ANALYSIS OF STOCK CONTROL AND PROCEDURE
(A CASE STUDY OF SETRACO CONSTRUCTION COMPANY ENUGU)
ABSTRACT
A lot of resources are invested in stock in the construction companies. Efficient financial management cannot take place in the construction companies without efficient stock management. This is the main reason why the analysis of stock control and procedures in construction companies are the main focus of this study.
The work was divided five chapters each dealing with a particular aspect of the research work.
Chapter one deals with introduction of the project, chapter two reviews the related literature about stock control and procedures. Chapter three dealt with research design and methodology, chapter four is all about data presentation and analysis, chapter five summarizes the findings, conclusion and recommendations. The overall aim of this research is to assess the degree of accountability being exercised and the problems being encountered in accounting for construction companies.
The outcome of the research showed that the control and management of stock in the companies has not been as adequately as it should be, in the optimal realization of the organizational objectives. Based on the finding of this research, the researcher recommends that companies should set up a separate committee within their operation and entrust them with the functions of policy decision in stock planning and control.
Also there should be adequate segregation of duties as to the physical counting of inventories.
Furthermore, alternative method of acquiring stock rather than importation should be exploited by the construction companies. Also the companies should consider setting up policy guidelines for manpower development and training of their staffs. Lastly, since the world is going computerized, the construction companies should join the bandwagon and use computer in handling its stock control and procedure.
With these recommendations the problems of this research topic will be take care of.
CHAPTER ONE: INTRODUCTION
- Introduction 1
- Purpose of the Study 9
- Statement of Problem 10
- Research Hypothesis 12
- Significance of Study 13
- Scope and Limitation of Study 14
- Definition of Terms 16
CHAPTER TWO: REVIEW OF RELATED LITERATURE
- Definitions of Inventory and Stock Control 18
- Stores Records and Procedures 22
- Indents Accounting procedure 28
- Stock Verification and Inspection 29
- The Benefits of Inventory and Stock Control 30
- Planning for Stock Requirements 34
- Control of Stock Levels 36
- Stocks Records 51
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
- Definition of Research Design 55
3.1 Study Area 55
3.2 Sources of Data 33
3.2.1 Primary Sources of Data 56
3.2.2 Secondary Source of Data 56
3.3 Methods of Investigation 57
3.4 Methods of Data Analysis 58
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
- Presentation and Analysis of Data 62
- Test of Hypothesis 81
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
- Findings 85
- Conclusions 87
- Recommendations 89
Bibliography 95
Appendices: 97
- Questionnaire 98
CHAPTER ONE
1.1 INTRODUCTION
In business enterprise, the activities involved are very diverse. The diversity becomes even more complex as the scope of the business increases. Take for instance; in a construction company, sourcing and storage of raw materials, the various process of constructing and the ever-increasing emphasis placed on business efficiency are among the technical problems involved which needs adequate inventory management and effective control system in the construction industry sector.
Furthermore, the Nigerian economy portfolios reveals a lot of uncertainties and raw materials required by construction companies are very scarce and limited. For stance, the federal government ban on the importation of a large variety of items and raw materials from the industrialized world and its foreign exchange restriction is so difficult and expensive to maintain and adjust with the business mission, economic performances, profitability and social welfare of Nigerian construction firms. It became even more expensive and complicated with the depreciation of naira.
These factors have subsequent led to the liquidation of many construction companies in Nigeria due to their inability to acquire raw materials for production. On the other hand, those companies which are active are able to acquire few raw materials for production at exorbitant prices, as such they cannot afford to entertain wastage. This makes it more difficult for an effective inventory, management in construction firms, for maximum and efficient utilization of acquired materials.
Stock or inventory can be defined as raw materials and supplies goods finished and in the process of production, merchandise on hand, in transit, in storage or consigned to other at the end of the accounting period (Kothler 1963 P. 280).
In his own contribution, E.U.L Imaga 1996 P 384), classified inventories into the following;
- PRODUCTION INVENTORIES: Raw materials, parts and components which enter the firms products, in the production process. These may consist of two general types;
- Special items manufactured to company specification
- Standard industrial items purchased “off the shelf”
- R.O INVENTORIES: Maintenance, repair and operating suppliers which are consumed in the production process, but which do not become part of the product (example; lubricating, oil, soap, machine repair parts).
- IN PROCESS INVENTORIES: Semi-finished products found at various stages in the production operation.
- FINISHED GOODS INVENTORIES: Completed products ready for shipment.
He further stated that in most manufacturing companies, production and MRO inventories together represent the major segment of total inventory investment.
According to (L.C. Megginson, L.R. Trueblood 1982), (G.M. Rose 1985 P. 213) inventory includes all raw material, supplies, and parts as well as finished products that aren’t currently being moved, used or sold. All production organization must have inventories so that operations don’t grind to a halt because of a missing part of unfillable order. But items in stock that aren’t serving a useful purpose become a costly burden. Thus stock constitutes a significant part of current assets of construction companies like Setraco construction company Enugu.
