INTRODUCTION

1
 INTRODUCTION
In our present day economy, finance is defined as the provision of

money at the time when it is required. Every enterprise, whether big, medium or

small, needs finance to carry on its operation and to achieve its targets. In fact,

finance is so indispensable today that it is rightly said to be the life blood of an

enterprise. Without adequate finance, on enterprise can possibly accomplish its

objectives.

The purpose of inventory management is to keep the stocks neither in such

a way that neither there is over-stocking nor under –stocking. The over stoking will

mean a reduction of liquidity and starving of other production processes; under –

stocking, on the other hand, will result in stoppage of work. The investment in

inventory should be kept in reasonable limits.

Kirloskar Electric Company is an electrical company which manufactures

generators, motors and other electrical goods it has a sales office in Hyderabad and

maintains a go down to store inventory required. It holds generators and motors of

various capacities to cater to the needs of different customers. The method of

inventory control used in the company is FIFO. The study is conducted for efficient

management of inventory in the company. The Company holds the inventory to see

that the demand for its products is met accordi9ng to the requirements. The study

is taken to know the efficiency and effectiveness of the company inventory

management.

2
 OBJECTIVES OF STUDY

Objectives:

1 To study how to ensure continuous supply of raw materials, spares and

finished goods. So that production is not suffering by different inventory

technics.

2 The inventory control methods followed by the organization

3 Whether the company is maintaining the optimum level of inventories to

supplement the demand of its products ion the market.

4 The efficiency of inventory control on the organizatio0n and suggest the

ways to improve the inventory control measures.

SCOPE:

The study is restricted to 7 products viz. 5 motors and 2 generators, the method

used for calculating the inventory control is first –in-first-out (FIFO). The study is

conducted for a period if 4 years.

SOURCES OF DATA:

The data is collected from two sources:

1. PRIMARY DATA: - The primary data is collected from the interviews of the

managers and senior executives of the company.

2. SECONDARY DATA: - The secondary data is collected from the stock

registers, hand-outs and other materials from the company.

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LIMITATIONS:

The study has the following limitations:

1 The study may be detail in all the aspects as it is conducted within limited

time frame.

2 The study is restricted to only 7 products. So a detail analysis of inventory

control of the products in not made.

INVENTORY MANAGEMENT

INTRODUCTION:

Every enterprise needs inventory for smooth running of its activities. It

serves as a link between production and distribution processes. There is, generally,

a time lag between the recognition of a need and its fulfillment. The greater the

time-lag, the higher the requirements for inventory, the unforeseen fluctuations in

demand and supply of goods also necessitate the need for inventory. It also

provides a cushion for future price fluctuations

The investment in inventories constitutes the most significant part of current

assets/working capital in most of the undertakings. Thus it is very essential to have

proper control and management of inventories. The purpose of inventory

management is to ensure a variability of materials in sufficient quantity as and

when required and also to minimize investment in inventories.

MEANING AND NATURE OF INVENTORY:

4
 The dictionary meaning of inventory is stock of goods, or a list of goods.

The word inventory is understood differently by various authors. In accounting

language it may mean stock of finished goods only. In a manufacturing concern, it

may include raw material, work in process, etc. to understand the exact meaning

of the word, ‘inventory’ we may study it from usage side or from the ‘side of point

of entry’ in the operations. Inventory includes the following things.

a) RAW METERIAL. Raw material form a major input the organization. They

are required to carry our production activities uninterruptedly. The quantity

of raw materials required will be determined by the rate of consumption and

the time required for replenishing the supplies. The factored like the

availability of raw materials and government regulation, etc. too affect the

stock of raw materials.

b) WORK-IN-PROGRESS. The work in progress is that stage of stocks which

are in between raw materials and finished goods. The raw materials enter

the process of manufacture but they are yet to attain a final shape of

finished goods. The quantum of work-in-progress depends upon the amount

of work in progress.

c) CONSUMABLES: These are the materials which are needed to smoothen

process of production. These materials do not directly enter production but

they act as catalysts, etc. consumable may be classified according to their

consumption and criticality. Generally, consumable store do not create any

supply problems and form a small part of production cost. There can be

instance where these materials may account for much value than the raw

5
 materials. The fuel oil may form a substantial part of cost

d) FINISHIED GOODS: These are the goods which are ready for the

consumers. The stock of finished goods provides a buffer between

production and market. The propose of maintaining inventory is to ensure

proper supply of goods to customers. In some concerns the production is

undertaken on order basis, in these concerns there will not be a need for

finished goods. The need for finished goods inventory will be more when

production is undertaken in general without waiting for specific orders.

e) SPARES: spares also form a part of inventory. The consumption pattern of

raw materials, consumable, finished goods are different from of that of

spares. The stoking policies of spares are different from industry to industry.

Some industry like transport will require more spares than the other

concerns. The costly spare parts like engines, maintenance spares etc. are

not discarded after use, rather they are kept in ready position for furtherer

use. All decisions about spates are based on the financial cost of inventory

on such spares and the costs that may arise due to their non-availability

PURPOSE/BENFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm’s found and the cost

of storage and handling every business enterprise has to maintain a certain

level of inventors to facilitate uninterrupted production and smooth running of

business. In the absence of inventories a firm will have to make purchases as

soon as it receives orders. It will mean loss of time and delay in execution of

orders which sometime may cause loss of customers and business. A firm also

needs to maintain inventories to reduce ordering costs and avail quantity

6
discount, etc. generally speaking, there are three main purposes or motives of

holding inventories:

i. The Transaction Motive which facilitates continuous production and timely

execution of sales orders.

ii. The Precautionary Motive which necessitates the holding of inventories

for meeting the unpredictable changes in demand and supplies of

materials.

iii. The Speculative Motive which induces to keep inventories for taking

advantage of price fluctuations, saving in re-ordering costs and quantity

discounts, etc.

