Perpetual Inventory System | Periodic Inventory System | Material Issue

 

 

Perpetual Inventory System

Perpetual inventory means continuous checking and supply of materials or inventories.

This continuous checking is done with the help of store ledger and storekeeper.

It helps to regular supply of materials to production department.

It is possible that the balance of stock shown by bin card may be differ from actual balance.

This different may be due to avoidable and unavoidable causes.

 

Definition of Perpetual Inventory System

According to H G Wheldon, “Perpetual inventory system is a system of records maintain by the controlling department, which reflect the physical movement of stock and their current balance.”

 

 

Avoidable causes

Some avoidable causes are:

Clerical mistake like wrong posting and non-posting.

Pilferage and theft of inventory.

Carelessness in inventory handing.

Short or over issue of materials.

 

Unavoidable causes

Some unavoidable causes are:

Actual balance of inventory may be less due to shrinkage and evaporation.

Actual balance of inventory may be more due to moisture or counting mistake.

Actual balance of inventory may be less due to loss by fire.

 

Advantage of perpetual inventory

Some important advantages of perpetual inventory are:

It helps to prepare periodical statement without taking physical inventory.

It helps to records accurate inventory up-to-date.

It helps to find out error of recording and shortage of materials.

It helps to control excess capital investment on inventory.

It helps to maintain a system of internal checking in inventory.

It helps to find out closing inventory to prepare final account.

 

Disadvantage of perpetual inventory

The main disadvantages of perpetual inventory are:

This is very expensive system.

This is not suitable for small organization.

It represents only figure not actual inventory value.

  

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Periodic Inventory System

What Is Periodic Inventory?

The periodic inventory system is a method of inventory valuation.

For financial statements purpose, a physical count of the inventory is performed at specific intervals.

This accounting method is knowns as the cost of goods sold (COGS).

Where:

COGS = beginning of a period + net inventory purchases – ending inventory

 

Under the periodic inventory system, a firm will not know its unit inventory levels without the physical counting.

This system may be acceptable by a business firm with a low number of store keeping units.

The perpetual system continuously updates the inventory ledger in a firm’s database system.

 

Example

A firm has a beginning inventory on 1^st January $350,000. The firm purchases inventory of $450,000 during a three-month period; it has ending inventory of $225,000 on 31^st March.

Required: Cost of goods sold (COGS)

[Answer: $575,000]

SOLUTION

Cost of goods sold (COGS)

= beginning of a period + net inventory purchases – ending inventory

= 350,000 + 450,000 – 225,000

= $575,000

 

 

Advantages of periodic inventory system

The main advantages of periodic inventory system are:

This system is less expensive.

Suitable for small and large business organizations

Inventories are counted once at the end of a period; so, the business is not hampered.

Ending inventory is reliable because it is counted.

 

Disadvantages of periodic inventory system

Inventories are counted in hurriedly due to a shortage of time.

There is chance of fraud and forgery because continuous control is absent.

There are chances of date expiry of the inventories.

Under this system, the stock control is very weak.

 

 

Differences between Perpetual Inventory System and Periodic Inventory System

Bases	Perpetual inventory system	Periodic inventory system
Time	The perpetual system gives the management an instant view of inventory.	The periodic system is time-consuming and less useful to management.
COGS update	It keeps updated COGS as movements of inventory occur.	It cannot give accurate COGS figures between counting periods.
Solution	If there are defective inventory, source of the problem can quickly be identified in perpetual system	Mostly the periodic system would not allow for prompt resolve of solution.
Data store	The perpetual system is tech-based and data can be backed-up.	The periodic system is manual, there may be human error; the data can be misplaced or lost.

 

 

Material Issue Procedure

Material issue is carried out by the storekeeper.

The materials should be issued at the right time, in right quantity and of right quality.

For these purpose, every organization must follow an issue procedure.

All issues should be recorded in the bin card by the storekeeper and in the stores ledger by cost department. For the authorization of material issues, material requisition note is prepared.

 

Whenever, materials are required from the store, the supervisor or departmental head writes a material requisition note.

It is a formal request to issue the material.

It contains information about the description, code, quantity of material and job or work order etc.

Generally, a material requisition note is prepared in triplicate:

(a) One copy is for further reference.

(b) Second copy is for accounting section

(d) Third copy is for storekeeper.

 

At the time of materials issue, the storekeeper posts the requisition in the bin cards.

 

 

Specimen form of materials requisition note

Everest Company Limited
Materials Requisition Note
Job process No.  ……………………..…………..			No.           ……………………..………
Department/Store/Shop       ……………………..…..……….			Date         ………………………………..
To, The store-keeper, Please issue the materials stated herein:
Particulars	Code No.	Quantity			For office use		Remarks
					Rate	Value
Bin No.                ………………………………….. Stores ledger folio No. …………………………………..				Priced by:  …………………………..
Stores ledger folio No. …………………………………..				Authorized by:    ………………………….
Issued by:            …………………………………..
Received by:                 …………………………………..

 

 

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