Inventory management stands as a pivotal aspect of any successful business, shaping the balance between supply and demand. Within this sphere, the periodic inventory system holds its significance, offering a structured approach to tracking stock levels. Understanding what periodic inventory entails and how to calculate it stands crucial for businesses aiming to maintain control over their merchandise and financial records. This article delves into the essence of periodic inventory and provides insights into the methodology used to calculate it.
What is periodic inventory?
It refers to a method of inventory management where a business only updates its inventory records periodically, rather than continuously or in real-time. With this system, the company doesn’t constantly track the number of items in stock as they are bought or sold.
What is the periodic review inventory method?
The periodic review inventory method, also known as the periodic review system, is a method of inventory management used to determine when and how much inventory to reorder at specific intervals. Unlike continuous monitoring in perpetual inventory systems. he periodic review system involves reviewing inventory levels at predetermined time intervals to decide on replenishment orders.
How do you calculate periodic inventory?
Calculating it involves determining the value of the goods that were sold and the remaining inventory at the end of a specific period. The periodic inventory system requires a physical count of inventory to compute the cost of goods sold (COGS). Here’s the basic formula to calculate
Cost of Goods Sold (COGS)=Beginning Inventory+Purchases−Ending InventoryCost of Goods Sold (COGS)=Beginning Inventory+Purchases−Ending Inventory
Here’s a breakdown of each component:
- Beginning Inventory: This refers to the value of the inventory at the start of the period. If this is the first period, the beginning inventory will be the opening inventory balance.
- Purchases: This includes all the additional inventory purchased during the period. To calculate purchases, you would add up the cost of all inventory purchases made during the period.
- Ending Inventory: This represents the value of the remaining inventory at the end of the period. Which is determined by a physical count of the inventory.
Once you have the values for beginning inventory, purchases, and ending inventory. You can plug these numbers into the formula to find the cost of goods sold. Here’s the complete formula:
Cost of Goods Sold (COGS)=Beginning Inventory+Purchases−Ending InventoryCost of Goods Sold (COGS)=Beginning Inventory+Purchases−Ending Inventory
This method allows businesses to calculate the cost of goods sold for the accounting period and, subsequently, the value of the remaining inventory.
Remember, the accuracy of the periodic inventory system depends on conducting regular and precise physical inventory counts and tracking all inventory purchases throughout the period.
5 advantages and disadvantages of using a periodic inventory system?
Here are five advantages and five disadvantages of utilizing the system:
Advantages:
- Simplicity and Cost-Effectiveness: They are less complex and more affordable to implement compared to perpetual inventory systems. They don’t require sophisticated tracking software and can be more accessible to smaller businesses with limited resources.
- Reduced Technical Dependencies: Unlike perpetual systems that demand continuous tracking tools, periodic inventory doesn’t need extensive technological infrastructure. hich might be favorable for businesses preferring a less tech-reliant approach.
- Ease of Implementation: Periodic systems are easier to establish and manage. They involve physical counts at specific intervals, simplifying the inventory management process.
- Time Efficiency: Periodic counts, though requiring dedicated time, don’t need to be conducted as frequently as perpetual inventory updates, saving employee time spent on inventory tracking.
- Suitable for Certain Businesses: It can suit businesses with slower inventory turnover or those where the cost of goods sold doesn’t significantly impact financial statements.
Disadvantages:
- Lower Accuracy: It might be less accurate due to infrequent counts, potentially resulting in discrepancies between recorded and actual inventory levels.
- Increased Risk of Stockouts or Overstock: Limited visibility into inventory levels between counts can lead to stockouts if items sell faster than anticipated, or overstock situations if too much is ordered between counts.
- Labor-Intensive: Conducting physical inventory counts can be time-consuming and labor-intensive, potentially leading to increased costs and human errors.
- Delayed Identification of Issues: With less frequent updates, problems with inventory such as theft, spoilage, or damage may go unnoticed until the next inventory count.
- Inefficient for Fast-Moving Inventory: Businesses dealing with rapidly changing inventory might find periodic systems inefficient due to the risk of running out of stock before the next count.
Businesses should weigh these advantages and disadvantages based on their specific operational needs, inventory turnover rate, and the importance of real-time inventory data before opting for a periodic inventory system.
Why use a periodic inventory system?
Businesses might choose to use a periodic inventory system for several reasons:
Cost-effective
can be less costly and complex to maintain compared to perpetual inventory systems. They don’t require sophisticated inventory tracking systems, barcode scanners, or real-time software. It makes them more accessible for smaller businesses or those with limited resources.
Simplicity
These systems are simpler to implement and manage. They involve periodic physical counts of inventory at specific intervals, which can be easier to conduct and manage compared to continuous tracking.
Time Efficiency
While periodic counts do require time, they don’t need to be performed as frequently as perpetual inventory updates. This can save time for staff who would otherwise be continuously involved in tracking and reconciling inventory levels.
Suitable for Certain Industries
Some industries or types of businesses where inventory turnover is slow, or where the cost of goods sold doesn’t significantly impact financial statements, might find systems sufficient for their needs.
Reduced Technology Dependency
Businesses that prefer a low-tech or manual approach to inventory management may opt for periodic systems as they rely more on physical counts and periodic adjustments rather than advanced technology or software.
However, there are also limitations to consider:
- Less Accuracy: The system might be prone to inaccuracies since they don’t provide real-time updates on inventory levels. There might be discrepancies due to theft, damage, or other reasons between the recorded and actual inventory levels.
- Higher Risk: Relying on periodic counts could lead to a higher risk of stockouts or overstock situations as there’s less visibility into inventory levels between counting periods.
- More Labor-Intensive: Conducting physical inventory counts can be time-consuming and require significant labor. There’s also the potential for errors during counting or in recording data.
Businesses should carefully consider their specific needs, the nature of their products, and the impact on financial reporting accuracy before choosing between a periodic or perpetual inventory system.