RISK AND COSTS OF HOLDING INVENTORIES:

The holding of inventories involves blocking of a firm’s funds and incurrence

of capital and other costs. It also exposes the firm to certain risks. The various

costs and risks involved in holding inventories are as below:

i. Capital Costs: Maintaining of inventories results in blocking of the firm’s

financial resources. The firm has, therefore, to arrange for additional

funds to meet the cost of inventories. The funds may be arranged from

own resources or from outsiders. But in both the cases, the firm incurs a

cost. In the former case, there is an opportunity cost of investment while

in the later case, the firm has to pay interest to the outsider.

ii. Storage and Handling Costs: Holding of inventories also involves costs

on storage as well as handling of materials. The storage costs include

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 the rental of the go down, insurance charges, etc.

iii. Risk of Price Decline: There is always a risk of reduction in the prices of

inventories by the suppliers in holding inventories. This may be due to

increased market supplies, competition or general depression in the

market.

iv. Risk of Obsolescence: The inventories may become obsolete due to

improved technology, changes in requirements, change in customer’s

tastes, etc.

v. Risk Deterioration in Quality: The quality of the materials may also

deteriorate while the inventories are kept in stores.

INVENTORY MANAGEMENT:

The investment in inventory is very high in most of the undertakings

engaged in manufacturing, whole-sale and retail trade. The amount of

investment is sometimes more in inventory than in other assets. In India, a

study of 29 major industries has revealed that the average cost of materials is

64 paise and the cost of labour and overheads is 36 paise in a rupee. In

industries like sugar, the raw materials cost is as high as 68.75 per cent of the

total cost. About 90 per cent part of working capital is invested in inventories.

It is necessary for every management to give proper attention to inventory

management. A proper planning of purchasing, handling, storing and

accounting should form a part of inventory management. An efficient system of

inventory management will determine (a) what to purchase (b) how much to

purchase (c) from where to purchase (d) where to store, etc.

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 There are conflicting interests of different departmental heads over the issue

of inventory. The finance manager will try to invest less in inventory because

for him it is an idle investment, whereas production manager will emphasize to

acquire more and more inventory as he does not want any interruption in

production due to shortage of inventory. The purpose of inventory management

is to keep the stocks in such a way that neither there is over-stocking nor

under-stocking. The over-stocking will mean a reduction of liquidity and

starving of other production processes; under-stocking, on the other hand, will

result in stoppage of work. The investments in inventory should be kept in

reasonable limits.

OBJECTIVES OF INVENTORY MANAGEMENT:

The main objectives of inventory management are operational and financial.

The operational objectives mean that the materials and spares should be

available in sufficient quantity so that work is not disrupted for want of

inventory. The financial objective means that investments in inventories should

not remain idle and minimum working capital should be locked in it.

The following are the objectives of inventory management:

1. To ensure continuous supply of materials, spares and finished goods so that

production should not suffer at any time and the customers demand should

also be met.

2. To avoid both over-stocking and under-stocking of inventory.

3. To maintain investments in inventories at the optimum level as required by

9
 the operational and sales activities.

4. To keep material cost under control so that they contribute in reducing cost

of production and overall costs.

5. To eliminate duplication in ordering or replenishing stocks. This is possible

with the help of centralizing purchases.

6. To minimize losses through deterioration, pilferage, wastages and damages.

7. To design proper organization for inventory management. A clear cut

accountability should be fixed at various levels of the organization

8. To ensure perpetual inventory control so that materials shown in stock

ledgers should be actually lying in the stores.

9. To ensue right quality goods at reasonable prices. Suitable quality standards

will ensure proper quality of stocks. The price analysis, the cost analysis and

value analysis will ensure payment of proper prices.

10. To facilitate furnishing of data for short term and long term planning

and control of inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT: Effective

inventory management requires an effective control system for inventories. A

proper inventory control not only helps in solving the acute problem of liquidity

but also increases profits and causes substantial reduction in the working capital

of the concern. The following are the important tools and techniques of

inventory management and control:

1. Determination of Stock Levels.

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 2. Determination of Safety Stocks.

3. Selecting a proper System of Ordering for inventory.

4. Determination of Economic Order Quantity.

5. A.B.C. Analysis

6. VED Analysis

7. Inventory Turnover Ratios

8. Aging Schedule of Inventories

9. Classification and Codification of Inventories

10. Preparation of Inventory Reports

1. Determination of Stock Levels

Carrying of too much and tool little of inventories is detrimental to the firm.

If the inventory level is too little, the firm will face frequent stock outs involving

heavy ordering cost and if the inventory level is too high it will be unnecessary tie-

up of capital. Therefore, an efficient inventory management requires that a firm

should maintain an optimum level of inventory where inventory costs are the

minimum and at the same time there is no stock out which may result in loss of

sale or stoppage of production. Various stock levels are discussed as such.

a. Minimum Level: This represents the quantity which must be maintained in

hand at all times. If stocks are less than the minimum level then the work will stop

due to shortage of materials. Following factors are taken into account while fixing

minimum stock level:

Lead Time: A purchasing firm requires some time to process the order and

time is also required to the supplying firm to execute the order. The time

taken in processing the order and then executing it is known as lead time, it

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 is essential to maintain some inventory during this period.

Rate of consumption: It is the average consumption of materials in the

factory. The rate of consumption will be decided on the basis of past

experience and production plans.

Nature of Material: The nature of material also affects the minimum level.

If a material is required only against special orders of the customer then

minimum stock will not be required for such materials. Minimum stock level

can b e calculated with the help of following formula:

Minimum Stock Level=Re-Ordering level-(Normal Consumption X

Normal Re-order period)

b. Re-ordering Level. When the quantity of materials reaches at a certain figure

then fresh order is sent to get materials again. The order is sent before the

materials reach minimum stock level. Re-ordering level or ordering level is fixed

between minimum level and maximum level. The rate of consumption, number of

days required to replenish the stocks, and maximum quantity of materials required

on any day are taken into account while fixing re-ordering level.

