INVENTOR

Y
COUNTIN
G
SYSTEMS
MANAGING INVENTORY
MGL204

DR J KANYEPE (CMILT)
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LECTURE OUTLINE

•Introduction
•Definition of terms
•Inventory counting systems/methods
•Inventory valuation

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LEARNING OBJECTIVES
•By the end of this lecture, learners should be
able to:
•Describe the various inventory counting
systems/methods
•Explain the inventory valuation methods
•Application on inventory valuation methods in
real situations

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INTRODUCTION
•Modern businesses are becoming more and
more complex.
•As they grow in complexity, managers
requires more information in order to
intelligently operate his business.
•As the number of reports and records
required by a firm increases, the amount of
actual data processed in the office usually
increases more than proportionally.
•With more data and more extensive records,
the access time for any given piece of data
will probably increase, as will the
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report
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INTRODUCTION
•Inventory counting is a common practice
carried out in the warehouse to accurately
verify stock levels and locations.
•This is fundamental for planning procurement
and logistics distribution tasks.
•There are various reasons for discrepancies,
some of them being: breakage, theft,
registering wrong quantity, scanning the
wrong item or the wrong location, moving
items between shelves without registering
that in the system, etc
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PERPETUAL INVENTORY
SYSTEMS
•Perpetual inventory system or continuous
inventory system describes systems of inventory
where information on inventory quantity and
availability is updated on a continuous/real-time
basis as a function of doing business.
•This is accomplished by connecting the inventory
system with order entry and in retail the point of
sale system.
•Each sale or purchase of merchandise is updated
on a real-time basis automatically, thus providing
the firm with a full financial picture of your
inventory levels.
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PERPETUAL INVENTORY
SYSTEMS
•The inventory count is updated in real-time using
inventory management software and procedures.
•It entails use of barcode scanners to capture sales,
purchases, or returns as they happen.
•The system is distinguished from the periodic approach
by the automatic or perpetual updating of the
inventory.
•Perpetual inventory involves use of advancements in
inventory management software than can be
integrated with other business systems.
•The flexibility of perpetual inventory software to
interact with other corporate systems gives it its true
worth.
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PERPETUAL INVENTORY
SYSTEMS
•Marketers may position the business to meet
anticipated customer demand.
•It is done by understanding customer behaviour in
the context of historical trends.
•This system can range from very simple to very
sophisticated.
 A two-bin system, a very elementary system, which
uses two containers for inventory.
 Batch or online
 Batch systems, inventory records are collected
periodically and entered into the system.
 Online systems, the transactions are recorded
immediately.

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WHO SHOULD USE A PERPETUAL
INVENTORY SYSTEM?

•Business owners or management need up-to-

date information about inventory levels thus
perpetual inventory system is the way to go.
•Large businesses prefer perpetual inventory
systems. They have large amounts of inventory.
•New and small to medium-sized organizations,
look for scalability.
•Cycle counts, which are required for a periodic
system, are challenging to conduct in large
enterprises thus having an updated database of
products may make it simpler for a company
with many retail locations to manage
inventories.
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WHO SHOULD USE A
PERPETUAL INVENTORY
SYSTEM?
•Small businesses looking to expand, or want to
take more control over their merchandise, also
prefer a perpetual system, as there are plenty of
intuitive and low-cost perpetual software options
in the market today.
•Other companies that need eternal inventory are
those that specialize in drop shipping-
manufacturers send products straight to clients
or in trade and distribution.
•A perpetual system or constant updates are
needed to understand which stocks are available
at any given moment.
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WHEN WOULD YOU USE A
PERPETUAL INVENTORY
SYSTEM
•Perpetual inventory systems are helpful for
individuals who must constantly comprehend
margins and profitability.
•Big businesses use a perpetual inventory
system with lots of products or by companies
who seek to grow new businesses over time.
•Perpetual inventory systems are becoming
more affordable and practical for usage by
even small organizations.
•More real-time product identification and
advancements in all areas relating to
transmitters in and on products are DRwhat
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J KANYEPE (CMILT)
WHEN WOULD YOU USE
A PERPETUAL
INVENTORY SYSTEM
•Each time the company makes a sale or buys
new goods, adjustments are recorded by
software into a sales revenue account.
•The price charged is also recorded by the
software.
•The cost to the client of the product is its
selling price.
•The costs related to the product, such as
shipping, receiving, and storage expenses,
are included in the purchase price.
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ADVANTAGES OF
PERPETUAL INVENTORY
SYSTEM
1. Reduces Costs
• It assists in eradicating labor costs and human
mistakes in addition to helping in the real-time
tracking of inventory data.
2. Real-time Updates
• A perpetual inventory system recognizes changes
in inventory levels, as soon as a sale or purchase
takes place.
• This constant inventory tracking provides
businesses with the advantage of always knowing
which goods may be running low so that they can
respond on time and avoid stock-outs or shortages.

