Question

Chapter Five mentions two different types of inventory systems: periodic inventory and perpetual inventory. Reflect upon these two types of inventory while answering the following questions: In YOUR OWN words, what is the main difference between these two types of systems? Provide a real-world example of businesses and/or locations that may use EACH type of inventory. Perhaps you have already worked for a company who uses one or the other. (You should have a total of two well-thought out examples. You may NOT use the examples provided in the lecture notes). Explain how you know that the inventory type you described is indeed what the business uses. Was this the most efficient type of inventory for each business? Finally, if you owned your own office supply store, which type of inventory would you use, and why? Explain your answer carefully.

Answer 1

Periodic inventory Vs Perpetual Inventory-

In periodic inventory system, the company makes physical counts after some interval to know the actual inventory with them and calculate the cost of goods sold while In perpetual inventory system the company maintains proper records of inventory including its consumption and always have the figures of the closing inventory with them.

Example of industry using periodic inventory system- Lighting Industry

A Lighting industry can use perpetual inventory but as it uses various consumables and chemicals the quantity of which is not fixed in proportion to each unit produced, it has to rely upon the periodic inventory system to know the closing value of inventory of the consumables and can calculate the exact cost of goods sold only after the physical count.

Example of Industry using perpetual inventory system- The retail stores of grocery having each item counted and properly barcoded can control it's Inventory through perpetual system as you can use the computer to maintain the inward and outward of each item bearing a unique barcode on them.

Normally the businesses uses the perpetual system of Inventory. The businesses prefer the perpetual system and maintain the inventory using the SAP softwares and track the movement of the raw material, consumables ,WIP and finished goods within the factory which help them to know the exact situation of inventory with the minimal differences.

If I own a office supply store I would prefer to have perpetual inventory system. Although the cost of maintaining records will increase but it will help to maintain Inventory control with in the store and also help to make a moral binding on the employees of the store. It will also help to control and detect and possible embezzlement within time.