Re-ordering level is fixed with the following formula:

Re-ordering Level=Maximum Consumption X Maximum Re-order period

c. Maximum Level. It is the quantity of materials beyond which a firm should not

exceed its stocks. If the quantity exceeds maximum level limit then it will be

overstocking. A firm should avoid overstocking because it will result in high

material costs. Overstocking will mean blocking of more working capital, more

space for storing the materials, more wastage of materials and more chances of

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losses from obsolescence. Maximum stock level will depend upon the following

factors:

1. The availability of capital for the purchase of materials.

2. The Maximum requirements of materials at any point of time.

3. The availability of space for storing the materials.

4. The rate of consumption of materials during lead time.

5. The cost of maintaining the stores.

6. The possibility of fluctuations in prices.

7. The nature of materials. If the materials are perishable in nature, then they

cannot be stored for long.

8. Availability of materials. If the materials are available only during seasons

then they will have to be stored for the rest of the period.

9. Restrictions imposed by the government. Sometimes, government fixes

the maximum quantity of materials which a concern can store. The limit

fixed by the government will become the limiting factor and maximum

level cannot be fixed more than this limit.

10. The possibility o change in fashions will also affect the maximum level.

The following formula may be used for calculating maximum stock level:

Maximum Stock Level=Re-ordering Level + Re-ordering Quantity-

(Minimum Consumption X Minimum Re-ordering period).

d. Danger Level

It is the level beyond which materials should not fall in any case. If danger

level arises then immediate steps should be taken to replenish the stocks even if

more cost is incurred in arranging the materials. If materials are not arranged

immediately there is a possibility of stoppage of work. Danger level is determined

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with the following formula:

Danger Level = Average Consumption X Maximum Re-order period for

emergency purchases

e. Average Stock Level

The average stock level is calculated as such:

Average Stock Level = Minimum Stock Level + ½ of re-order quantity

2. Determination of Safety Stocks

Safety stock is a buffer to meet some unanticipated increase in usage. The

usage of inventory cannot be perfectly forecasted. It fluctuates over a period of

time. The demand for materials may fluctuate and delivery of inventory may also

be delayed and in such a situation the firm can face a problem of stock-out. The

stock-out can prove costly by affecting the smooth working of the concern. In order

to protect against the stock-out arising out of usage fluctuations, firms usually

maintain some margin of safety or safety stocks. The basic problem is to determine

the level of quantity of safety stocks. Two costs are involved in the determination

of this stock i.e. opportunity cost of stock-outs and the carrying costs. The stock-

outs of raw materials cause production disruption resulting into higher cost of

production. Similarly, the stock-outs of finished goods result into the failure of the

firm in competition as the firm cannot provide proper customer service. If a firm

maintains low level of safety frequent stock-outs will occur resulting into the larger

opportunity costs. On the other hand, the larger quantities of safety stocks involve

14
higher carrying costs.

3. Ordering Systems of Inventory

The basic problem of inventory is to decide there-order point. This point

indicates when an order should be placed. The re-order point is determined with

the help of these things: (a) average consumption rate, (b)duration of lead time,

(c)economic order quantity, when the inventory is depleted to lead time

consumption the order should be placed. There are three prevalent systems of

ordering and a concern can choose any one of these:

a. Fixed order quantity system generally known as economic order

quantity(EOQ) system;

b. Fixed period order system or periodic re-ordering system or periodic review

system;

c. Single order and scheduled part delivery system.

4) Economic order quantity

A decision about how much to order has great significance in inventory

management the quantity to be purchased should neither be small nor big because

costs of buying in carrying materials are very high. Economic order quantity is the

size of the lot to be purchased which is economically viable. This is the quantity of

materials, which can be purchased at minimum costs. Generally, economic order

quantity is the point at which inventory-carrying costs are equal to order cost. In

determining economic order quantity it is assumed that cost of inventory is made

up solely of two parts i.e. ordering costs & Carrying costs

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 a) Ordering costs: These are the costs, which are associated with the

purchasing or ordering of materials.

These costs include:

1. Costs of staffs posted for ordering of goods. A purchase order is

processed and then placed with suppliers. The labors spent on this

process are included in ordering costs.

2. Expenses incurred on transportation of goods purchased.

3. Inspection costs of incoming materials.

4. Cost of stationary, typing, posting, telephone charges, etc.

These costs are also known as buying costs and will arise only when some

purchases are made.

b) Carrying costs:

These are the costs for holding the inventories. These costs will not be

incurred if inventories are not carried. These costs include:

1. The cost of capital invested in inventories. An interest will be paid

on the amount of capital locked up in inventories.

2. Cost of storage, which could have been used for other purposes.

3. The loss of materials due to deterioration and obsolescence. The

materials may deteriorate with passage of time.

4. Insurance cost

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 5. Cost of spoilage in handling of materials.

The planning commission of India had estimated these costs between 15% to 20%

of total costs. The longer the materials kept in stocks, the costlier it becomes by

20% every year the ordering and the carrying costs have a reverse relationship.

The ordering cost goes up with the increase in number of orders placed. On the

other hand carrying costs go down per unit with the increase in number of units,

purchased and stored.

5. A-B-C Analysis: The materials are divided into a number of categories for

adopting a selective approach for materials control. It is generally seen that in

manufacturing concern, a small percentage of items contribute a large

percentage of value of consumption and a large percentage of items of

materials contribute a small percentage of value. In between these two limits

there are some items which have almost equal percentage of value of materials.

Under ABC Analysis, all the materials are divided in to there categories viz. A, B

& C. past experience has shone that almost 10% of the items contribute to 70%

of value of consumption and this category is called a category. About 20% of

the items contribute about 20% of value of consumption and this is known as

category B. category C covers about 70% of items of materials which contribute

only 10% of value of consumption. There may be some variation in different

organizations and an adjustment can be made in these percentages.

