The close relationship between inventory and accounting
Inventory is considered a business asset, so inventory management ties in closely with accounting. When inventory and accounting are integrated well, you get real-time metrics into your goods at every step of the process.
Your inventory management system should support multiple inventory valuation methods and functions such as:
Inventory turnover rate
The cost of goods sold divided by average inventory on hand.
Low turnover rate indicates duplicate orders and deteriorating inventory value.
High turnover rate can mean excess shipping costs to quickly replace things that are out of stock, incomplete orders, and wasted time trying to locate missing items.
Balanced turnover rate indicates high efficiency, lower costs, and higher customer satisfaction.
Weighted average costing
The cost of available goods for sale divided by the number of units for sale. This metric yields the weighted average cost per unit.
Estimate of the expected cost for an item in the accounting records, which is periodically checked against the actual cost. The variance between the two numbers is recorded in the accounting records. This method is used when it’s too time-consuming to track actual costs in real time.
Bill of materials (BOM)
Refers to the list of sub-items that make up a single inventory item.
Bundling the parts and items that make up a single finished item.
Just in time (JIT) inventory
A logistics term that refers to receiving inventory just before or at the exact time it’s needed.
Work in progress
Tracks inventory from manufacturing to when it’s used on the production shop or factory floor.