Inventory Costing Project: Perpetual and Periodic Inventory Systems

1275 words (5 pages) Essay in Organisations

18/05/20 Organisations Reference this

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1) A periodic inventory system uses an actual physical count, performed at regular intervals, to keep track of the inventory. After each interval a count is performed and the inventory and cost of goods sold are updated. The purchases, however, are kept track of constantly. To calculate cost of goods sold in the periodic system the following equation is used: cost of inventory purchases + beginning inventory – ending inventory = cost of goods sold. Large businesses’ inventories include thousands and thousands of items so performing a physical count is extremely tedious and difficult. Due to this, large companies only update their counts once a quarter or possibly once a year. This leads to the inventory and cost of goods sold figures being quite inaccurate at certain times for large businesses under this model.

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 A perpetual inventory system continuously keeps track of the inventory count, adding and subtracting every time a unit is purchased or sold. This means that inventory numbers should theoretically always be accurate, but there are still some sources of error. Possible sources include employee mistakes, computer glitches, and theft. These systems are primarily computer based utilizing scanners and bar codes on inventory to track everything digitally.

2) The first advantage of the periodic system is that the company forgoes the cost associated with a perpetual inventory system. This includes the cost of software, computer systems, and staff to operate them. Another advantage of the periodic system is that since an actual count is taken the inventory on certain crucial dates can be confidently known. Meanwhile, in a perpetual system, if there are any errors with the system they could accumulate over time and cause inaccurate numbers on important days like quarterly or yearly reports. A disadvantage of this system is the lack of accurate inventory and cost of goods sold figures. Knowing these numbers could be important to making decisions within the business and under the periodic system there are times when they will not be known accurately. Another disadvantage is the difficulty of manually counting the entire inventory. For some companies this disadvantage is the reason that they use perpetual inventory while for others inventory can be counted with relative ease. A good comparison would be an Amazon warehouse vs a car dealership. An Amazon warehouse maintains a perpetual inventory through the use of scanners by every individual employee while a car dealership could easily count the number of cars on their lot every day if they wanted to. Manually counting every item in an Amazon warehouse, however, would take a significant amount of time and effort.

 The first advantage of the perpetual system is that, barring system errors, an accurate count for inventory and cost of goods sold is know at all times. Another advantage is that a perpetual system is attainable for companies which deal in high volumes of items. Using a periodic system would be nearly impossible for some companies. Referring back to the earlier example, using a periodic system in an Amazon warehouse would be nearly impossible due to the sheer volume of inventory contained in even a single warehouse. A disadvantage of the perpetual system is the cost of acquiring and maintain the system. The systems usually require purchase of software, computers, scanners, staff to operate it, and more. Another disadvantage is that since the inventory is never actually counted systematic errors could accumulate over time and cause inaccurate inventory numbers. This would lead to either reporting inaccurate numbers or having to perform a periodic inventory check which defeats the purpose of having a perpetual system in the first place.

3) I will use Amazon as my first business because I worked there in the past and have some experience with their inventory system. Amazon is an online retailer which means all of their goods are stored in warehouses until purchase and are then shipped off to the customer. Due to the large volume of items in and out Amazon uses perpetual inventory systems at their warehouses. I will use Hershey Park as my second business because I have also worked in the warehouse there and also have experience with their inventory system. Although they are a warehouse that deals with a wide variety of different sized goods like Amazon, they use a periodic inventory system with counts usually being performed every one or two days. Amazon is an online retailer that deals in a wide variety and huge volume of items. Their main selling point is that you can get a good selection of just about any type of item with good prices and fast shipping. Hershey Park’s warehouse deals in supplying the different stores around the park with merchandise at the beginning of each day. They also stock a wide variety of items albeit in a much lower volume than Amazon which is why they can manage to use the periodic inventory system.

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4) Perpetual inventory is very valuable for Amazon because trying to manually count their inventory would be a nearly impossible task. It would take one person so long that by the time they finished the inventory would have significantly changed. Since periodic is just not feasible Amazon uses perpetual. An added benefit is that since every employee uses scanners to perform their duties (unpacking, stowing, pulling, packing), Amazon can also use the inventory system to track employee performance. They take full advantage of this and place benchmarks on employee performance. This allows them to get another benefit out of the cost associated with the digital perpetual inventory system. Hershey Park, on the other hand, uses the periodic inventory system. Since they deal in much less volume it is feasible for them to count inventory frequently. This allows them to save the money on a big system and this method of inventory tracking probably has little chance of error since the count is updated so frequently.

5) Amazon actually uses neither LIFO nor FIFO when it comes to deciding which item will be sold next. They decide that by which item is in the warehouse with closest proximity to the customer. Due to this it appears from their financial statement that they tend to use weighted average to calculate inventory and cost of goods sold figures. This makes sense in their position as using the item closest to the consumer will reduce shipping times and increase customer satisfaction. Since there is no set order in which items will be sold weighted average will be the most accurate method. The Hershey Park warehouse actually utilizes both LIFO and FIFO. For perishable inventories FIFO was used and for the non-perishable inventories LIFO was used. The warehouse stored a significant amount of candy and sold the older items first to prevent spoiling.

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