6) VED Analysis: The VED Analysis is used generally for spare parts. The

requirements and urgency of spare parts is different from that of materials. The

17
demand for spares depends upon the performance of the plant and machinery.

Spare parts are classified as Vital, Essential and Desirable. The Vital spares are

must for running the concern smoothly and these must be stored adequately. The

non availability of vital spares will cause havoc in the concern. The E type of spares

also necessary but their stocks may be kept at low figures. The stocking of D type

of spares may be avoided at times. If the lead time of these spares is less, then

stocking of these spares can be avoided.

7) Inventory turnover ratios:

Every firm has to maintain a certain level of inventory of finished goods so as to be

able to meet the requirements of the business. But the level of inventory should

neither be too high nor too low. It is harmful to hold more inventory for the

following reasons :

a) It unnecessarily blocks capital which can otherwise be profitably used

somewhere else.

b) Over-stocking will require more go down space, so more rent will be paid.

c) There are chances of obsolescence of stocks. Consumers will prefer goods of

latest design, etc.

d) Slow disposal of stacks will mean slow recovery of cash also which will

adversely affect liquidity.

e) There are chances of deterioration in quality if the stocks are held for more

periods.

It will there fore, be advisable to dispose off inventory as early as possible.

On the other hand, too low inventory may mean loss of business opportunities.

Thus, it is very essential to keep sufficient stocks in business.

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 Inventory turnover ratio also known as stock velocity is normally calculated

as sales/ average inventory or cost of goods sold/ average inventory. It would

indicate whether inventory has been efficiently used or not. The purpose is to

see whether only the required minimum funds have been locked up in

inventory. Inventory Turnover Ratio indicates the number of times the stock has

been turned over during the period and evaluates the efficiency with which a

firm is able to manage its inventory.

Inventory turnover ratios are calculated to indicate whether inventories have been

used efficiently or not. The purpose is to ensure the blocking of only required

minimum funds in inventory. The inventory turnover ratio also known as stock

velocity is normally calculated as sales / average inventory or cost of goods sold /

average inventory cost. Inventory conversion period may also be calculated to find

the average time taken for clearing the stock

Generally, the cost of goods sold may not be known from the published financial

statements. In such circumstances, the inventory turnover ratio may be calculated

by dividing net sales by average inventory at cost. If average inventory at cost is

not known then inventory at selling price may be taken as denominator and where

the opening inventory is not known the closing inventory figure may be taken as

the average inventory.

INVENTORY CONVERSION PERIOD:

It may also be of interest to see average time taken for clearing the stocks. This

19
can be possible by calculating inventory conversion period. This period is calculated

by dividing the number of days by inventory turnover.

8) Aging Schedule of inventories:

Classification of inventories according to period (Age) of their holding also helps in

identifying slow moving inventories there by helping in effective control and

management of inventories.

9) Classification and codification of inventories:

The inventories of a manufacturing concern may consist of raw materials, work in

progress, finished goods, spares, consumable stock, etc. all these categories may

have their sub divisions. The raw materials may be of 3-4 types, finished goods

may also be of more than one type, spares may be of a number of types and so

on. For a proper recording and control of inventory, a proper classification of items

is essential. The inventories should first be classified and then code numbers

should be assigned for their identification.

10) Inventory reports:

From effective inventory control, the management should be kept informed with

the latest stock position of different items. This is usually done by preparing

periodical inventory reports. These reports should contain all information necessary

for managerial action. On the basis of these reports management takes corrective

action wherever necessary.

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 REVIEW
&
LITERATURE

21
 FINANCIAL MANAGEMENT

INTRODUCTION

Finance is defined as the provision of money at the time when it is required.

Every enterprise, whether big, medium or small, needs finance to carry on its

operations and to achieve its targets. In fact, finance is so indispensable today

that it is rightly said to be the lifeblood of an enterprise. Without adequate finance,

no enterprise can possibly accomplish its objectives.

The subject of finance has been traditionally classified into two classes:

1. Public Finance

2. Private Finance

Public finance deals with the requirements, receipts and disbursements of

funds in the government institutions like states, local self-governments and central

government. Private finance is concerned with requirements, receipts and

disbursements of funds in case of an individual, a profit seeking business

organization and a non-profit organization.

Definition of Financial Management:

Financial Management refers to that part of management activity which is

concerned with the planning and controlling of firm’s financial resources. It deals

with finding out various sources for raising funds for the firm. The sources must be

22
suitable and economical for the needs of the business. The most appropriate use

of such funds also forms a part of financial management.

OBJECTIVES OF FINANCIAL MANAGEMENT:

Financial management is concerned with the procurement and use of funds.

Its main aim is to use business funds in such a way that the firm’s value/earnings

are maximized. The main objective of a business is to maximize the owner’s

economic welfare. This objective can be achieved by:

a) Profit Maximization

b) Wealth Maximization.

c)

1.Profit maximization: Profit earning is the main aim of every economic activity.

A business being an economic institution must earn profit to cover its costs and

provide funds for growth. No business can survive without earning profit. Profit

is a measure of efficiency of a business enterprise. Profits also serve as

protection against risks which cannot be insured. The accumulated profits

enable a business to face risks like fall in prices, competition from other units,

adverse government policies etc. Thus, profit maximization is considered as the

main objective of business. The following arguments are advanced in favor of

profit maximization as the objective of business:

a) When profit-earning is the aim of the business then profit

maximization should be the obvious objective.

b) Profitability is the barometer of measuring the efficiency and economic

prosperity of the business enterprise, thus profit maximization is

justified on the grounds of rationality.

c) Economic and business conditions do not remain the same at all the

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 times. There may be adverse business conditions like recession,

depression, severe competition, etc. therefore the business should try

to earn more and more when the situation is favorable.

d) Profits are the main source of finance for the growth of the business.

