4 Main Inventory Systems | Cost Accounting

The following points highlight the four main inventory systems. The systems are: 1. Perpetual Inventory System 2. Continuous Stock Taking System 3. Periodic Stock Taking System 4. Two Bin System.

1. Perpetual Inventory System:

CIMA defines perpetual inventory system as “the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value.” Under this system, a continuous record of receipt and issue of materials is maintained by the Stores Department and the information about the stock of material is always available.

In this method, stock records are maintained in such a way as to make an entry in the records, the physical movement of stock, on receipts and issues of materials and to indicate the balance of each item of material in the stores at any point of time.

In this system, the entries are made in bin cards and stores ledger as and when the receipts and issues of materials take place and ascertaining the balance after every receipt or issue of materials. The stocks as per the dual records namely bin card and stores ledger are reconciled on a continuous basis.

Advantages:

(a) This system avoids the disruptions to production or trading caused by the periodic stock taking.

(b) This system facilitates production planning and inventory control.

(c) Perpetual inventory system is efficiently maintained without continuous stock taking.

(d) The perpetual inventory system avoids the necessity of stock taking by actual count at the end of financial period.

(e) Stock can be taken for the purpose of preparation of Profit and Loss Account and Balance Sheet.

(f) It helps in having a detailed and more reliable check on the stocks.

(g) The stock records are more reliable and stock discrepancies are investigated and appropri­ate actions are taken immediately.

2. Continuous Stock Taking System:

CIMA defines “continuous stock taking is the process of counting and valuing selected items at different times on a rotating basis.”

Under this system, physical stock verification is made for each item of stock on continuous basis. It is a physical checking of the stock records with actual stocks on continuous basis. It is a method of verification of physical stock on a continuous basis instead of at the end of the accounting period. It is a verification conducted round the year, thus covering each item of store twice or thrice. Valuable items are checked more frequently than the stocks with lesser value.

Advantages:

(a) Any discrepancies, irregularities or changes are detected at early stage and brought to the notice of management.

(b) It acts as a moral check on stores and acts as a deterrent to dishonesty.

(c) It insists on up-to-date maintaining of stock records.

(d) It is carried out by independent staff from store keepers avoiding any irregularities in stock taking.

(e) The disruption in production caused by periodic stock taking is eliminated.

(f) Control over stock is improved by eliminating over stocking or running out of stock.

(g) More time is available, reducing errors and allowing time for investigations.

(h) Regular skilled stock takers can be employed, reducing likely errors.

3. Periodic Stock Taking System:

CIMA defines periodic stock taking as “a process whereby all stock items are physically counted and then valued”.

Under this system the stock levels are reviewed at fixed intervals e.g., at the end of every month or three months. All the items of stocks in the store are reviewed periodically. The aim of periodic stock taking is to find out the physical quantities of materials of all types that are physically counted at a given date.

The following points should be noted for adopting this system:

1. A team of stock-checkers should be allocated to count all stock in one area, to ensure that all stock is counted once, and that no omissions or duplications occur.

2. In the office, the completed stock sheets should be collated and totalled, and the quantities checked against the stock records.

3. Senior staff or auditors should perform sample checks on a number of items.

4. All staff involved should be issued with stock taking instructions well before the date of the actual count. Often non-stores staff will also be involved in the count.

5. Any stocks showing discrepancies should be recounted, and if still not resolved should be reported to management.

6. Stock checkers should enter amounts counted on preprinted stock sheets.

7. A ‘cutoff’ time should be set, after which no movement of stock is allowed until the count has been completed.

4. Two Bin System:

Under two bin system, each item of material is stored in two bins and material is continuously issued from one bin until the stock material is emptied in that bin. Then material from the second bin is started using and action will be taken to replenish the material in the first bin. The material in the second bin will be sufficient enough until the fresh delivery is received.

The maintenance of two bin system is a continuous process. This system is maintained in another form by maintenance of a single bin marking it inside with a red line. It indicates the reorder stock position for replenishment.

The operative convenience and the cost analysis are to be made before adopting two bin system. The major advantage under this system is that stock can be kept at a lower level because of the ability to reorder whenever stock fall to a low level, rather than having wait for the next reorder date.