stocks are maintained at optimal level without waiting valuable space in the warehouse or typing up capital that should have been put to more profitable use. one of the steps taken which generally take place once a year.stock taking refers to the process in which every stock items in the warehouse is counted, and a value placed on each. the value may be the original cost price or current selling price of each item, which ever is the lower. the summation of all these values will give the grand total called closing stock. the closing stock at the end of one period becomes the opening stock at the beginning of the next period
stock taking as described above is important in business for a number of reasons
- it enables the value of the closing stock at the end of the period determined.
- As a result of (1) above the value of the opening stock is also determined for the next period.
- the value of the opening stock and closing stock is used in calculating the cost of goods sold and gross profit on trading.
- the values of annual stock taking are some times used to calculate the rate of stock turnover.
- stock taking is valuable in helping us to calculate profits
- the closing stock figure forms part of the current assets in the balance sheet
- stok taking when done regularly, helps to check incidence of theft and fraud.
- it enhanced maximum and minimum levels of stock holding to be determined.
The maximum level of stoke holding is the level above which it is unprofitable to hold stock. Above this level, valuable storage space may be used up. some items may become obsolete. further more too much capital will be tied up in stock. each of these will lead to losses
The minimum stock level is the opposite stock held below this level runs the risk of some items being out of stock when needed. this will result in inability to satisfy customer demand and consequently,loss of good will.
between maximum and minimum levels is the re-order level. the level is below the maximum but above the minimum levels. when the maximum level falls to the re-order level, new supplies have to be re-ordered by means of purchase requisition form. the essence of the re-order level is timing. the items must be re-orderd in time so that they arrive before the re order level reduces to minimum level.
we must therefore define re-order level of stock holding below the maximum but above the minimum, at which a purchase requisition has to be made, so that new stores are received before reaching the minimum level of stock holding.