Inventory Management and Fixed Asset Management – One and the Same?
Professional service firms don’t sell products, rather they sell their time and expertise. The common problem is that many smaller firms see the profits generated from their services, but they overlook their losses from poor inventory management and fixed asset management. Even worse, they sometimes manage and track them in the same manner. To make things a bit more complicated, inventory management and fixed asset management are not one and the same. The goal here is to explain the difference between the two and, to explain the importance of utilizing proper accounting for fixed asset management.
Inventory Management
In the professional services world, inventory management
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Fixed assets, no matter if you’re a professional service firm or retailer, are the same. For the sake of keeping this more focused though, I’ll keep this concentrated on professional services.
Fixed assets are purchased assets of the firm for long-term use to support ongoing business operations. For example, fixed assets are laptops, desks, and trucks, just to name a few. Here’s where the distinction between inventory assets and fixed assets becomes important and evident. Since fixed assets have a longer life and will be used for multiple projects and multiple accounting periods, GAP dictates a different accounting procedure than would be used for inventory management.
Following GAP, fixed assets are part of the non-current assets of the balance sheet. Which in layman terms means that the asset is not likely to turn to cash within one year. As a result, their purchase price must be amortized over the useful lifespan of the asset and the asset must be depreciated during its life as well. If that sounds like a lot, we still haven’t covered how credits and debits occur within the balance sheet for fixed assets and I promise it’s more complex than inventory management. So I’ll save you the time not detail that
Variable costs, for a manufacturing company, are those costs that increase or decrease as production increases or decreases. If production increases, then variable costs will increase; if production decreases, variable costs will decrease. For Claire’s Antiques, examples of their variable costs would be manufacturing labor, raw materials, and manufacturing overhead. Examples of manufacturing overhead would be the utilities that are used in the production facility, and the oils and lubricants used in the machinery. Fixed costs in a manufacturing company are those costs that remain constant regardless of the level of production. Examples of fixed costs for Claire’s Antiques are: sales and administrative costs, rent and/or mortgage on the production facility, and depreciation. Semi-variable, or mixed, costs are costs that have both fixed and variable costs. An example of a semi-variable cost could be if Claire’s leases their delivery trucks, and the lease includes a mileage fee. The monthly lease would be considered a fixed costs, but the mileage fee would be a variable cost. (Hofstrand, 2007). In most cases, fixed costs are usually higher than variable costs, and can absorb a great deal of profits. Because of this, some companies may consider converting their fixed costs to variable costs.
The Assets consists of: Current assets are highly liquid (cash, receivables, and inventories), Fixed assets can be capital-intensive assets which are permanent, and other assets can be intangible (patents, copyrights, and goodwill).
As part of the calculation for cost of goods sold it is necessary to determine the value of goods on hand, termed merchandise inventory. Accountants use two basic methods for determining the amount of merchandise inventory. Identify the two methods and describe the circumstances (including examples of users of each method) under which each method would be used.
Costco Wholesale’s business model is focused on generating high sales volumes and rapid inventory turnover (Thompson, Peteraf, Gamble, Strickland III, & McGraw-Hill, 2013, pp. C–9). Which provides Costco with the opportunity to sell and receive cash for inventory allowing them to make payments to vendors before they are due. Consequentially Costco is able to take advantage of the early payment discounts vendors provide as incentive to complete payments earlier. These two aspects of Costco’s business model has allowed them the flexibility of needing a smaller working capital as they conduct their business.
Downes and Goodman (2014) maintain fixed costs incorporate pay rates, salaries of employees, interest costs, rent, depreciation, and insurance expenses, which appear differently in relation to variable costs (direct labor, materials costs), which are recognized from semi-variable expenses. In other words, semi-variable expenses fluctuate,as they remain fixed up to a level of sales, then reach higher and increase when sales enter a higher range (2014). Important to realize is that no expense is truly fixed and the presumption relies on the purpose of the planning period
Fixed cost is a cost that does not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense (Investorwords, 2008). Fixed costs remain constant regardless of the company’s activities. An example of one of our organization’s fixed cost is the building lease. If we lease our office building for $4500 per month, this will stay the same regardless of the financial performance of the company. Other examples of fixed costs include insurance and property taxes. Fixed costs are much different than variable costs. Variable costs are those cost that can vary over time.
Other assets that can be liquefied to support annual operations include accounts/pledges receivable with a year-end total of $25,505, inventories from sale with a year-end carry over of $502,722, and other assets (e.g. investments, land, buildings, real estate, etc.) that have a combined value of $18,506,767. This final value, though not as readily liquefiable as cash or savings, represents approximately 95% of total assets for the organization. Of this total, only a fraction is easily liquefied.
Available for sale securities are debt and equity securities that is not classified as trading or held to maturity. Available for sale securities are recorded on the balance sheet either as current or noncurrent, all depending on if the company has the intend to sell these securities in the near future or not. They are reported at the fair value on the balance sheet. They are classified as current assets if they intend to liquidate within one year. Or long term assets if they intend to hold onto them for a long period of
Launched by Jeff Bezos, the Amazon.com website started in 1995 and is today considered as one of the most prominent retail website on the internet with a record turnover of US$ 14.87 billion in 2007. Jeff Bezos’s intention was to create an internet based company with the most dedicated product portfolio on the internet where customers could find anything they might want. Amazon’s success is based on technology, services and products (Jens et al., 2003).
Current assets are a major financial position statement item and especially significant to smaller firms. Mismanagement of working capital is therefore a common cause of business failure, e.g.:
...n. Based on the definition of asset/liability, the operating leases items meet it. Therefore the amount should show as asset/liability off balance sheet as well.
Expenditure on fixed assets can be divided into capital expenditure and revenue expenditure. Capital expenditure includes costs incurred to get a fixed asset and any subsequent expenditure that increases the earning capacity. The cost of get a fixed asset not only includes the cost of purchases, it also includes additional costs incurred in bringing the fixed asset into its condition. Take for example, a delivery costs. Capital Expenditure was include the purchase costs that less any discount received, installation costs, delivery costs, replacement costs, legal charges, and up gradation costs. Capital expenditure will increase in the fixed assets, so the accounting entry is as:
Inventories may not be as liquid as other assets like account receivables. But Inventory is also incorporated under current assets. Prepaid expenses are also categorized into current asset not on the grounds that they are liquid assets and can be converted to cash, but rather in light of the fact that they are agreement for cash for other necessities of business or organisations. Examples of prepaid expenses include: payment to contractors, insurance payments,
There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle from the demand forecasting, supply chain management, inventory control and reverse logistics. Inventory management is the optimization of inventories of manufactured goods, work in progress, and raw materials. According to Doucette (2001) inventory management can be challenging at times; however, the need for effective inventory management is largely seeing more as a necessity than a mere trend when customer satisfaction and service have become a prime reason for a business to stand apart from its competition. For example, Wal-Mart’s inventory management is one of the biggest contributors to the success of the company;