There are two types of inventory management techniques: periodic and perpetual. Periodic is best for frequently moving and homogeneous goods, while perpetual tracks every purchase, sale, or adjustment. Companies should have inventory policies in handbooks and use manual and internal controls to ensure compliance. Periodic systems require quarterly physical inventory counts, while perpetual systems are more reliable but require more labor. Weekly cycle counts may be necessary to comply with government inventory requirements.
Two basic types of inventory management techniques are common in business: periodic and perpetual. These techniques derive from the accounting method used to track inventory. Companies will then build different types of businesses or businesses that use the basic theory of these systems to track and maintain inventory. A periodic table is easiest for commodities that move frequently and are mostly homogeneous in nature. Perpetual inventory systems track goods after every purchase, sale, or adjustment. Constant inventory is generally not required for permanent inventory management.
Companies should list their inventory policies in handbooks provided to department heads who oversee inventory. Owners and managers will often select a periodic or perpetual system and create procedures for the inventory system in place. For most businesses, inventory is the second largest expense behind employees. Manual and internal controls for inventory management techniques are required to ensure that all employees follow established procedures throughout this business process. Periodic inventory systems typically require fewer instructions due to work spread over several months or quarterly, allowing for lower inventory management requirements.
For periodic inventory management techniques, companies will count and adjust inventory on at least a quarterly basis. During the rest months of the quarter, the company’s accountants will simply make dollar adjustments in the accounting register. These adjustments take the starting inventory balance, add the monthly purchases, subtract the monthly sales, and add or subtract adjustments to create a dollar value for the reports. At the end of the quarter, the company will do a physical inventory count and reconcile the physical inventory to the number in the ledger. These types of inventory management methods are often less work-intensive, but they’re also less reliable. Businesses may also incur higher adjustments for damaged, lost, stolen or damaged goods.
Perpetual inventory management techniques are more labor intensive, but are also more reliable. A computer program will adjust the company’s master inventory account for each movement during each month. Instead of counting physical inventory on a quarterly basis, companies using perpetual inventory management techniques can offload this onerous task to an annual project. To maintain compliance with government inventory requirements, businesses may need to conduct weekly cycle counts to demonstrate they are not reporting inaccurate inventory amounts. Many local and state governments levy a tax on unsold inventory; this requires the company to have a neat technique to avoid paying too much tax.
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