COMMERCE O LEVEL(FORM TWO) NOTES – STOCK ADMINISTRATION

STOCK ADMINISTRATION

Stock administration is the management of stock in the business to ensure that there is a sufficient quantity of goods without holding more or less stock than required.

FUNCTIONS OF STOCK ADMINISTRATION

Stock administration involves the following functions:

1. Receiving of goods – includes the following activities:
   • Accepting deliveries from transporters or carriers
   • Inspecting or checking the condition of goods against quantity, quality, and types of goods
   • Unloading of goods
   • Comparing goods received with order documents
   • Notifying the purchasing department about the receipts and general condition of the goods
   • Keeping records of stock/goods received
2. Placing items – involves allocating or placing the goods in appropriate places. Stocks must be arranged in good order so that old goods are distinguishable from new ones.
3. Care of stock – goods received must be kept in good condition by cleaning, dusting, and sorting out spoiled goods.
4. Issuing of stock – delivering goods against vouchers to ensure proper records of stock movement.
5. Stock control – checking and keeping records of the quantity and value of articles or goods in stock for a particular period.

WHY STOCK CONTROL IS NECESSARY / IMPORTANCE OF STOCK CONTROL

Stock control is necessary because:

1. It helps to know whether sufficient stocks are available to carry out normal orders.
2. It helps management obtain new supplies before stock runs out.
3. It helps management understand stock turnover to distinguish between slow and fast-moving items.
4. Stock control is necessary for insurance purposes.

STOCK TAKING

Stock taking is the process of finding the quantity and value of stock held. It involves physically counting and listing all stock, usually conducted at the end of each financial year.

PURPOSE OF STOCK TAKING

1. To detect stock pilferage
2. To check accuracy of records
3. To identify weaknesses in the stock control system
4. To support the value of closing stock used in final accounts

STOCK LEVELS

Stock levels are volumes or points of stock reached at different times. Stock levels include the following:

1. Minimum stock level (also called buffer stock) – the lowest quantity of stock to safeguard sales against unforeseen delays in delivery or production.
2. Maximum stock level – the highest level of stock reached immediately after receipt of a new delivery. Stock should not exceed this level.

DETERMINATION OF MAXIMUM STOCK LEVEL

The stock level can be determined by:

1. Financial capability of the business
2. Storage capacity (available space)
3. Cost of storage
4. Seasonal factors (especially agricultural products)
5. Stability of prices

AVERAGE STOCK LEVEL

This is the average number of stock levels within a certain period (usually a year).

CALCULATION OF AVERAGE STOCK

Example

If a firm has opening stock valued at Tshs 2500/= and closing stock valued at Tshs 1500/=, calculate average stock.

STOCK ORDER POINT OR RE-ORDER LEVEL

This is the level, expressed in units, at which another order is placed before stock falls below the minimum level.

OR

It is the level at which ordering or placing of new items must be done.

DETERMINATION OF ORDER POINT

Order point is determined according to:

1. Volume of last sales or consumption
2. The period between placing an order and receiving deliveries
3. Minimum stock level

CALCULATION OF ORDER POINT

Formula:

Order point = (Daily sales × Delivery time) + Minimum stock

Example 1

If a firm has a daily sale of 10 units and minimum stock of 100 units. The time between placing and receiving the order is 20 days. Find the order point.

Solution:

Order point = (Daily sales × Delivery time) + Minimum stock

• Daily sales = 10 units
• Delivery time = 20 days
• Minimum stock = 100 units

Order point = (10 × 20) + 100 = 200 + 100 = 300 units

Example 2

Calculate the order point from the following information:

1. Daily sales: 20 cartons of soaps (each carton contains 10 bars of soap)
2. Delivery time: 2 weeks
3. Minimum stock: 500 bars of soap

Solution:

• 1 carton = 10 bars
• 20 cartons = 200 bars
• 1 week = 7 days
• 2 weeks = 14 days

Order point = (Daily sales × Delivery time) + Minimum stock

= (200 bars × 14 days) + 500 bars = 2800 + 500 = 3300 bars of soap

TURNOVER/SALES

Turnover is the net sales during the trading period. It is calculated as follows:

RATE OF STOCK TURNOVER

This is the number of times the average volume of stock held has been sold during any given period. It is given as follows:

Rate of stock turnover:

Example:

Given:

• Opening stock = 2,000/=
• Closing stock = 2,500/=
• Purchases = 14,000/=
• Sales = 25,000/=
• Expenses = 4,000/=

Calculate:

1. Cost of goods sold
2. Average stock
3. Gross profit
4. Net profit
5. Rate of stock turnover

Solution:

MARK-UP AND MARGIN

Mark-up is a profit shown as a fraction or percentage of the cost price (cost of goods sold).

Example:

Given:

• Cost price = 400
• Selling price = 500

Calculate:

1. Gross profit
2. Mark-up as a percentage
3. Margin

= 100/500 × 100

Margin = 20%

RELATIONSHIP BETWEEN MARK-UP AND MARGIN

Both margin and mark-up figures refer to the same profit but are expressed as a fraction or percentage of different figures. There is a relationship: if one is known as a fraction, the other can be found.

If the mark-up is known, to find the margin, take the numerator of the margin equal to the numerator of the mark-up, then for the denominator of the margin take the total of the mark-up denominator plus numerator.

Margin = (1/n) = 1/(n-1) × 100 (less mark-up)

Margin = (1/n) = 1/(n+1) × 100 (add mark-up)

1. Mark-up margin
2. ¼ = 2/11 = 2/(11+2) = 2/13
3. Margin mark-up
4. 1/6 – 1 = 1/5
5. 3/13 – 3 = 3/10

Example

The following figures are for 2005:

• Stock at 01.01.2005 = 400
• Stock at 31.12.2005 = 600
• Purchases = 5200

A uniform rate of mark-up of 20% is applied. Find out:

1. Cost of goods sold
2. Gross profit
3. Sales figure

Solution:

Cost of goods sold = Opening stock + Purchases – Closing stock

= 400 + 5200 – 600

= 5600 – 600

= 5,000 Tshs

Sales figure = Cost of goods sold + Gross profit

= 5000 + 1000

= 6000 Tshs

EXERCISE

Given the following figures for 2006:

• Stock at 01.01.2006 = 500
• Stock at 31.01.2006 = 800
• Sales = 4000

A uniform rate of margin of 25% is in use. Calculate:

1. Gross profit
2. Purchases figure
3. Cost of goods sold