So, a business should aim at maximization of profits for enabling its

growth and development.

e) Profitability is essential for fulfilling social goals also. A firm by

pursuing the objective of profit maximization also maximizes socio-

economic welfare.

However, profit maximization objective has been criticized on many grounds. A firm

is pursuing the objective of profit maximization starts

exploiting workers and the consumers. Hence, it is immoral and leads to a number

of corrupt practices. Further, it leads to colossal inequalities and lowers human

values which are an essential part of an ideal social system. It is also urged that

profit maximization should be the objective in the conditions of perfect competition

and in the wake of imperfect competition, today it cannot be the legitimate

objective of the firm. The profit maximization has been rejected because of the

following drawbacks:

a) The term ‘profit is vague and it cannot be precisely defined. It means

different things for different people. Even if we take the meaning of profits as

earnings per share and maximize the earnings per share, it does not necessarily

mean increase in the market value of shares and the owner’s economic welfare.

b) Profit maximization objective ignores the time value of money and does not

consider the magnitude and timing of earnings. It treats all earnings as equal

though they occur in different periods. The stockholders may prefer a regular

return from investment even if it is smaller than the expected higher returns after

24
a long period.

c) It does not take into consideration the risk of the prospective earnings

streams. Some projects are more risky than others. The earning streams will also

be risky in the former than the latter.

d) The effect of dividend policy on the market price of shares is also not

considered in the objective of profit maximization. In case, earnings per share is

the only objective then an enterprise may not think of paying dividend at all

because retaining profits in the business or investing them in the market may

satisfy this aim.

2. Wealth Maximization: Wealth Maximization is the appropriate objective of an

enterprise. Financial theory asserts that wealth maximization is the single

substitute for a stockholder’s utility. When the firm maximizes the stockholder’s

wealth, the individual stockholder can use his wealth to maximize his individual

utility. A stockholder’s current wealth in the firm is the product of the number of

shares owned, multiplied with the current stock price per share.

Stockholder’s current = (number of shares owned) (current wealth in a firm stock

price per share)

Given the number of shares the stockholder owns, the higher the stock price

per share the greater will be the stockholder’s wealth. While pursuing the objective

of wealth maximization, all efforts must be put in for maximizing the current

present value of any particular course of action. Every financial decision should be

based on cost-benefit analysis. If the benefit is more than the cost, the decision

will help in maximizing the wealth and vice-versa.

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Implications of wealth maximization:

There is a rationale in applying wealth maximization policy as an operating

financial management policy. It serves the interests of the suppliers of loaned-

capital, employees, management and society. Besides shareholders, there are

short-term and long-term suppliers of funds who have financial interests in the

concern. Short-term lenders are primarily concerned in the liquidity position so

that they get their payments in time. The long-term lenders get a fixed rate of

interest from the earnings and also have priority over shareholders in return of

their funds. The employees may also try to acquire the share of company’s wealth

through bargaining, etc. The survival of management for a longer period will be

served if the interests of various groups are served properly. The economic interest

of the society is served if various resources are put to economical and efficient

use.

Criticism of wealth maximization:

The wealth maximization objective has been criticized by certain financial

theorists mainly on following accounts:
It is a prescriptive idea. The objective is not descriptive of what the firms actually
do.
i. The objective of wealth maximization is not necessarily socially desirable.
ii. There is some controversy as to whether the objective is to maximize the
stockholders wealth or the wealth of the firm which includes other financial
claimholders such as debenture holders, preferred stockholders, etc.
The objective of wealth maximization may also face difficulties when ownership
and management are separated as is the case in most of the large corporate form
of organizations. When managers act as agents of the real owners, there is a
possibility of a conflict of interests between shareholders and the managerial
interests. The managers may act in such a manner which maximizes the
managerial utility but not the wealth of the stockholders or the firm.

26
27
COMPANY
PROFILE

28
 COMPANY PROFILE

KIRLOSKAR electric company was incorporated in the year 1946, it had a

turnover of Rs.3700 million. A group, which draws its strength from its 4000

employees. It has manufacturing bases in Bangalore, IIubli, Mysore and Pune.

The Kirloskar name stands for excellence in engineering and for quality and

reliability. The business areas of group’s companies reflect its diversity. The

group has interests in electrical engineering, process control equipment, machine

tools, internal combustion engines, pumps, compressors and environmental

engineering.

These companies serve the core sector of industries, and the synergy

between group companies gives KIRLOSKAR the strength to grow, expand and

globalize. The company has overseas offices in Germany, Malaysia, Singapore,

Dubai, and Kenya, and vast international dealer network. KIRLOSKAR has to its

credit of having supplying Power support vehicles charged with AC Generator for

launching of satellites, and it is not out of place to mention that only Kirloskar

Electric Company is the approved vendor by ISRO for this application.

The M/S KIRLOSKAR developed an alternator for producing power coupled to a

PTO of a tractor when it is idle. It also developed an alternator coupled to a

welding transformer for welding purpose.

KEY GROUP COMPANIES ARE:

KIRLOSKAR brother’s Ltd. the oldest company in the group, which

29
manufactures AC Generators, pumps, valves, machine tools and compressors, as

well as intricate castings in various materials and critical components required in

areas such as defense and nuclear power. The company’s products have

applications in the power, oil, gas, chemicals and petrochemicals, fertilizers, steel,

cement and sugar industries to but a few. Established in 1920, the company has

4580 employees.

The company has entered into a collaboration agreement with COPELAND

CORPORATION, USA to form a venture-Kirloskar Copeland Limited. Copeland

Corporation, a fully owned subsidiary of Emerson Electric Company, USA, is an

acknowledged market and technology leader.

Kirloskar Electric Company Limited is units fifth decade. The companies

manufacture AC motors up to 20000 KW, AC Generators up to 20,000 KVA and

Transformers up to 50,000 KVA, 220 KV and DC machines up to 3000KW. The

applications of these products can be seen in every sector of the industry. And

new horizons have opened in the field of industrial electronics.

