Which of the following is not considered a pressure to hold large inventories?

Small vs. Large InventoriesThe pressures for small inventory consist of cost of capital, storage, and handling cost, andtaxes, insurance or shrinkage. Crayola would be more affected by the pressures for largeinventories. Sales patterns have strong seasonality, and stock-outs cannot be permitted. Asmentioned, the back to school season takes on 42% of the total revenue, and in addition,holiday sales take 35% of the revenues. Since capacity is limited, Crayola may have to buildup anticipation inventory in the pre-season in order to maximize resource utilization.However, this does not mean that Crayola cannot deploy inventory reduction techniques.Despite the pressure for large inventories, Crayola successfully manages the inventory levelsby using automation to streamline the process, adding flexibility through suppliermanagement, and improving its forecasting. Kanban systems are also used to pull rawmaterials inventory from the warehouses that are positioned close to the production lines(Krajewski 2010).Independent and dependent demands at CrayolaDependent demand items consist of raw materials and work in process inventories that arerequired for producing other items held in the firm’s inventory. These raw materials as givenin the case are dyes, paraffin wax, resins, clay, paper, ink, cardboard, and plastics. Also,crayons and markers are considered as work in process inventory, which means dependentdemand items. The end products such as kits, packages and bundles of Crayola products arethe finished goods for which demand influenced by market conditions and hence is notrelated to the inventory decisions. These would be the independent demand items (Krajewski2010).Flexibility to adjust to unexpected demand surgesCrayola established duplicate capacities in China to meet the foreseen aggregate demandgrowth, but located closer supplier networks to accommodate short-term demandfluctuations. During the demand surge, Crayola was able to quickly source the long lead-timeink bottles because their key supplier was located in close proximity. Crayola focuses onsourcing raw materials from domestic suppliers as much as possible. Cartons, clay, ink, labelsand corrugated boxes are sourced from the mid-Atlantic region of USA. As shown in thecase, this policy results in most primary components for production being literally within atwo-hour ride.Crayola can get the materials into their plants at least three days before production schedulesbegin. After converting a production order, the products would go to the distribution centerimmediately. So Crayola is able to convert a customer order into production within a 48-hourtime span. In terms of the four inventories, Crayola can focus on building up safety stockinventory and anticipation inventory. This would require Crayola to order earlier than theexpected demand realization, or order more than the required amount. Since Crayola knowsmost of the demand patterns and seasonal shifts with high accuracy (typically 80% or higher),

What Is Inventory?

The term inventory refers to the raw materials used in production as well as the goods produced that are available for sale. A company's inventory represents one of the most important assets it has because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders. There are three types of inventory, including raw materials, work-in-progress, and finished goods. It is categorized as a current asset on a company's balance sheet.

Key Takeaways

• Inventory is the raw materials used to produce goods as well as the goods that are available for sale.
• It is classified as a current asset on a company's balance sheet.
• The three types of inventory include raw materials, work-in-progress, and finished goods. 
• Inventory is valued in one of three ways, including the first-in, first-out method; the last-in, first-out method; and the weighted average method.
• Inventory management allows businesses to minimize inventory costs as they create or receive goods on an as-needed basis.

Understanding Inventory 

Inventory is a very important asset for any company. It is defined as the array of goods used in production or finished goods held by a company during its normal course of business. There are three general categories of inventory, including raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP), and finished goods or those that are ready for sale.

As noted above, inventory is classified as a current asset on a company's balance sheet, and it serves as a buffer between manufacturing and order fulfillment. When an inventory item is sold, its carrying cost transfers to the cost of goods sold (COGS) category on the income statement.

Inventory can be valued in three ways. These methods are the:

• First-in, first-out (FIFO) method, which says that the cost of goods sold is based on the cost of the earliest purchased materials. The carrying cost of remaining inventory, on the other hand, is based on the cost of the latest purchased materials
• Last-in, first-out (LIFO) method, which states that the cost of goods sold is valued using the cost of the latest purchased materials, while the value of the remaining inventory is based on the earliest purchased materials.
• Weighted average method, which requires valuing both inventory and the COGS based on the average cost of all materials bought during the period.
  

Company management, analysts, and investors can use a company's inventory turnover to determine how many times it sells its products over a certain period of time. Inventory turnover can indicate whether a company has too much or too little inventory on hand.

Special Considerations 

Many producers partner with retailers to consign their inventory. Consignment inventory is the inventory owned by the supplier/producer (generally a wholesaler) but held by a customer (generally a retailer). The customer then purchases the inventory once it has been sold to the end customer or once they consume it (e.g., to produce their own products).

The benefit to the supplier is that their product is promoted by the customer and readily accessible to end users. The benefit to the customer is that they do not expend capital until it becomes profitable to them. This means they only purchase it when the end user purchases it from them or until they consume the inventory for their operations.

Inventory Management

Possessing a high amount of inventory for a long time is usually not a good idea for a business. That's because of the challenges it presents, including storage costs, spoilage costs, and the threat of obsolescence.

Possessing too little inventory also has its disadvantages. For instance, a company runs the risk of market share erosion and losing profit from potential sales.

Inventory management forecasts and strategies, such as a just-in-time (JIT) inventory system (with backflush costing), can help companies minimize inventory costs because goods are created or received only when needed.

Types of Inventory

Remember that inventory is generally categorized as raw materials, work-in-progress, and finished goods. The IRS also classifies merchandise and supplies as additional categories of inventory.

Raw materials are unprocessed materials used to produce a good. Examples of raw materials include:

• Aluminum and steel for the manufacture of cars
• Flour for bakeries that produce bread
• Crude oil held by refineries

Work-in-progress inventory is the partially finished goods waiting for completion and resale. WIP inventory is also known as inventory on the production floor. A half-assembled airliner or a partially completed yacht is often considered to be work-in-process inventory.

Finished goods are products that go through the production process, and are completed and ready for sale. Retailers typically refer to this inventory as merchandise. Common examples of merchandise include electronics, clothes, and cars held by retailers.

How Do You Define Inventory?

Inventory refers to a company’s goods and products that are ready to sell, along with the raw materials that are used to produce them. Inventory can be categorized in three different ways, including raw materials, work-in-progress, and finished goods.

In accounting, inventory is considered a current asset because a company typically plans to sell the finished products within a year.

Methods to value the inventory include last-in, first-out (LIFO); first-in, first-out (FIFO); and the weighted average method.

What Is an Example of Inventory?

Consider a fashion retailer such as Zara, which operates on a seasonal schedule. Because of the fast fashion nature of turnover, Zara, like other fashion retailers is under pressure to sell inventory rapidly. Zara's merchandise is an example of inventory in the finished product stage. On the other hand, the fabric and other production materials are considered a raw material form of inventory.

What Can Inventory Tell You About a Business?

One way to track the performance of a business is the speed of its inventory turnover. When a business sells inventory at a faster rate than its competitors, it incurs lower holding costs and decreased opportunity costs. As a result, they often outperform, since this helps with the efficiency of its sale of goods.

Which one of the following is not considered to be a cost of holding inventory?

Which of the following is not considered a type of inventory?

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