Business Studies Year 10 Unit 1: The Purchasing Function

Ms L. Attard 1

BUSINESS STUDIES YEAR 10 UNIT 1: THE PURCHASING FUNCTION

Stock Control

What is Stock (Inventory)?

Stock is classified as any material or finished products a company

currently holds.

Companies need to be very careful how much stock they hold. They

cannot hold too much, but they cannot hold too little.

Can you name the types of stock the following business have?

Business Types of Stock

Supermarket

PC Manufacturer

Bike Shop

Local butchers

What is Stock Control?

Companies need to be very careful how much stock they hold. A system of stock

control therefore controls the firm’s investment in stock (inventory) to avoid

overstocking or understocking

Ms L. Attard 2


We are a shoe shop. Name the pictures below whether these are overstocking or understocking

Water for

employees

Shoes for sale

The Purchasing Department needs to ensure that not

too much capital (money) is tied up as stock (spent

on stock that will take a long time to sell or use).

This is called ___________________

If too little stock is held, this may lead to costly

delays in manufacturing or delivering the goods to

customers. Carrying too little stock is called

___________________________

What do you think are the main objectives of a good stock control system? Think

in terms of overstocking and understocking.

________________________________________________________________

_________________________________________________________________

________________________________________________________________________________________

1. __________________________________________________________________________________

__________________________________________________________________________________

2. __________________________________________________________________________________

__________________________________________________________________________________

Think about the following businesses. Consider what might be the effects of having too much stock or

too little stock?

Business Too much stock Too little stock

Supermarket

PC

Manufacturer

Ms L. Attard 3


Too much stock Too little stock

Bike Shop

Local butchers

Ordering Costs are

________________________________________________________. These

include

clerical costs (invoice processing, accounting and communication),

cost of finding suppliers

transportation costs to the business

receiving costs (such as uploading goods at a warehouse, and inspecting

goods to make sure they are the correct items and free of defects),

Holding Costs are

_________________________________________________________

_________________________________________________________

These usually include:

Inventory financing costs, such as interest paid on overdraft

used to pay for the stock

Opportunity cost of investing the money elsewhere which would have given a higher return

Storage space costs such as renting out the storage facility, its lighting, heating, etc.

Inventory handling costs such as insurance

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Just-In-Time

Stock needs to be ordered in advance of when it is needed, but not

too far in advance.

Just –in-time (JIT) production

______________________________________

__________________________________________________________________________________.

With this approach, the business needs less factory space, as it holds smaller stocks, but it depends on

suppliers agreeing to meet delivery requirements.

The business does not have so much money tied up in stock or

warehousing costs as it has minimal buffer stock (stock stored in case of

unforeseen stock shortages).

However, the reliability of the supplier in delivering good-quality stock

on time is crucial to keeping the production process running smoothly.

Ms L. Attard 5


Stock Control – Case Study

Philip owns a soft drink factory which makes ‘Slurm’. The drink itself is

made on site, using a mixture of fruit and other ingredients. The cans are not

made on site – they are bought from a local can supplier. The drink costs

Philip 20p to make and the can costs him 10p to buy – he sells the drink to

retailers for 50p.

Philip likes to make sure he has plenty of cans in stock because once, he ran

out and it was very costly to the business: The workers were unable to carry

on making the drinks, but Philip still had to pay them their wages for the day.

Also, he had to delay a delivery to a local supermarket and they were so

annoyed that they switched to another supplier.

Nowadays, Philip keeps at least 10,000 empty cans in stock at any one time.

The advantages of this are that he never runs out, plus he gets a discount for

buying in bulk (an order of 10,000 works out at 10p per can, but an order of

less than 10,000 works out to be 15p a can).

However, there are some disadvantages to this system;

Philip has had to rent out an extra storage room to keep the cans in at a cost of £500 per month.

He has also found that the cans sometimes get damaged as they are moved from the storage room to the

production line.

Philip had another problem recently; he had just paid for a delivery of 10,000 cans (£1,000) when he

received a final reminder for his telephone phone bill (£75) which would be cut off if he didn’t pay

immediately. Philip had no money left in the bank account to pay for the phone bill.

Finally, Philip recently found that some of the cans in the storage room had gone rusty and had to be

thrown away.

Questions:

1. What are the advantages of holding high levels of stock?

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

2. What are the disadvantages to Philip of holding high levels of stock?

_____________________________________________________________________________________

_____________________________________________________________________________________

____________________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

Ms L. Attard 6


______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

3. Philip has heard that there is a stock control system called ‘Just-in-time’. Find out what this means

and why it might be a good idea.

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________

______________________________________________________________________________

4. Philip has also heard the business term ‘Lean Production’. Find out what this means.

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

_____________________________________________________________________________________

____________________________________________________________________________________

5. How much profit per can does Philip currently make?

____________________________________________________________________________________

____________________________________________________________________________________

6. What might happen to the profit per can if Philip stops buying in bulk?

____________________________________________________________________________________

____________________________________________________________________________________

7. Why it is better for Philip to sell his cans to retailers, rather than directly to customers himself?

____________________________________________________________________________________

___________________________________________________________________________________ :

________________________________________________________________________________

________________________________________________________________________________

Ms L. Attard 7


________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

Ms L. Attard 8


First In First Out (FIFO)

In order to prevent stock being wasted firms

may have a FIFO system of stock control.