Kirloskar has signed licensing agreements with world leaders AEG,

ROLLSROYES, FUJI ELECTRIC and TOSHIBA to name but a few, for generators,

transformers, and thyristor converters, inverters and uninterruptible power

sources. The company has formed a strategic alliance with General Electric drive

systems, USA, a global leader in automation.

The Kirloskar Ebar pumps limited, established in 1988 is a joint venture

promoted by Kirloskar brothers and ebera Corporation, Japan, to manufacture

high tech process pumps as per API-610Its present manufacturing programme

cover single stage process pumps with single and double suction impellers. The

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 capabilities range up to 5500 M/hr with total heads managing up to 550M.

The Mysore Kirloskar limited was incorporated in 1941 and manufacture a

wide range of machine tools, machining centers bearing as well as grey iron

casting and SG iron casting. The machine tools find application in the

Engineering, automobile, aeronautical and defense industries, and in the fields of

railways, marine vocational training and education.

Kirloskar oil engines limited manufactures diesel engines up to 8200BHP thin

walled and bridge bearings, and engine valves. Engines are used in agriculture,

power generation, industrial equ9ipment and marine engineering. The company

exports engines for all the applications listed above and have a long list of

customers, including the Indian navy and the coastguard.

Kirloskar pneumatic company limited was set up in 1958 and manufactures

pneumatic compressors, air conditioning, refrigeration and transmission

equipments. Orders have come from such prestigious customers as IPCL, Madras

refineries limited, Finolex pipes and APSEB.

Kirloskar snyder general limited was incorporated in 1992 with joint venture

partners Snyder general corporation, USA, which addresses the needs of control

equipment, ventilation control equipment, ventilation systems, corrosion control

treatment plants and effluent plants.

KIRLOSKAR ELECTRIC MOTORS

The Emergence Of Product Range:

1948: AC motors

1954: Transformers

1954: Alternator

1963: DC motors and Generators

1963: Welding Equipment

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 1965: Control Equipment

1980: Industrial heating equipment

1982: Thyrister Converters

1987: CNC systems

1988: Minimicro Computers

1989: Inverters and UPS

PRODUCT RANGES IN 1999:

_________
AC Generators Up to 20 MW
_________
AC Induction Motors Up to 5000 MW

_________
DC Machines Up to 3000 KW

_________
Transformers Up to 50 KVA, 220 KV

Welding Equipments &

__
Systems Control equipments LV & MV Up to 11 KV

Motorized Gear units ______ Up to 22 KW

RF Induction heaters/tube welders,

Uninterrupted Power systems,

Static Inverters,

Thyristers Converters,

____
Metal Working automaton Systems CNC,DRO

&Drive Packages,

Servo drive Packages,

Mini Computers Systems,

System Engineering for Turnkey projects,

Application Engineering for Package electrics.

32
MARKET LEADERSHIP IN INDIA:

 Number one in India for:

AC Generators ----------- 50% Market share.

AC Motors ----------- 30% in Market share.

AC Motors ------------ 72%Market share.

 Amongst first three in India for:

Transformers

Variable speed drivers

Metal working automation

 Largest manufacturers of AC Generators in India, amongst top three in

Asia.

 Largest manufacturers of DC Machine in India, widest variety of DC

Machines in Asia.

 Largest India exporter of AC Motors and Generators to Malaysia,

Singapore, Italy, Japan, Australia, Germany, UK, USA, S.E., ASIA,

SAARC countries, Kenya, Zambia, Nigeria, South Africa and Greece.

QUALITY POLICY:

The Quality policy of Kirloskar Electric Company shall be to design,

manufacture, and market, at competitive prices, product of such quality

which results in total customer satisfaction, quality reputation and

market leadership.

The Quality policy shall be implemented through Company Wide Quality –

Management (CWQM) program with emphasis on:

 Customer needs including delivery, after sales service, education and

feedback.

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  Use of latest technology, management tools, statistical techniques,

defect prevention methods and document in all activities.

 Design assurance through design reviews Prototype testing and field

trials to evolve designs that full meet customer quality requirements

include functional reliability, cost, safety and ascetic characteristics.

 Process control during purchase, manufacture, testing, dispatch,

erection and commissioning.

 Material management through vendor selection, development,

evaluation, surveillance and assistance techniques.

 Planned and systematic education and training programmes for

continuous up gradation of necessary attitudes, knowledge and skills of all

employees.

 Participation of all departments and all employees in continuous

improvement activities through structured annual quality improvement

programmes.

 Regular management reviews, audits and quality costing to monitor

the effectiveness of the CWQM programme.

TOTAL QUALITY MANAGEMENT:

"Ensures Customer satisfaction through process and positive customer

satisfaction. "

Approach:

 Policy and guiding principles of operations including technology

investment, human resource and quality have been clearly spelt out.

 Business groups have been empowered with in policy guidelines to plan

34
 the overall growth.

 Quality improvement techniques have been adopted to improve

process.

 The top management every month views the quality systems.

 All development activities are through quality function Deployment

methodology.

The Quality Focus On Products, Process & people

 Total Quality Management is our way of life ensuring customer

satisfaction.

 Total involvement of all the people as a team to accomplish the task of

achieving our goals.

 As a result of TQM culture, all major group companies have been

accredited with ISO 9001 certificate.

 Group has in house R&D facilities to take on challenges of new

developments and the state of the art manufacturing facilities.

 Group HRD team has a synergic approach in training, and development of

managerial and operational skills needed to take on global competition.

 Need based collaborations from world leaders in technology.

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 " Human Resource Development" is our priority.

36
Technology Sourcing:

Synchronous & Asynchronous Machines up to 5 MW:

7 AEG, Germany.

AC Generators 2000-7500 KVA:

- ToyoDenky, Seizo KK, Japan

DC Machines 10000-30000 KW:

-AEG, Germany.

