An inventory budget is a detailed presentation of the monetary values related to a company’s inventory. The monetary values are identified by the purchases made for the inventory, the amount currently stocked in the inventory and the amounts leaving the inventory, whether it is for sale or waste. An inventory budget analysis is an examination of these numbers to find more productive methods of running the inventory with the final goal of increasing its value and decreasing waste.
The inventory budget reveals how much the business spends each month on purchasing materials for the inventory. This can include raw materials and supplies, if the products sold by the business are constructed in a plant, or finished products ready for sale. Identify how much the company is spending on inventory products. Compare the amount to the limits set by the master budget. The master budget will often have a certain amount set aside for inventory purchases to keep the company’s budget balanced.
Identify the monetary amount of outgoing inventory items. These are items or raw materials being put into the production plant to create the product for sale. Each item will have a single monetary amount, so the outgoing figure will be a reflection of the number of items used for production. If the outgoing amount is close to the inventory purchase amount, the inventory is an effective entity, as it uses items being purchased for product development. If the amount is low, the inventory manager may be spending unnecessary money.
The wastes figure on the inventory budget shows how much the company is essentially throwing out each month. This can be items that have been purchased but have broken during stock procedures or due to passing safe expiration dates. Examine the monetary amount of wastes and compare it to both the purchasing and the outgoing figures. The wastes figure should be minimal, but if it is close to or more than the outgoing figure, it makes up around half of the purchase figures. This essentially means that the inventory manager is spending company money on waste.
If you have been asked to analyze the inventory budget and provide feedback in regard to improvements, examine the purchased items with expiration dates. The waste due to broken items may be harder to cut down, especially if they happen during transport to the inventory. However, if the items have expiration dates, the inventory manager should only order the amount of items used in the product development rather than having too much in stock.