Inventory System

The two principal systems for determining the inventory quantities on hand are the periodic system and the perpetual system. Both systems may be used simultaneously by companies with different classes of inventory.

The Periodic System

This system requires a physical count of goods on hand at the end of the period. A cost basis (i.e., FIFO, LIFO, etc.) is then applied to derive an inventory value. This system is widely used because it is simple and requires records and computations primarily only at the end of the period. It is not as useful as the perpetual system, however, in the planning and control of inventories.

The Perpetual System

This system calls for a continuous record of receipt and disbursement for every item of inventory. Physical counts of the quantities on hand are usually made at least once a year and reconciled to the perpetual records. Most large manufacturing and merchandising companies use the perpetual system to provide continuous control over the quantities and the investment in inventory.
Adequate supplies are assured for production or sale and costly machine shut-downs and customer complaints are minimized.

Perpetual and Periodic inventory System

Perpetual and Periodic inventory System

Inventory Costing

Inventory cost includes all expenditures relating to inventory acquisition, preparation and readiness for sale. Any purchase discounts are treated as reductions in the cost of inventory. Accounting for inventory costs for goods in process and finished
goods can be best accomplished by means of a good cost accounting system, a topic which will be treated in depth in later volumes of this series. In a manufacturing company, the two primary methods for accumulating costs are (1) by job order and (2) by process or operation.

Job Order Cost System

This system is generally used by companies which manufacture a number of different products in limited quantities. The costs for each job are accumulated separately on a job order cost record and are included in goods in process until the job is completed. The completed job and its associated costs are considered finished goods until the job is sold. Examples of companies using job order cost systems are printing shops and construction companies.

Process Cost System

This system is used where large amounts of similar units are produced on an assembly-line basis. The controlling factor is the cost center or department. Costs of raw material, direct labor, and manufacturing overhead are accumulated by cost center rather than by individual job. The unit cost is obtained by dividing total costs by the quantity produced for the week, month, etc. Examples of companies using process cost systems are steel mills, paper companies, and other
large-volume enterprises.