| Calculating inventory is a critical component of | | | | required. The fundamental assumption is that the |
| inventory control. It helps management to determine | | | | business holds stocks of raw materials that it uses in |
| what inventory is available for future use-information | | | | production. Therefore, "materials requisitioned" are |
| that can affect the ordering and stocking of raw | | | | those that are already committed to the production |
| materials. You can calculate free inventory by using | | | | process, although they have not yet been issued to |
| the following equation: | | | | the production department by the stores department. |
| Free inventory = Materials in inventory + Materials on | | | | For an example of free inventory, assume that our |
| order - Materials requisitioned but not yet issued | | | | current stock of a particular raw material (X) is 1000 |
| You should note that free inventory does not denote | | | | units. If we have not ordered more of X and none has |
| the difference between the current level of stock and | | | | been committed to production, our free inventory of X |
| maximum storage capacity. The crux of the matter is | | | | is 1000 units (1000 + 0 - 0). Again, this means that we |
| how much inventory we have for future use. | | | | have 1000 units of X available for future use. |
| Therefore, we must discount materials that are | | | | Suppose we order 500 more units of X. That would |
| already committed to other products or projects. | | | | increase our free inventory to 1500 units. However, in |
| "Materials in inventory" refer to the current stock of | | | | the normal course of business, it is clear that some |
| raw materials in stores. This material is at hand for | | | | units of X would be committed to production already. |
| production (whether current or future). "Materials on | | | | Assume that 800 units of X are committed to |
| order" refer to that which the Stores department or | | | | production, but the stock of X remains in the Stores |
| warehouse has ordered from suppliers. This is added | | | | Department (not yet issued). Then, you should use all |
| to the current stock because it has already been | | | | variables in calculating free inventory: |
| ordered and would increase the inventory in a short | | | | 1000 + 500 - 800 = 1500 - 800 = 700 units |
| time span. "Materials requisitioned but not yet issued" | | | | Naturally, you can change the subject of the formula |
| refers to raw material stock that is already committed | | | | once you have three known variables. For instance, if |
| to production but remains part of materials in inventory. | | | | you know much material is in inventory, on order, and |
| Naturally, the calculation of free inventory occurs in a | | | | available for future use, you can determine how many |
| manufacturing environment or type of business where | | | | units are requisitioned but not yet issued. |
| a conversion of raw materials into a finished product is | | | | |