Question

Discuss in detail the following;
a. Cycle counting and Importance of implementing cycle counts?

b. Inventory Valuation Process and methods of inventory valuation adapted by the firms?

Answer 1

Cycle Counting:- Cycle counting is defined as an inventory auditing procedure where the company counts a part of inventory every day. The scheduled is developed for counting and a specific part of inventory is counting according to the schedule laid down by the company.

Importance of implementing cycle counts:-

1. Accurate Inventory Management Year Round:- Instead of waiting till the end of the financial period and submitting details for financial reports, cash flow and taxes, a precise count and valuation can be maintained without any chance of errors in terms of inventory valuation.
2. Open for Business Through-out:- Company that take inventory at the end of year need to shut down business for a couple of days for their staff to count the inventory which is a time consuming and tiring process forgoing sales and revenue which could have been achieved during that shutdown period.
3. No More Stock Out:- Companies do not have to worry about the surge in product demand where they might run out of stock and take time to get the next stock in stores. You need not pay extra money to supplier for a rush delivery of stock to meet customer demands.
4. Reduced Management Time:- Every department of the company is updated with current valuation and there is less time spent to track down inventory and identify the locations of items in the warehouse. The warehouse team responsible for counting stock is more efficient in handling stocks and an accurate record is maintained with fewer efforts.

Inventory Valuation Process:- Inventory valuation process can be defined as interpreting the net worth of company’s stock in monetary terms so that the accurate value can be submitted to the finance team who then add the value in the financial statements. Here are the three methods which companies follow for inventory valuation:-

1. First In-First Out Method:- In FIFO method, The goods sold first are in order of their purchase or productions. The cost of goods sold is the cost of older inventory and the remaining goods are the ones which are purchased or produced later.
2. Last In-First Out:- A complete opposite method to the previous one, the newer inventory arriving at the facility is sold first and the remaining stay in the inventory. The cost of goods sold usually increase with the newer high priced inventory and what remains is the older lower-cost inventory.
3. Average Cost Method:- In this method, the entire inventory is valued by weighted average cost per unit where the total cost of goods in inventory is divided by total units in the inventory. The purchase or production order of the inventory is not considered in this method.