Question

Do manufacturing companies use a perpetual or periodic inventory system? Please elaborate on reasons why one is preferable over the other.

Answer 1

Perpetual Inventory System – Meaning:

                It refers to updating inventory records such as materials related records continuously as and when a transaction occurs. That is, whenever a purchase transaction occurs or materials issue to production transaction occurs, inventory records will be updated immediately. As a result, physical counts and book stocks will always match under perpetual inventory system. As the records are continuously updated, possibility of theft or stock missing, etc. are very minimum under this system. However, it is more time consuming and involves more paper works.

Periodical Inventory System – Meaning:

                It refers to updating inventory records such as materials related records periodically at regular interval like weekly once or monthly once, etc. That is, records will not be updated as and when a transaction occurs. Instead, cumulative updates will be done on inventory records at regular interval. Due to periodical update procedure, possibility of loss of stock in terms of theft or stock missing, etc. are high under this system. However, it is less time consuming and involves less paper works.

Preferred Inventory System at Manufacturing units:

                As many processes are involved in a manufacturing system and many inward and outward transactions are expected to occur continuously very often, it is not practically possible to update inventory records continuously. Instead, if possible, management use to decide to update inventory records under periodical inventory system but fixing periodical gap as daily or weekly at the earliest possible. If perpetual inventory system is followed, it is very difficult to trace all transactions accurately because there may be certain issue of materials transaction and subsequently some returns also. Meanwhile, another issue transaction may take place at the same time. So, manufacturing units usually follow periodical inventory system rather than following perpetual inventory system.