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ADVANTAGES OF
PERPETUAL INVENTORY
SYSTEM
3. Precise Demand Forecasts
• Demand forecasting is made simple with a real-time
inventory system.
• One can analyze historical inventory and sales data to
forecast upcoming sales cycles and ensure they have the
correct inventory quantity.
4. Decreased Frequency of Physical Inventory Counts
• Physical inventory counts no longer need to be performed
regularly, given that every physical count requires a
company to halt its warehouse operations for the count
period.
• External auditors are not required to see an inventory
count, instead, they are given an inventory report that
contains the locations and unit quantities of the goods,
which they may compare to the actual inventory.
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ADVANTAGES OF
PERPETUAL INVENTORY
SYSTEM
5. Planning and Forecasting
• Businesses can improve their demand forecasts by
analyzing the data trends from historical
transactions.
• Businesses can get a better understanding of their
customer’s buying patterns, along with insight on
best-selling products and growing segments.
6. Save Time and Minimize Error
• There’s nothing better than automating tedious,
repetitive, and time-consuming tasks.
• A perpetual inventory system saves business time,
money, and prevents a handful of human accounting
errors that can occur along the way.
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DISADVANTAGES OF
PERPETUAL INVENTORY
SYSTEM
1. Technological Dependence
• Implementing perpetual inventory systems
necessitates a sizable technological
infrastructure i.e software and hardware tools
such as warehouse management software,
barcode/RFID scanners, and point-of-sale
systems.
2. Employee Training
• Personnel training is required in terms of time
and financial resources.
• In contrast, manual procedures are often used in
periodic inventory systems to count and record
your inventory.
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DISADVANTAGES OF
PERPETUAL INVENTORY
SYSTEM
3. Margin-of-Error
• Even if computers are less likely to make mistakes than
people, it is still conceivable, some procedures need
some human interaction (such as scanning items),
physical counts are required to confirm inventory data.
• It is also due to the propensity for human beings to
engage in dishonest behaviors like theft.
4. Breakage Of Items
• For quick record keeping, inventory levels can be updated
using buy and sales data.
• Any object that is damaged, spoiled, or unsaleable is regarded
as a part of the inventory.
• The perpetual inventory system is at a disadvantage if there
isn't an actual physical count to update the broken item's
data.
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PERIODIC INVENTORY
SYSTEMS
•A periodic inventory system is an inventory
management valuation method to determine the cost
of goods sold (COGS) for accounting and financial
reporting purposes.
•As its name implies, this solution requires physically
taking inventory levels at designated periods.
•Intervals between periods could be as short as a week
or a month.
•However, because physically counting inventory
generally takes an excessive amount of time and
staffing, especially for larger product quantities, many
companies set quarterly or annual accounting periods.

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 PERIODIC INVENTORY SYSTEMS

•Since inventory
counts happen at the
end of an accounting
period, you must rely
on estimates to
understand COGS
during intervals.
•When ending
inventory is
determined, you use
it to adjust estimates
to reflect actual
counts.
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HOW DOES IT WORK?
•Periodic inventory systems don’t continuously update
inventory accounts to reflect individual sales.
•Instead, you manually edit these values at the end of
your specified time interval.
•As result the method requires keeping personal
accounts for beginning inventory, purchases and on-
hand inventory.
•Consider the beginning inventory costs for a period,
add the cost of inventory purchases during the
interval and subtract the cost of your remaining
inventory after you’ve gathered your ending count.
•The result is your cost of goods sold.
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HOW DOES IT
WORK?
•In addition to accounts for
beginning inventory, purchases and
ending inventory, you’ll want to
keep track of sales.
•It won’t directly impact your
inventory account since the
numbers aren’t adjusted until you
have your ending counts.
•Compare recorded sales to
beginning and ending counts at the
end of a period to ensure products
aren’t missing.