This stands for First In First Out.

________________________________________________________________________________________

________________________________________________________________________________________

________________________________________________________________________________________

________________________________________________________________________________________

________________________________________________________________________________________

________________________________________________________________________________________

The Stock Control Card

Stock Record Card

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Levels of Stock

Maximum Stock Level:

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Re-Order Level:

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Minimum Stock Level:

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Re-Order Quantity:

__________________________________________________________________________________

__________________________________________________________________________________

Lead Time:

__________________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Ms L. Attard 10


Checking of Stock

_________________________________________________ would result in actual stock levels differing

from the quantities recorded in the stock cards. These can cause a firm to lose a lot of money. For these

reasons a check called an inventory or stock-check is made. Items in stock are counted to see that the

number of items actually counted agree with the figures shown in the stock record cards.

Nowadays, the use of barcodes or QR Codes facilitate the counting of stocks.

Firms may use

a periodic stock-check or

inventory-check are checks

performed at specific intervals,

e.g., every month, six months or

year. This is usually carried out during shut-down

period, thus avoiding disruptions to operations.

a permanent inventory or stock-check system. Using this

system, the firm would employ full time stock-checkers whose

job is to check the stock levels against stock cards all year-round.

Why do actual stock counting differ from Stock Records?

1. Items taken out are not recorded at all or the amount is wrongly

inputted

2. Items received are not recorded at all or the amount is wrongly

inputted

3. Faulty items returned are not deducted

4. Items are stolen and no adjustments have been made

5. Items expire or deteriorate and no adjustment is made

6. Employees may be entitled to buy from the company at a reduced price and this is not reco

Business Studies Year 10 Unit 1: The Purchasing Function

Ms L. Attard 11

Short Question:

1. Describe the functions of the stock controller:

______________________________________________________________________________

_____________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

______________________________________________________________

2. What is overstocking and what are its implications?

Overstocking is when too much capital is tied up as stock and therefore, the business holds

more stock than it needs.

Implications of overstocking should include?

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

3. Why is understocking undesirable?

___________________________________________________________________________

___________________________________________________________________________

____________________________________________________

4. JIT stands for Just-In-Time. What are its advantages and disadvantages?

___________________________________________________________________________

__

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

The disadvantages of JIT are:

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

__________________________________________________________


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5. What is FIFO and why is it used?

______________________________________________________________________________

_________________________

______________________________________________________________________________

_________________________

6. What is a stock record card used for?

______________________________________________________________________________

_________________________

7. Explain the term ‘re-order level’.

______________________________________________________________________________

_________________________

8. What does ‘max stock’ mean?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______

9. What is a periodic stock check?

______________________________________________________________________________

______________________________________________________________________________

________________________________________________________

Annual 2016 Year 10 Question 2

Question 2 – Read the following passage and then answer the questions that follow:

Jane is the chief store-keeper in a manufacturing company. Among her responsibilities she

has to issue materials to the workshops against a materials requisition and to send the

purchase requisition when the stock reaches the reorder level. For some time, she, together

with her team, has been thinking of changing into a system of Just-In-Time (JIT).

(a) Explain the following terms as used in stock control:

(i) Re-order level (1 mark)

(ii) Just-In-Time (1 mark)

(b) Explain terms maximum stock level and minimum stock level. (2 marks)

(c) Explain three other reasons, besides those mentioned in (b) above, why firms should

exercise good stock control. (6 marks)


Ms L. Attard 13

(d) Mention two ways how Jane can keep record of the stocks in the store. (2 marks)

(e) Explain two advantages of each method of stock control mentioned in (d) above. (8

marks)

Annual 2017 – Year 10 No. 24

24. (a) Explain what you understand by the following terms:

(i) Understocking (2 marks)

(ii) Overstocking (2 marks)

(iii) Maximum stock level (2 marks)

(iv) Minimum stock level (2 marks)

(v) Re-order level (2 marks)

(b) Explain why a business organisation should operate strict stock control. In your answer,

refer to the problems that a firm would face in the case of

(i) Overstocking and (ii) understocking (10 marks)

Total for Question 24: 20 marks

Matsec 2010 Paper 1 Question 8 (a-c)

a) Why is stock control important in a business? ( 2m)

b) Distinguish between the minimum stock level and the re-order stock level (2m)

c) Distinguish between the internal recruitment and external recruitment (2m)

Matsec 2013 Paper 1 Question 4 (a-d)

a) What is the purpose of stock control? (2m)

b) What does the minimum stock level represent? (2m)

c) Why should a firm establish a maximum stock level? (2m)

Matsec 2018 Paper 2A Question 5 (a-b)

a) Define “re-order stock level”, “minimum stock level” and “maximum stock level”

(4m)

b) List FOUR criteria for selecting suppliers. (4m)

Documents

Business Studies Year 10 Unit 1: The Purchasing Function