Inventories constitute about 55% of their current assets and one third of its total assets. Hence proper inventory management control and procedure is very important in construction companies.
Inventories as already indicated consist of raw materials, work-in-progress and finished goods. In actual practice, these inventories are interwoven and interrelated. The performances of one does not cease before the next is started. Raw materials on hands are waiting to be used in the production process, raw materials and work-in-progress facilitate production but finished goods are those goods that are fully completed but not yet sold.
Inventory provides a means by which one can effectively organize operations such as purchasing, manufacturing and/or distribution so that ultimately the end user receives any desired level of service. These process require effective control and procedure by management.
Stock control and procedure is the means by which supplies on hand are controlled, it involves the calculation of items to be held in stock, decision on the extend of stock holding of such items. The regulation of the procurement of raw materials and the control of disbursement of the inventory materials from the store/warehouses. By the aforementioned process, it will be possible to adjust continuously the quality and value need to conform to economic conditions at all times. There is not doubt that stocks are expensive to maintain even though the cost does not appear separately in the accounting records. The minor cost of keeping stock on hand result from the fact that;
- It uses up space that could be used for other purposes.
- Insurance and tax cost increases as inventory increases.
- The item may deteriorate or become obsolete and so depreciate.
- Items must be moved to and from storage.
- Money invested in stock could be earning income elsewhere through new machine, or investments.
The cost of not having adequate stocks on hands is;
- Loss of customers
- Idle machine, workers, materials and trucks
- Wasted management time (Ibid. P. 214)
The result of bad control and procedure is seem in this country during the era of economic recession when lack of inventory caused retrenchment of workers, closure of factories, dwindling of Nations Gross Domestic Product (GDP). Consequently, stock control and procedure is an important policy to a management to avoid incurring heavy overhead cost like carrying cost. Stock control and procedure plays an essential and pervasive role in any enterprise because it makes it possible for the following;
- To order large quantities of goods, materials or components from suppliers at advantageous prices
- To provide reasonable customer service through supplying most requirement from finished goods without delay.
- To maintain more stable operating and/or workforce level.
- To plan overall operating strategy through decoupling of successive stages in the chain of acquiring goods, preparing products and finally selling to customers.
The benefit of holding inventories are often indirect for example, a large varieties of finished goods reduces the changes of having a “stock out; if demand is unexpectedly high. A producer holding a small finished goods inventory is more likely to be caught short, unable to fill orders promptly. Similarly, large raw material inventories reduces the changes that an unexpected shortage would force the firm to short down production or use a more costly substitute material. Bulk order for raw material, although they lead to large average inventories, may be worthwhile if the firm can obtain lower prices from suppliers (ie bulk order may yield quantity discount)
According to Horngreen and Foster (1987) P. 576) the optimal inventory level will have two danger points; these danger points are insufficient inventories and excessive inventories. With insufficient inventories, there is the risk that production may be disrupted by the non availability of some critical items so that a customer may not receive an order on time while excessive cause excess carrying cost which leads to high risk of obsolescence. Hence stock control and procedure is very important and necessary.
It is a well known fact that for a well developed and organized system of store control in any company like Setraco construction company Enugu, there must be established policies and procedures in order to achieve the overall objectives and aims of the companies. Without good policies and procedure put in place the companies will surely face the risk of misadministration which will be to the detriment and disappointment of the founders.
Policies, rules and regulations are statements of co-operate overall performances and objectives in the various areas of the organization which its operation are mainly in personnel, finance, accounts and store administration.
1.2 PURPOSE OF THE STUDY
Proper management and control of inventories are integral for the profitable business operations especially in construction firms like Setraco Construction Company. The objective of this study is to appraise the stores control and procedures in these firms. This study will critically examine the stores control and procedures in the above mentioned companies and determine how effective is the system and make alternative recommendation for improvement using management by exception. In doing so, this study will actually look into how Setraco Construction Company tries to;
- Procure its raw materials
- Ensure that the organization maintain an optimal balance of inventory that will minimize total cost of maintenance and inventory.
- Use documents and records to support every stock movement in the companies
- See the degree of interdependence exercised by various departments concerned with stock management
- Value its unused stock at the end of account period.
- To determine whether the stock valuation methods adopted by the two firms suites in view of the prevailing economic circumstances.
- To find out the likely consequences of excess inventory, inadequate inventory and other associated problems of stock control and procedure as experienced by the company and how the company have been adjusting to remain into existence not minding environmental changes.
1.3 STATEMENT OF PROBLEM
The inventory holding of any organization affects its working capital. Stock being a significant component of the current assets of an organization has a direct impact on the liquidity and solvency of the firm, that is to say that the firm is greatly affected by the value of stock at hand.