Cast resin transformers up to 2000 KVA:

1 Ocrey, Italy

Transformers up to 75 MVA -220 KVA:

- Peebless Electric, UK

Inverters up to 280 KW:

- Fuji Electric, Japan

Un interruptible power supply up to 300 KVA:

- Toshiba corp, Japan

MF induction heaters 1-500 KW :

- Themo machine,Italy

Output frequency 1-10 KHZ CNC controls:

- Adolph Numerical Controls, UK

- Anilam Electronics, USA

37
 Kirloskar Electric Company & Its Business Associates:

M/s Saraswathi Agencies ------ Hyderabad

M/s Sumit Engineering ------ Hyderabad

M/s JayaLaxmi Generators ------ Hyderabad

M/s Surya Industries ------ Vijayawada

M/s Sarathi Power ------ Vishakapatnam

M/s Balajee Engineering ------ Vishakapatnam

Kirloskar Electric Company & Its Service Centers:

M/s Sri sai Engineering ------ Hyderabad

M/s Balajee Engineering ------ Hyderabad

M/s Bala Tripura Sundari Engineering ----- Guntur

M/s Mahalaxmi Engineering ------ Vijayawada

M/s S.V.Ramachandra Engg.Works ----- Vishakapatnam

M/s R.K.Electricals ----- Vishakapatnam

M/s Anwar Electricals ----- Kurnool

38
 DATA ANALYSIS
&
INTERPRETATION

39
 DATA ANALYSIS AND INTREPRETATION

VALUATION OF INVENTORY USING FIFO METHOD FOR THE YEAR 2006-07

Opening
Machine Closing
Amount Receipts Amounts Issues Amount Amount
No. Balance
Balance

100 6 52,050 37 320,975 43 373,025 0 0

90 6 22,800 297 1,128,600 298 1,132,400 5 19,000

100 10 48,550 193 937,015 203 985,565 0 0

112 5 26,400 217 1,145,760 214 1,129,920 8 42,240

132 6 47,580 335 2,616,900 331 2,624,830 10 79,300

160 3 68,655 97 2,219,845 95 2,174,075 5 114,425

180 11 171,050 7 108,850 18 279,900 0 0

TOTAL 47 437,085 1,183 8,477,945 1,202 8,699,715 28 254,965

Analysis:

In the year 2006-07, the company received 1183 units of total machines

costing Rs. 8477945 and issued 1202 units of total machines costing Rs.

8699715

In those particular receipts Motor No. 132 played a big role that a big

amount of issues were made where as Generator No. 180 receipts and

issues are very low.

1 The closing inventory for this year: 28 machines Rs. 254965

40
 VALUATION OF INVENTORY USING FIFO METHOD FOR THE YEAR 2007-08

Machine Opening Closing

Amount Receipts Amounts Issues Amount Amount
No. Balance Balance

100 0 0 56 534,240 55 524,700 1 9,540

90 5 19,000 489 2,041,740 476 1,985,500 18 75,240

100 0 0 274 1,453,940 264 1,405,880 10 53,400

112 8 42,240 242 1,406,020 232 1,343,680 18 104,580

132 10 79,300 348 2,966,500 353 3,071,975 5 43,625

160 5 114,425 148 3,725,900 151 3,789,975 2 50,350

180 0 0 3 51,315 3 51,315 0 0

TOTAL 28 254,965 1,560 12,179,655 1,534 12,173,025 54 336,735

Analysis:

In the year 2007-08, the company received 1560 units of total machines

costing Rs. 12179655 and issued 1534 units of total machines costing Rs.

12173025

In those particular receipts Motor No. 90 played a big role that a big

amount of issues were made where as Generator No. 180 receipts and

issues are very low.

The closing inventory for this year: 54 machines Rs. 336735

41
VALUATION OF INVENTORY USING FIFO METHOD FOR THE YEAR 2008-09

Opening Closing
Machine No. Amount Receipts Amounts Issues Amount Amount
Balance Balance

100 1 9,540 165 1,629,591 162 1,599,575 4 39,556

90 18 75,240 156 675,792 172 733,704 12 51,984

100 10 53,400 119 658,665 105 855,975 24 132,840

112 18 104,580 135 815,215 153 919,795 0 0

132 5 43,625 157 1,399,417 142 1,262,260 20 180,800

160 2 50,350 58 1,511,278 50 1,302,574 8 208,704

180 0 0 228 4,041,756 227 7,250,343 7 124,089

TOTAL 54 336,735 1,018 10,731,714 1,011 13,924,226 75 737,973

Analysis:

In the year 2008-09, the company received 1018 units of total

machines costing Rs. 10731714 and issued 1011 units of total machines

costing Rs. 13924226

In those particular receipts Generator No. 180 played a big role that a

big amount of issues were made where as Motor No. 160 receipts and issues

are very low.

The closing inventory for this year: 75 Machines Rs. 737973

42
 VALUATION OF INVENTORY USING FIFO METHOD FOR THE YEAR 2009-10

Machine Opening Closing

Amount Receipts Amounts Issues Amount Amount
No. Balance Balance

100 4 39,556 86 871,286 90 910,842 0 0

90 12 51,984 130 569,620 142 621,604 0 0

100 24 132,840 257 1,427,830 281 1,560,670 0 0

112 0 0 34 204,646 34 204,646 0 0

132 20 180,800 207 1,871,280 227 2,052,080 0 0

160 8 208,704 154 4,017,552 162 4,226,256 0 0

180 7 124,089 376 6,953,027 382 7,057,834 1 19282

TOTAL 75 737,973 1,244 15,915,241 1,318 16,633,932 1 19282

Analysis:

In the year 2009-10, the company received 1244 units of total machines

costing Rs. 15915241and issued 1318 units of total machines costing Rs.

16633932

In those particular receipts Generator No. 180 played a big role that a

big amount of issues were made where as Motor No. 112 receipts and issues

are very low.

