Perpetual Inventory System | Cost Accountancy

In this article we will discuss about Advantages and Disadvantages of Perpetual Inventory System.

Advantages of Perpetual Inventory System:

The following advantages can be derived from Perpetual Inventory System:

(i) The long and costly work of a stock-taking count can be avoided.

(ii) It does not become necessary to stop production at the time of carrying out of physical stock taking.

(iii) Discrepancies and errors can be detected and localised promptly and remedial measures can be adopted to prevent their occurrence in future.

(iv) This system has a direct effect on the morale of the staff and acts as a deterrent to dishonesty.

(v) This system ensures that adequate stocks are maintained within the prescribed limits as the actual stocks with the authorised maxima and minima can be compared.

(vi) The stocks being kept within the prescribed limits, the working capital sunk in storing materials does not exceed the desired amount.

(vii) The disadvantages of excessive stocks can be avoided.

Disadvantages of Perpetual Inventory System:

The disadvantages of excessive stock arise because of:

(a) Loss of interest on capital locked up in stock;

(b) Loss through deterioration;

(c) Fall in market value;

(d) Obsolescence.

(viii) As the storekeeper remains responsible for maintaining different prescribed stock levels, the production departments do not suffer from shortage of raw materials. It helps to prevent delays and stoppage in production.

(ix) Profit and Loss Account and Balance Sheet at interim period, if required, can be prepared on the basis of prompt information about the stock of raw materials to be supplied by the Store Ledger.

(x) It acts as an internal check since a detailed and reliable check can be conducted by experienced men.

(xi) Perpetual inventory records provide details about cost of materials for individual products, jobs, processes, production orders etc. These information are helpful to management in exercising control over costs.

(xii) More effective control through greater opportunity for using specialised skills and equipment.

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