Wiley CIAexcel Exam Review 2014: Part 3, Internal Audit Knowledge Elements

3.5 Inventory Management Techniques and Concepts

From inventory management viewpoint, demand is of two types: independent demand and dependent demand. Independent demand inventory systems are based on the premise that the demand or usage of a particular item is independent of the demand or usage of other items. Examples include finished goods; spare parts; material, repair, and operating supplies; and resale inventories.

(a) Independent Demand Inventory Systems

Independent demand inventory systems are “pull” systems in that materials are pulled from the previous operation as they are needed to replace materials that have been used. An example: Finished goods are replaced as they are sold. These types of inventory systems answer the question of when to place the replenishment order and how much to order at one time. Reorder point models and fixed/variable order quantity models (e.g., economic order quantity [EOQ]) are examples of independent demand inventory systems as they do review inventory either continuously or periodically. Four possibilities exist:

1. Continuous review and fixed order quantity

2. Periodic review and fixed order quantity

3. Continuous review and variable order quantity

4. Periodic review and variable order quantity

(b) Dependent Demand Inventory Systems

Dependent demand inventory systems are based on the premise that the demand or usage of a particular item is dependent on the demand or usage of other items. Examples include raw materials, work-in-process ...