The closing inventory for this year: 1 Machine Rs. 19282

43
 ABC ANALYSIS AND INTERPRETATION

1. ABC analysis for the year 2006-07

ABC ANALYSIS (2006-07)

ANNUAL
MACHINE % OF
CONSUMPTION
NO. A.C.V
VALUE

132 2624830 0.302

160 2174075 0.250
90 1132400 0.130
112 1129920 0.130
100 985565 0.113
100 373025 0.043
180 279900 0.032
TOTAL: 8699715 1.000

Analysis:

In the year 2006-07 item numbers 132, 160 & 90 fall into ‘A‘ Category. The

company should have strict control of these items and prevent protection against

stock outs. Items numbers 112 and 100 fall into category B. The company should

have fairly tight control but not as tight as A type items. Items numbers DS-100

and 180 come under category ‘C’. These item numbers require periodic require

periodic review system and large reorder quantities.

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 2. ABC analysis for the year 2007-08

ABC ANALYSIS (2007-08)

ANNUAL
MACHINE % OF
CONSUMPTIO
NO. A.C.V
N VALUE
160 3789975 0.311
132 3071975 0.252
90 1985500 0.163
100 1405880 0.115
112 1343680 0.112
100 524700 0.043
180 51315 0.004
TOTAL 12193025 1.00

Analysis:

In the year 2007-08 item numbers 160, 132 & 90 fall into ‘A‘ Category. The

company should have strict control of these items and prevent protection against

stock outs. Items numbers 100 and 112 fall into category B. The company should

have fairly tight control but not as tight as A type items. Item numbers DS and 180

come under category ‘C’. These Item numbers require periodic require periodic

review system and large reorder quantities

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 3. ABC analysis for the year 2008-09

ABC ANALYSIS (2008-09)

ANNAL
MACHINE CONSUMPTIO % OF
NO. N VALUE A.C.V

180 7250343 0.521

100 1599575 0.115
160 1302574 0.094
132 1262260 0.091
112 919795 0.066
100 855975 0.061
90 733704 0.053
TOTAL 13924226 1.000

Analysis:

In the year 2008-09 item numbers 180, DS & 160 fall into ‘A‘Category. The

company should have strict control of these items and prevent protection against

stock outs. Items numbers 112 and 100 fall into category B. The company should

have fairly tight control but not as tight as A type items. Items numbers DS and

180 come under category ‘C’. These. Item numbers require periodic require

periodic review system and large reorder quantities

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 4. ABC analysis for the year 2009-10

ABC ANALYSIS (2009-10)

ANNUAL
MACHINE % OF
CONSUMPTIO
NO. A.C.V
N VALUE
180 7057834 0.424
160 4226256 0.254
132 2052080 0.123
100 1560670 0.094
100 910842 0.055
90 621604 0.037
112 204646 0.012
TOTAL: 16633932 1.00

Analysis:

In the year 2009-10 item numbers 180 &160 fall into ‘A’ Category. The

company should have strict control of these items and prevent protection against

stock outs. Items numbers 132, 100 & DS-100 fall into category B. The company

should have fairly tight control but not as tight as A type items. Items numbers 90

& 112 come under category ‘C’. These Item numbers require periodic require

periodic review system and large reorder quantities

47
 1. Computation of Inventory Turnover Ratio of KIRLOSKAR CO. for 4
years

INVENTORY TURNOVER RATIOS

2006-07 24.60
2007-08 40.97
2008-09 25.91
2009-10 43.39

Analysis:
The inventory turnover ratio in the year 2006-07 is 24.60. It has increased
marginally to 40.97 in the year 2007-08. It has drastically reduced to 25.91 in the
year 2008-09. However the turnover ratio jumped to 43.39 in the year 2009-10.

Note:
Since, the opening and closing stocks for machine numbers 180 & 112 for
the years 2007-08 and 2009-10 respectively are not available. So, the net sales
value of these machines is not taken for the calculation of inventory turnover ratio.

2. Computation of Inventory Conversion Period of KIRLOSKAR CO. for 4

48
 years.

INVENTORY CONVERSION PERIOD

2006-07 14.84
2007-08 8.91
2008-09 14.09
2009-10 8.41

Analysis:
The inventory conversion period is 14.84 days in the year 2006-07. It has
reduced marginally to 08.91 days in the year 2007-08 and raised drastically to
14.09 days in the year 2008-09 due to higher turnover ratio. The period has
reduced to 08.41 days in the year 2009-10.

49
SUGGESTION
&
CONCLUSION

50
 CONCLUSIONS

1 The inventory turnover ratio of the company is not stable. It has been

widely fluctuating with varying degrees over the last four years.

2 The fluctuating inventory turnover ratio has affected the conversion

period of the company. This has affected the liquidity locking up of

capital in inventory.

3 The Prices of the products are always rising. Hence the basis on which

the inventory is valued may not be suitable.

4 In the ABC analysis done, the items falling under the category A, B,

and C are fluctuating from year to year.

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 SUGGESTIONS

1 The FIFO method is suitable when prices are falling. So the company may

follow another method which is more useful.

2 The company may take measures to lessen the inventory turnover ratio

reduce unnecessary locking of investment in inventory. This may improve the

liquidity position of the company.

3 The company may reduce the inventory conversion period to improve the cash

and liquidity position of the company.

4 The company should computerize its inventory records to improve the

efficiency.

5 The items under A, B, and C categories should be stable.

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BIBLIOGRAPHY

53
 BIBLIOGRAPHY

1 Management Accounting
By R. K. Sharma & Shashi K. Guptha

2 Financial Management
By Prasanna Chandra
3 Financial Management
By S. N. Maheshwari

4 Inventory registers and annual reports of Kirloskar Electric Company

Limited.

5 www.vrkec.com
6 www.inventorymgnt.com
7 www.google.com
8 www.wikipidia.com

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