Retail businesses maintain an inventory of finished goods for sale and operating supplies to conduct business. A manufacturer also maintains an inventory of finished goods and supplies, but also keeps a store of the raw materials used to manufacture finished goods. Inventories represent a cost to the organization and may be the largest asset the company owns. Companies strive to maintain the lowest level of materials in inventory while still meeting customer demand and orders. To exercise control over inventory levels, accurate inventory records are essential. Counting inventory is necessary in all management systems, but the frequency can vary.
Perpetual Inventory Systems
A perpetual system updates inventory records as the company uses raw materials or sells products to customers. For example, in a retail store when customers purchase a product, the cash register or computer system automatically deducts the product from inventory records. In a manufacturing organization, a work order system subtracts raw materials from the inventory records when the production department begins the order. The perpetual system deducts finished product from the system when customer orders ship from the facility. Companies may use a bar code system to update the inventory records or rely on employees to manually enter transactions.
Companies that use a perpetual system employ cycle counting to maintain the accuracy of inventory records. Cycle counting counts a portion of the company’s inventory every day and compares the quantity against inventory records. Cycle counters investigate discrepancies in inventory records to determine the cause of incorrect quantities. The cycle counting process also includes an adjustment of the inventory records to update and accurately reflect the physical count. Cycle counting corrects inventory records and identifies problems in the inventory management system. For example, in a manufacturing organization, work orders deduct materials from the system based on a bill of materials. If the bill of materials does not pull a correct quantity of raw materials from the inventory system, each time the production department builds the product, the quantity in the system will become more inaccurate. A cycle counter will identify the problem and correct the bill of material to deduct the correct quantities from inventory records.
Benefits of Perpetual Systems
Perpetual systems offer companies inventory records that update in real time. Purchasing and planning can rely on the inventory records to make decisions regarding material purchases and work scheduling. The business is not required to shut down at the end of each month to physically count the inventory.
Annual Physical Inventory Count
Companies that use a perpetual system may still conduct an annual physical inventory. In the periodic inventory system, physical counts are used to determine the amount of goods sold. In the perpetual system, a year-end physical inventory validates the inventory records.
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