Perpetual inventory derives its name from the functions it does i.e. at all times, indicates the balance of each item of store in hand. The ascertainment of the quantity & value of stock in hand at any time without the stock being physically counted & independent valuation thereof is covered by the functions, & also at any frequency desired by the management, physical verification of stock is done.

    A perpetual inventory is usually checked by a continuous stock taking programme & sometimes, the two terms are loosely considered synonymous, which is not recommended. Perpetual inventory means the system of records, on the other hand, physical checking of those records with actual stocks are defined by continuous stock taking.

     Thus perpetual inventory means automatic inventory. It comprises of (i) bin card, for quantitative perpetual inventory; (ii) stores ledger for quantitative cum valued perpetual inventory; & (iii) continuous stock taking for physical perpetual inventory.

Advantages of Perpetual Inventory system:

1. On the stores, a complete & reliable check is obtained.


2. For the purpose of stock taking, the normal working of the company is not needed to be kept suspended.


3. As stock figures are available from cost records, under financial accounting system, preparation of profit & loss account & balance sheet need not be delayed for stock figures.


4. Detection & adjustment of discrepancies can be readily made. Where ever possible, measures to avoid such discrepancies should be taken


5. It becomes possible to keep the stock within the prescribed limits, because to this aspect, the stores audit also extends.


6. Since within the limits, the stocks are kept, the chances of capital being unnecessarily blocked, bottleneck in supply for production, loss due to deterioration, obsolescence etc., are not there.


7. Assurance is given of timely stock replenishment because store audit also looks into the fact whether as soon as the stock reached the ordering level, initiative for purchase was taken or not.


8. Upon the stores personnel, it creates a moral check.


9. Reliable stock figures can be obtained for fire insurance etc.


10.  To work on the system, experienced personnel can be employed.


11.  Detection of obsolete & slow moving materials can be achieved by systematic review of perpetual inventory.

Disadvantages of Perpetual Inventory system:

1. It is costly.


2. The work shall be hampered unless the bin cards & stores ledgers are kept up to date.


3. The bin card balance & the stores ledge balance must be reconciled first if the two balances does not agree & then only physical verification of stock shall be feasible. This will require time.
   
   The perpetual inventory system is of high importance, in spite of the above mentioned disadvantages, because these disadvantages are easily outweighed by the various advantages which are mentioned above.

Inventory Turnover:

   Inventory turnover or stock turnover which is usually expressed as a ratio, indicates during a particular period, the number of times the inventory is turned over (i.e. bought & consumed).

    It measures the rate at which materials are consumed. The slow-moving, dormant & obsolete items are identified with the help of the ratio. By using the following formula, the calculation of the ratio can be done:

Inventory turnover ratio = Cost of materials consumed during a period
                                            Average inventory held during the period

    Average inventory is the average values of the opening & closing stock of materials, or if monthly or quarterly stock figures are available, the average of these figures taken over the period.

    Low stock is indicated by a high inventory turnover & high stock in relation to usage is indicated by low inventory turnover. Therefore, (a) danger of deterioration or obsolescence, (b) excessive holding costs, e.g. interest on capital, (c) excessive storage space, can be avoided by a high inventory turnover.

    On the other hand, accumulations of obsolete materials, carrying of too much stock etc. are indicated by a low inventory turnover. However, for holding high stocks, there may be good reasons, namely (a) at cheap prices, large forward purchases made, (b) uncertainty of supply, (c) cost of stock-outs, (d) high reordering costs.

For inventory turnover, no general rules can be laid down; on individual circumstances, the desired turnover depends.

Problems in calculating the ratio may be:

(a) Deciding on how many ratios to calculate. Much work & materials may be involved for calculating a ratio for each item of materials; therefore, the ratios should be grouped.

(b) Store price fluctuations may mean that, different unit values from those of average stock may be included in the cost of materials. Therefore, instead of values, number of units should be used.

(c) Since average can be calculated in a number of ways, it can be misleading.
The inventory turnover ratio is only one of a number of techniques available for inventory control & probably not as important as techniques used for determining the optimum order size & level of stock.

Problem:
In a period of 1 year, comprising 365 days, the particulars relating to two items of stock A & B, are the following:
                                                                                                    A                 B
Stock on 1.1.10                                                                         6000           7000
Purchases during 2010                                                             30000          9000
Stock on 31.12.10                                                                      2000          5000

Calculate the turnover ratios & comment on the status of the stock.

Solution:  The turnover ratios are worked out as follows:

 Materials consumed during 2010:
     Opening Stock                                                                         6000            7000
     Add: Purchases                                                                      60000           9000             
                                                                                                   66000           16000
Less: Closing Stock                                                                    (2000)          (5000)
                                                                                                  64000         11000
Average Inventory: A=   (6000+2000)/2 = 4000
   
                                B = (7000+5000)/2 = 6000
                                                                                                                                        
Inventory turnover ratio= Cost of materials consumed during a period
                                            Average inventory held during the period

                                A = 64000/4000 = 16

                                B= 11000/6000 = 1.833

No. of days the Average inventory held: A = 365/16 = 22.81 days.

                                                                 B = 365/1.833 = 199.45 days
                                                                                                   
Thus the above results show that, Material A is a fast moving item & material B is very slow-moving.

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• Accounting for Materials
• ABC System/Selective Control System
• Average Cost Methods
• Centralized vs Decentralized Purchase
• Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method
• Economic order Quantity (EOQ)
• General Accounting Entries for Materials
• Levels of Stock
• Material Control
• Materials-Introduction
• Materials-Pricing the Issue
• Materials receipt & checking, Constituents of Material Cost
• Periodic Simple Average Method, Periodic Weighted Average Method
• Purchase Procedure
• Standard Price Method
• Stock Valuation
• Types of Stores