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Inventory variance is when the actual inventory in a store is less than the records indicate. It can be caused by theft, loss, or destruction of items. Managers can choose to ignore it or take steps to limit future variance. Stores aim for a variance of 2% or less.
Inventory variance is a common business event where the amount of inventory in a store is less than the records imply. The easiest way to find out inventory variance is to have your entire store inventory scanned and compare the actual inventory to the inventory records. After discovering variance, managers can choose to ignore it or be proactive in limiting future variance. The causes of this variation can be external or internal theft, loss of objects or destruction and registration of objects. Stores tend to aim for a variation of 2 percent or less, and numbers higher than that can be a problem.
There are several ways to find out inventory variance, but the most common way is to have an employee scan all items in the store or in a particular department, such as men’s shoes in a shoe store. After an employee scans inventory, a manager typically compares the scanned values to the inventory values recorded in the company’s database. If the database shows a different amount, then there is variance. The variance can be greater than the amount in the database, but this is rare and usually not serious.
When inventory variance is detected, managers can decide how to deal with the situation. Some managers may see this as a temporary event and feel that trying to reduce variance would just be wasted effort. Other managers may examine records and videos to understand why the variance has occurred and may establish rules and policies to try to reduce the variance. Most stores have policies that state that managers must report changes to senior management and work to resolve them.
The reasons for inventory variance are varied, but there are some common causes. Theft is one of the most common and malicious and can be internal or external theft causing a variance. Another possibility is that the items are lost and, after some searching, can be found. If products have to be destroyed due to manufacturing errors or if someone returns used goods, it can cause a variance if the destruction is not recorded.
Inventory variance can destroy profits, so most companies aim for a low variance percentage. The common goal for most companies is 2 percent, but some attempt 1 percent or less. If the variance is much higher than this, such as 5 or 10 percent, this can raise serious concerns and these businesses may need to be closed.
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