Moreover, many firms neglect that effective inventory management is necessary for profitability and growth but depends on employing cheap and untrained personnel to handle their inventories thereby creating room for a lot of problems such as fraud, in appropriate records etc.
The growing market competition, harsh economy and advancement in the field of management science, requires that the methods of inventory control being practiced by companies should be revised from time to time update the stock and makes it more result oriented. Many construction firms do not up date their inventories and the result is poor profit, loss of jobs and in some cases winding up.
Another problem of stock control and procedure is valuation. The method to use in valuation of unused inventories at the end of accounting period has become controversial. The controversy emerged as a result of acceptance of different methods by the accounting profession. These methods may under certain condition have significantly difficult effect on both the balance sheet and the income statement of the company.
It is necessary that each organization must have effective stock control and procedure for the actualization of the company’s objectives and meeting customer’s needs. It is against this background that researchers seek answers to the following questions.
- Has the construction company instituted proper procedures and control measure to ensure adequate control of the stores and stock?
- Are the control and procedure instituted by Strabag in accordance with the provisions of relevant sections of the financial memorandum?
- Are the controls and procedures in (a) and (b) above consistently applied as prescribed?
- How are goods ordered and received into the store?
1.4 RESEARCH HYPOTHESIS
The following hypothesis was formulated to direct the intent of the study;
HO: Store control and procedures instituted by the construction company have not been in conformity with the relevant sections of the financial memorandum.
HI: Store control and procedures instituted by the construction company have been conformity with the relevant sections of the financial memorandum.
HYPOTHESIS 2
HO: Store control problems revolves on the problems of determining inventory or stock alteration by Setraco Nigeria Ltd.
HI: Store control problems do not revolve on the problems of determining inventory or stock alteration by Setraco Nigeria Ltd.
1.5 SIGNIFICANCE OF STUDY
This study will be of immense importance to construction companies and every other organization involved in inventory management, as it will bring to their knowledge the numerous ways of controlling their inventories. This study will help to produce reliable costing information as regards to the records of material issues.
To the researcher and aspiring managers, this study will help direct their minds to the practical problems that would confront them in inventory management in their actual practice of management.
Moreover, the findings of this research will be of much relevance to stores staff and management of the company understudy. As the study will re-examine and re-define the stock control system and procedures used in their stores. These procedures will bring out problems and insufficient practices inherent to avoid wastage of companies fund. It will help the store staff to be more efficient in their duties.
Generally, production operations cannot flow smoothly without having stock of raw materials, work in progress and finished goods.
1.6 SCOPE AND LIMITATION OF STUDY
This project will specifically cover all aspect of stock control and procedure as practiced in construction companies using Setraco construction company Enugu as a study. It will study all control measures involved in all activities of the company. This study intends to examine the inherent benefits and disadvantages of the procedure and make useful recommendations arising from the studies for the benefits of other construction firms and also for the growth and knowledge of management services.
Research works in developing countries are faced with lots of problems such as personal constraints, respondents’ constraints and non-human constraints. The prominent personal constraints are financial inadequacies, limitation due to other engagements/activity. In addition to physical, mental and social weariness.
The respondents’ constraints include secrecy, inadequate provision of information or data, the provision of wrongful and/or misleading information. While the obvious non-human constraints include geographical or weather unfavourability, transportation and logistic inadequacy etc.
The aforementioned limitations notwithstanding, it is the belief of the researcher that the findings of this study will help, in no small measures, in the improvement and effective inventory management and control of inventories in the entire construction companies.
More so, it was not all the questionnaires distributed that were returned by the respondents, some staff could not produce theirs on demand by the researcher, on the ground that it was misplaced or lost in the process. However, the researcher tried as much as possible to collect enough data for this research work despite all the above hindrances.
1.7 DEFINITION OF TERMS
TENDER: A list submitted by an intending supplier, showing the unit price and totals for all materials which he intends to supply.
TOOLS: These are usually metal instruments held in the hand and used for making or repairing something example hammer, screwdriver, bolt and drills etc
WORK IN PROGRESS: These groups of items comprise the various uncompleted materials yet undergoing construction process. These groups of items are usually found in shop floor or at the site, workshop or somewhere they may be receiving the final finishing touches.
RAW MATERIALS: These are some basic materials that are used in the construction process to produce finished products. Examples are steel, lead, bitumen, rubber and cement etc.
SCRAPS AND RESIDUE: These are surplus materials, wastes or used/unused parts arising out of rejected components, steel/non-ferrous turnings, obsolete machinery, condemned spare parts, tyres and tubes.
FIX TURES AND FITTINGS: These are pieces of equipment especially designed for holding materials or parts while carrying out a given machinery or fitting.
BIN CARD: Is a card recording particular material held in stores, receipts and issues and the balance which should be on hand.
GENERAL STORES: These are materials not categorized in the day to day running of the company example paint, nuts/bolts, grease and lubricants etc.
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