping. Businesses that use dropshipping essentially outsource all
aspects of managing stock — with several benefits but a few key drawbacks
 Bulk shipments. This technique is based on the assumption that buying in
bulk is cheaper. The method is great if a business is sure that their products
will sell but can pose challenges when demand suddenly changes
Backordering. A backorder is when a customer places an order for stock that
is not yet available. Learn more about how backordering impacts inventory
control
 Consignment. This technique allows a consignor, usually a wholesaler, to
give their goods to a consignee, usually a retailer, without the consignee
paying for the goods up front. The consignor still owns the goods, and the
consignee pays for the goods only when they actually sell. This sounds great
but it also carries major risks
 Cross-docking. This system virtually eliminates the need to hold inventory.
Products are delivered to a warehouse where they are sorted and prepared for
shipment immediately. They are usually reloaded into other trucks at the
same warehouse and sent out for delivery immediately
 Cycle counting. This technique involves counting a small amount of
inventory on a specific day without doing an entire stocktake. This method
helps your business regularly validate accurate inventory levels in your
inventory management software
Learn more about JIT, ABC analysis and dropshipping here.
How to grow your inventory management skills
Use the Unleashed Academy video training series to learn more about
inventory management and put your knowledge into practice.
Inventory management glossary
Let’s look at some of the basic terminology and formulas you need to
know before diving deeper into inventory management systems.

Cost of goods sold

Cost of goods sold (COGS), otherwise known as cost of sales, refers to

the direct costs of producing goods. This includes the cost of the
materials and labour directly used.

Days inventory outstanding (DIO)

Days Inventory Outstanding, also known as Days Sales of Inventory, is

used to measure the average number of days a company holds
inventory before selling it.

Economic order quantity (EOQ)

The economic order quantity is the optimal order quantity at any given
point in time. An optimal EOQ minimises total holding and ordering
costs. It is sometimes known as the optimum lot size.

Finished products

Finished products, or finished goods inventory, refers to the number of

manufactured products in stock that are ready to sell.

Inventory accounting

Inventory accounting deals with valuing and accounting for changes in

assets. Inventory involves goods in three stages of production: raw
goods, in-progress goods, and finished goods. An accurate inventory
accounting system keeps track of changes to inventory at all three
stages and adjusts asset values and costs accordingly.

Inventory costs

Inventory costs are the costs associated with procuring, storing and
managing inventory. They can be categorised into one of three types:
ordering costs, carrying costs and shortage costs.

Inventory management software

A software system for tracking inventory levels, orders, sales and

deliveries. It can also be used in production to create a bill of materials
and other production-related documents.

Lead time

an inventory management context lead time is the period between an

order being placed to replenish inventory and when the order is received
In.

Point of sale

The point of sale, or point of purchase, is the time and place in which a
retail transaction is completed. It usually involves an invoice and options
to make payment.

Purchase order

A purchase order is a document created by a buyer and sent to a vendor

requesting goods or services. The buyer will, at a minimum, specify what
products are being ordered, the quantity, the agreed price, and delivery
and payment terms.

Reorder point

This is the level of inventory which triggers an action to replenish it. It is

a minimum amount of stock a business needs to have, such that, when
stock falls to this amount, the item must be reordered.
Safety stock

This refers to a buffer or reserve of critical stock that is held to protect

against unforeseen supply or demand pressures.

Sales channels

A way of bringing products or services to market so that consumers can

buy them. Sales channels can be direct if it’s selling directly to
consumers, or indirect if an intermediary is involved.

Stock levels

Otherwise known as inventory levels, stock levels are the quantity of

goods or raw materials kept on the premises of a business.

Supply chain

A supply chain is a system of organisations, people, activities and

resources involved in supplying a product or service to a consumer.

4 fundamental inventory management formulas

For new business owners, the following calculations might seem
daunting, but don’t let that deter you. These formulas are essential for
keeping stock levels optimised. Let’s explore:
1. The Economic Order Quantity (EOQ) formula
2. The Days Inventory Outstanding (DIO) formula
3. The safety stock formula
4. The reorder point formula

Calculating Economic Order Quantity (EOQ)

EOQ = √(2DK/H)
It’s important to buy the right amount of inventory stock – neither too little, nor
too much. You use the EOQ formula to determine the optimal order quantity –
one that minimises the costs of ordering, receiving and holding inventory.

Where:
 D is the setup cost per order; this typically includes shipping and handling
costs
 K is the demand rate (your quantity sold per year)
 H is the holding cost per year per unit

Calculating Days Inventory Outstanding (DIO)

DIO = (Average inventory/COGS) × Days in period

The Days Inventory Outstanding formula goes a step further than the inventory
turnover ratio by putting the figure into a daily context and providing a more
accurate picture of a company’s inventory management and overall efficiency.
Generally a low DIO is preferred but to make sense of it, you need to take into
account the industry and market dynamics.

Where:
 Average inventory = (Beginning inventory + Ending inventory) / 2
 COGS is your cost of goods sold
 Days in Period is the number of days in the timeframe that you want to
measure, whether it’s weekly, quarterly or annually
Calculating safety stock

Safety stock = (Maximum daily usage × Maximum lead time in days) –

(Average daily usage × Average lead time in days)

Knowing how much buffer stock to hold will help your business navigate safely
through demand and lead time fluctuations. It might seem daunting but all you
need to know are your purchase and sales orders history.
Calculating reorder point

Reorder point = (Average daily usage x Average lead time in days) + Safety stock

You use the reorder point calculation to determine when to reorder stock. Small
business owners often rely on intuition and past experience to know when to
place another order, but as the business grows, this quickly becomes
unsustainable.