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ADVANTAGES AND
DISADVANTAGES

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PERPETUAL VS
PERIODIC

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INVENTORY VALUATION
•Inventory valuation is an accounting practice that is
followed by companies to find out the value of unsold
inventory stock at the time they are preparing their
financial statements.
•As a asset for an organization it needs to have a financial
value- this value can help determine inventory turnover
ratio, which in turn will help in making purchasing decisions.
•There are three standard inventory valuation methods for a
periodic inventory system and a fourth less common
approach:
1) First-in, first-out (FIFO),
2) Last-in, last-out (LIFO)
3) Weighted average costing and
4) Specific identification

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INVENTORY VALUATION
METHODS
1. First-in, First-Out (FIFO)
• Sell your products in order from oldest to newest- take
stock of the most recently purchased items at the end
of your accounting period.
• In addition, costs are assigned based on the most
recent price of purchased goods.
2. Last-in, first-out (LIFO)
• It is similar to FIFO in that it requires selling goods in a
particular order.
• However, instead of selling the oldest items first, you
sell the most recently purchased items.
• At the end of your accounting period, you’re left with
the oldest stock, and the cost of goods sold will reflect
the price of these purchases rather than the most
recent prices.
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INVENTORY VALUATION
METHODS
3. Weighted Average Costing
• Rather than valuing stock based on the newest or oldest
price of purchased goods, weighted average costing
takes both into account and lands you somewhere in
between.
• To determine your weighted average, you take the cost of
your beginning inventory, add the cost of purchases
made during the period and divide by the number of
available items for sale.
4. Specific Identification
• If you choose this method, prepare to keep in-depth
records relating to inventory quantities and costs for
individual items.
• It requires you to document each item’s individual cost,
including additional costs relating to the item prior to
selling it, instead of grouping purchases together.
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WHICH INVENTORY
VALUATION METHOD TO
USE?
•Inventory valuation technique depends on the
market conditions, and financial goals of the
organization.
•The following scenarios can help to pin down
the best inventory valuation technique.
1. Applying for a loan for business expansion
2. Attracting investors and keeping
shareholders happy
3. Saving taxes

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 WHICH INVENTORY
VALUATION METHOD TO
USE?
1. Applying for a loan for business expansion
• When a business is planning to apply for a loan, it will need to
keep its stock as collateral.
• It is preferable if the value of the stock is high, because higher
valuation will give more assurance to the lender.
• If prices are increasing throughout the year, a FIFO inventory
valuation technique will give a higher value for closing inventory.
• If prices are decreasing, a LIFO technique will give a higher
value.
• The value of the closing inventory in the balance sheet is one of
the factors used by financial institutions before approving a loan
to a company, so the technique that gives the highest inventory
value will be the best for the company.

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WHICH INVENTORY
VALUATION METHOD TO
USE?
2. Attracting investors and keeping shareholders
happy
• A company with a high profit margin can get a lot of
attention from potential investors and keep its
existing shareholders happy.
• Thus if you’re looking for a new funding opportunity
or if you want to please your shareholders with good
earnings, then FIFO valuation will be beneficial under
inflationary market conditions.
• Similarly, the LIFO valuation will be a better choice
when prices are falling.

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WHICH INVENTORY
VALUATION METHOD TO
USE?
3. Saving taxes
• If an organization is looking for ways to cut
down on its tax liability, then its inventory
valuation technique can help.
• Assuming an inflationary situation again, a
LIFO valuation technique will save some
money.

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TASK

In pairs discuss the following

1. Two-Bin System
2. Universal Bar Code

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CONCLUSIONS
•Inventory counting is an essential process in
warehousing
•it provides a clear picture of items on hand, helps
to keep optimal inventory levels, and facilitates
data-driven inventory forecasting.
•If performed manually, inventory counting is a
labour-intensive process fraught with mistakes.
•Modern technology-based approaches to
inventory counting use automation to boost the
counting speed and inventory accuracy and ease
the burden of doing it manually.
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