What is the Perpetual Inventory system?
What is the Perpetual Inventory system?
The Perpetual Inventory System is a method of recording store balances after each receipt and issue to enable regular checks and prevent the need for work shutdown during stocktaking. This system is maintained through the use of bin cards and the stores ledger, which document the physical movement of stock during material receipts and issues, while also reflecting the balance in the stores.
To ensure the accuracy of perpetual inventory records, a continuous stocktaking program includes physical verification of the stores. It is advisable to count and compare the number of items with the bin cards or stores ledger on a daily basis or at frequent intervals.
Under normal circumstances, the recorded stock should align with the actual stock of materials. However, discrepancies may arise due to the following reasons:
Unavoidable causes:
- Climatic conditions leading to deterioration (such as moisture absorption)
- Shrinkage and evaporation
- Losses resulting from accidents or fires
- Losses occurring when breaking up bulk materials, as in the case of sawing wood
Avoidable causes:
- Errors in posting or calculating receipts, issues, or balances on bin cards or the store ledger
- Pilferage and breakages
- Entering transactions in the wrong bin card or the wrong stores ledger.
Advantages of the Perpetual Inventory System:
Easy Preparation of Financial Statements: With the closing stock readily available from the bin cards or stores ledger, it becomes convenient to prepare monthly and quarterly profit and loss statements as well as balance sheets without the need for physical inventory checks on all items.
Detailed and Reliable Checks: The perpetual inventory system allows for a more thorough and reliable verification process. This ensures greater accuracy in tracking inventory levels and reduces the chances of errors or discrepancies.
Eliminates Year-End Interruption: By eliminating the need for physical checking of all store items at the end of the year, the perpetual inventory system avoids disruptions to production. This saves time and resources that would otherwise be spent on extensive stocktaking procedures.
Promotes Discipline and Carefulness: Implementing this method has a positive effect on staff morale, as it encourages discipline and carefulness. It serves as a deterrent against dishonest actions and promotes responsible handling of inventory.
Efficient Stock Management: The perpetual inventory system enables the comparison of actual stocks with authorized minimum and maximum levels. This helps to maintain inventory within prescribed limits, preventing the storage of excessive stock and the tying up of working capital beyond the target.
Reliable Stock Figures: The systematic and unhurried approach to recording and continuous stock taking in this method results in more reliable stock figures. Accuracy is prioritized, minimizing errors and ensuring the integrity of the inventory data.
Prompt Detection of Discrepancies: The perpetual inventory system facilitates the prompt identification of discrepancies and errors. This allows for timely remedial action to be taken, preventing their recurrence in the future.
Insurance Purposes: Stock figures are readily available for insurance purposes, providing accurate and up-to-date information for coverage assessment and claims processing.
Identification of Obsolete and Surplus Materials: The perpetual inventory system makes it easier to identify obsolete, slow-moving, and surplus materials. This enables swift remedial actions to be taken, such as selling off excess inventory or adjusting procurement strategies.
Cross Checking and Internal Auditing: The bin cards and stores ledger serve as cross-checking tools for each other. Errors are promptly detected as they occur, enhancing the system's internal auditing capabilities for effective inventory management.
Inventory Turnover Ratio
The inventory turnover ratio is a control technique used to manage inventory effectively. This ratio expresses the relationship between the cost of material consumed and the average inventory held during a specific period. By calculating the inventory turnover ratio, we can determine if inventory is fast-moving or slow-moving. In the case of slow-moving inventory, we can reduce purchases, while for fast-moving inventory, we can increase the quantity purchased. A low ratio indicates the accumulation of obsolete stock, poor purchasing decisions, or excessive inventory levels. Conversely, a high ratio indicates fast-moving stock and a lower investment in inventory.
The formula to calculate the inventory turnover ratio is as follows:
Inventory Turnover Ratio = Cost of Material Consumed during the period ÷ Cost of Average Stock Held During the Period
The average stock can be calculated by adding the opening and closing stock values, then dividing the sum by two:
Average Stock = (Opening Stock + Closing Stock) ÷ 2
The inventory turnover ratio serves as an indicator of inventory management efficiency or inefficiency. It is beneficial for organizations to compare the turnover of different types and grades of materials to identify slow-moving stock, minimizing capital tied up in undesirable inventory.
No comments:
Post a Comment