(Where is the Real Value?)

Inventory consists of Stocks of raw material, semi-finished and finished goods.

 

The Inventory equation=

Opening Stock

+Purchases

-Sales

=Closing Stock

Where, opening stock is the last year's closing stock and closing stock will be the next year's opening stock.

 

 Since manufacturing units have three types of inventories (raw0materials, stock in process, and finished goods), we will, for purposes of easy comprehension, treat inventory as only of one type e.g. finished goods, as in a supermarket.

 

Periodic v/s Perpetual Inventory Methods:

In the inventory equation, the problem centres around

• Cost of goods sold, and
• Closing Inventory.

 

 

Keeping track of sales receipts does not necessarily mean accounting for each and every outgoing item from inventory. A hardware merchant cannot physically account for each of thousands of items in stock, which he sells. Doing so would leave him little time to make sales!

 

Periodic Method of Inventory means a periodic physical count of inventory at yearly, or shorter intervals.

 
Weaknesses are:

• No control; no idea, at given point of time, what is in stock, (how much sold, how much left).

 

• If not in inventory, no way of determining whether item is lost, spoilt in storage, broken or stolen.

 

• If treated as sold, their costs end up as ‘cost of goods sold' expense.

 

• Very unreliable and haphazard approach to inventory control.

 

The Perpetual Method:

• Alternative to ‘Periodic' method.
• Here each transaction of sale/item recorded.
• Only possible where unit cost is high, range of items is limited, and units sold are limited in number.

 

 

Yet Computers and Bar Codes have solved the problems to a maximum extent and, provided computerized systems are well maintained, on-line inventory control in Real Time Has Arrived.