BUDGETING

 

- Define budgeting

- Define inventory

- State objectives of inventory control

- Explain 6 reasons of conducting inventory control

- Outline 5 principles of budgeting

- Explain approaches that can be used in budgeting

1. Define Budgeting

Budgeting is the process of creating a plan to manage income and expenditure over a specified period. It helps in setting financial priorities and ensuring that resources are allocated efficiently.

2. Define Inventory

Inventory refers to the goods and materials a business holds for the purpose of resale or production. It includes raw materials, work-in-progress, and finished products.

3. Objectives of Inventory Control

- Maintain adequate supply of materials

- Minimize inventory costs

- Avoid overstocking or stockouts

- Ensure smooth production and operations

- Improve customer service

- Optimize storage and handling

4. Six Reasons for Conducting Inventory Control

- To reduce wastage and obsolescence

- To detect pilferage or theft

- To track material movement and consumption

- To maintain accurate stock records

- To ensure timely replenishment

- To support financial reporting and audits

5. Five Principles of Budgeting

- Comprehensiveness: All revenues and expenditures should be included.

- Accuracy: Projections should be based on reliable data.

- Consistency: Follow the same standards and timeframes.

- Transparency: The budget should be clear and understandable.

- Accountability: Those responsible must be held accountable for performance.

6. Approaches Used in Budgeting

- Incremental Budgeting: Based on previous budgets with adjustments.

- Zero-Based Budgeting: Every expense must be justified from scratch.

- Activity-Based Budgeting: Focuses on activities that incur costs.

- Performance-Based Budgeting: Links funding to outcomes or results.

Types of Inventory

Inventory refers to the stock of goods or materials that a business holds for production, sale, or maintenance. Different types of inventory serve various purposes in supply chain management and operations. The main types include:

1. Raw Materials

• Definition: Basic materials that are used to manufacture finished products.

• Example: Wood for furniture-making, steel for car manufacturing.

2. Work-in-Progress (WIP) Inventory

• Definition: Partially finished goods that are still in the production process.

• Example: A car on the assembly line, a half-sewn garment.

3. Finished Goods

• Definition: Completed products ready for sale to customers.

• Example: Packaged electronics, bottled beverages.

4. Maintenance, Repair, and Operations (MRO) Inventory

• Definition: Supplies used to support production but are not part of the final product.

• Example: Lubricants, cleaning supplies, spare parts for machinery.

5. Safety Stock (Buffer Inventory)

• Definition: Extra inventory kept to prevent stockouts due to unexpected demand or delays.

• Example: Retailers keeping extra stock before holiday seasons.

6. Cycle Inventory

• Definition: Inventory ordered in batches to balance ordering costs and holding costs.

• Example: A bakery ordering flour in bulk every two weeks.

7. Pipeline (In-Transit) Inventory

• Definition: Goods that are being transported from suppliers to warehouses or customers.

• Example: Shipments of smartphones being delivered to stores.

8. Anticipation Inventory

• Definition: Stock built up in anticipation of future demand spikes (e.g., seasonal demand).

• Example: Retailers stocking up on umbrellas before the rainy season.

9. Decoupling Inventory

• Definition: Extra inventory kept at different production stages to prevent bottlenecks.

• Example: A car manufacturer keeping extra engines to avoid assembly line delays.

10. Obsolete (Dead Stock) Inventory

• Definition: Unsold or outdated inventory that is no longer useful.

• Example: Old smartphone models that are no longer in demand.

Conclusion

Understanding these inventory types helps businesses optimize stock levels, reduce costs, and improve efficiency in supply chain management.