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Unit 3 of 4 · MBA Sem 4

Unit 3: Selective control and accounting

Inventory Management notes · PTU syllabus (MBA 956-26)

3 min read5 topics10 exam questions
On this page
  1. Unit summary
  2. Pareto analysis and ABC classification
  3. VED and FSN analysis
  4. Feedback inventory information systems
  5. Inventory accounting: valuation of issues
  6. Material issue procedures
  7. Key terms
  8. Quick revision
  9. Important questions

Unit summary

Not all items deserve the same attention, and inventory must be valued and issued correctly. This unit covers ABC, VED and FSN classification, Pareto analysis, feedback inventory information systems, inventory accounting methods — FIFO, LIFO and weighted average — and material issue procedures.

After this unit you can

  • Apply ABC, VED and FSN classification and Pareto analysis
  • Explain feedback inventory information systems
  • Value inventory issues using FIFO, LIFO and weighted average
  • Explain material issue procedures

PTU syllabus topics

  • ABC
  • VED and FSN classification
  • Pareto analysis
  • feedback inventory information systems
  • inventory accounting methodologies (FIFO, LIFO, weighted average)
  • material issuance procedures
ComparisonInventory valuation methods
Issues at
In rising prices

FIFO

Oldest cost first

Lower cost of goods, higher profit

LIFO

Newest cost first (not allowed under Ind AS)

Higher cost of goods, lower profit

Weighted average

Average cost

In between

1

Topic 1

Pareto analysis and ABC classification

  • Pareto principle: a small proportion of items accounts for a large proportion of value (the vital few and the trivial many).
ProcessABC analysis steps
  1. 1List items with annual usage value (quantity × unit cost)
  2. 2Rank in descending order of value
  3. 3Compute cumulative percentages of value and items
  4. 4Classify A (about 70% value), B (about 20%), C (about 10%)
  5. 5Set control policies for each class
2

Topic 2

VED and FSN analysis

  • VED analysis classifies items (especially spares) by criticality: vital (production stops without them — keep ample stock), essential (stoppage cost high but tolerable for a short time), desirable (little effect).
  • FSN analysis classifies by movement: fast-moving, slow-moving and non-moving — identifies obsolete stock for disposal.
  • Combined matrices: ABC–VED matrix — e.g., a C-class vital spare is still stocked generously, while an A-class desirable item is bought only when needed.
ClassificationOther selective controls
Selective control

  • HML

    High, medium, low unit price

  • SDE

    Scarce, difficult, easy to obtain

  • GOLF

    Government, ordinary, local, foreign sources

  • SOS

    Seasonal and off-seasonal items

  • XYZ

    Value of stock held at year-end

3

Topic 3

Feedback inventory information systems

  • Feedback control: compare actual inventory performance with targets and feed results back for corrective action.
  • Reports: stock status, slow-moving and obsolete items, stock-outs, inventory turnover, ageing analysis, variance between book and physical stock.
  • Systems: perpetual inventory records in ERP, dashboards, automatic reorder alerts, supplier portals.
4

Topic 4

Inventory accounting: valuation of issues

ComparisonInventory valuation methods
Method
Effect in rising prices

FIFO (first in, first out)

Earliest purchases issued first

Lower cost of goods issued, higher closing stock and profit

LIFO (last in, first out)

Latest purchases issued first

Higher cost of issues, lower profit; not permitted under Ind AS 2 or IFRS

Weighted average

Issues at average cost of units on hand

Smooths price changes

Example

Opening 100 units at ₹10; purchase 100 at ₹12; issue 150. FIFO cost = 100 × 10 + 50 × 12 = ₹1,600; weighted average = 150 × 11 = ₹1,650; LIFO = 100 × 12 + 50 × 10 = ₹1,700.

  • Others: specific identification, standard cost.
5

Topic 5

Material issue procedures

ProcessMaterial issue
  1. 1Material requisition slip

    Raised by the user department, authorised

  2. 2Stores checks availability
  3. 3Issue and record in bin card and stores ledger
  4. 4Material transfer note or return note

    For transfers and returns

  5. 5Costing

    Charge to job or department

  • Documents: material requisition, bill of materials (pre-planned issue), bin card, stores ledger, material return note, material transfer note.
  • Controls: authorised signatures, issue against valid requisitions only, FIFO physical rotation for perishables, periodic reconciliation.

Key terms

Pareto principle
Vital few items account for most value
FSN analysis
Classification by movement
Perpetual inventory
Continuous record of stock balances
Weighted average cost
Average cost of units on hand
Material requisition
Authorised request to draw materials from stores

Quick revision

  • Pareto; ABC steps and controls.
  • VED, FSN, HML, SDE, GOLF, SOS.
  • Feedback reports and systems.
  • FIFO, LIFO (not allowed under Ind AS 2), weighted average.
  • Issue procedure and documents; controls.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.What is the Pareto principle?
  2. Q2.State the steps of ABC analysis.
  3. Q3.Distinguish VED and FSN analysis.
  4. Q4.What is a feedback inventory information system?
  5. Q5.Why is LIFO not used under Ind AS?
  6. Q6.What is a material requisition slip?

Long-answer questions

  1. Q1.Explain ABC analysis and other selective inventory controls.
  2. Q2.Explain feedback inventory information systems.
  3. Q3.Explain FIFO, LIFO and weighted average methods with an example.
  4. Q4.Explain the procedure for issue of materials.

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