What are inventory costs?

Knowing your inventory costs helps you make smarter decisions. There are
three broad categories of inventory costs: ordering costs, carrying costs, and
shortage costs.
Inventory ordering costs
This is the expense incurred in creating and processing an order to a supplier.
You’d use this to determine the EOQ of your inventory. Examples of ordering
costs are:
 Cost to prepare a purchase requisition or purchase order
 Cost of the labor required to inspect receipted goods
 Cost to process the supplier invoice related to an order
 Cost to prepare and issue a payment to the supplier

Inventory carrying costs

Carrying costs are the expenses related to storing unsold goods. This includes
the tangible costs such as storage, handling, and insuring, as well as intangible
costs such as depreciation, the cost of deterioration and obsolescence and
opportunity costs. Carrying costs will generally comprise 20% to 30% of a
business’ total inventory costs.

Inventory shortage costs

Also known as stock out costs, this is the expense that arises from an out-of-
stock situation. This can include measurable costs such as the cost of expedited
shipping, buying last minute from another supplier, or loss of the margin on
incomplete sales. These also include costs that are hard to quantify such as loss
of customer confidence or loss of customers, idle employees and loss in
goodwill.
Learn more about inventory costs.

Next steps
Deciding when you might need dedicated inventory management software is a
key step in the growth of your company. To find out more about how to manage
your inventory better, take a look at our guide to inventory management
systems. Or if you’d like more information on the fundamentals of stock, read
our inventory management basics blog.
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3 Common Inventory Management Strategies

 When it comes to managing inventory on Amazon, there are plenty
of inconsistencies that can cause problems. Sellers often have
little to no visibility into the demand of products, resulting
in ongoing supply issues on the backend. If products are moving
slow, brands can be subject to hefty storage fines from Amazon.
Plus, if a manufacturer creates more products than it can sell, the
leftover inventory can drive down prices. These are just a few of
the issues brands face when it comes to selling on the Amazon
Marketplace—but it doesn’t have to be this way.

 For brands selling on Amazon, navigating the complexities of the

online marketplace can be confusing in and of itself without adding
inventory management strategy to the mix. In this article we’ll dive
into the three most common inventory management strategies that
most manufacturers operate by: the pull strategy, the push
strategy, and the just in time (JIT) strategy. While supply chain
strategies deal with how products are managed on the back-end of
the consumer process, supply and demand can greatly impact a
brand’s reputation and relationship with consumers, especially * *
when dealing with an online marketplace like Amazon. As a
consumer, there’s nothing worse than seeing that ‘ships in three
weeks’ disclaimer next to the Buy Now button on a product listing.
 If a product isn’t in stock or is backordered, consumers won’t wait
around for it—they’ll move on. This is why having a clear inventory
management strategy in place is so important. It increases a
brand’s credibility in the space while positively impacting
relationships with consumers.
 Now, let’s explore the three main inventory management
strategies:

The Pull Strategy
 In a pull strategy, a brand is manufacturing inventory based
on clear demand from customers. 
 Essentially, customers are ‘pulling’ product from the brand,
creating a two-way street of supply and demand. When customers
demand a product, the brand will supply it. Pull strategies are good
for brands looking to keep inventory costs low. However, if
consumer demand changes rapidly, there can be problems
adjusting output levels to keep up, which results in stocking out.
The downside of stocking out on Amazon is loss of demand and a
drop in organic product ranking.

The Push Strategy
 The push strategy is when a brand is pushing out products
based on expected or forecasted demand.
 Instead of waiting for a customer to ask for a product such as in
the pull model, brands leveraging the push strategy would create
as many products as they think customers will demand and then
wait for the requests to come in. In the push strategy, it’s easier to
keep operating costs low because you’re creating more products
at one time, but there is also more risk involved compared to the
pull strategy. If the demand for a product doesn’t meet the
forecasted levels, a brand could be left with serious excess
inventory, driving down the cost of the product overall.
 

The Just In Time Strategy

 The just in time (JIT) inventory model is when products are
created based on a demand schedule that will deliver the final
product to a consumer right when they request it.
 Elements from both the push and the pull strategy are evidenced
in the JIT model as there is a need for both outspoken demand
from customers as well as a clear understanding of market
forecasting to succeed. The JIT strategy relies on manufacturers
having raw materials on hand but not actually creating products * *
until the demand comes in, which can keep overhead costs low but
can also create delays in delivering the end products to
consumers. Currently, it is not advised to use this strategy for your
Amazon business due to inconsistencies with Amazon’s shipping
partners and longer than normal warehouse receiving times
caused by COVID-19.

Which one is right for you?

 When it comes to choosing an effective inventory management
strategy for your business, just remember—every use case is
different. Take some time to look at how your products are
performing on Amazon currently in addition to how your inventory
is spread out across warehouses and storage facilities. Many
brands decide to leverage a hybrid model of push and pull
strategies to keep inventory costs low while still covering
immediate customer demands. This hybrid strategy helps keep
customers happy while proactively controlling costs.
 Inventory management is a critical part of succeeding on the
Amazon marketplace. At SupplyKick we keep brands ahead of the
curve and in front of inventory management trends with expert
knowledge of the Amazon marketplace and with our proprietary
reordering system that optimizes inventory levels for our partners.