The types are: 1. Perpetual Inventory System 2. Continuous Physical Stock Taking Inventory System. 3. Periodic Stock Verification.
Inventory System: Type # 1.
Perpetual Inventory System:
In the words of Wheldon: “Perpetual Inventory System may be defined as a method of recording store balances after every receipt and issue, to facilitate regular checking and to obviate closing down for stock-taking”.
The Institute of Cost and Works Accountants (U.K.) has defined Perpetual Inventory System as: “a system of records maintained by the controlling department which reflects the physical movement of Stock and their current balance. A perpetual inventory is usually checked by a programme of continuous stock taking”.
The perpetual inventory system gives information such as goods ordered, expected delivery date and unit costs. An essential feature of the perpetual inventory method is that items of stocks are checked periodically, normally at least once or twice in a year. This ensures that stock balances as per book records tally with the physical stocks which is vital for effective stock control.
Perpetual inventory system comprises:
(i) Bin Cards;
(ii) Store Ledger; and
(iii) Continuous Stock-taking.
Inventory System: Type # 2.
Continuous Physical Stock Taking Inventory System:
The perpetual inventory system remains incomplete and ineffective without a systematic procedure for physical verification of stores. Physical check reveals the actual balances of materials on hand on a particular day. But it is to be noted that continuous stock taking is a part of perpetual inventory system.
Difference between perpetual inventory system and continuous stocktaking:
(i) Perpetual inventory system signifies a complete process of inventory control while continuous stock-taking is a part of perpetual inventory system.
(ii) Perpetual inventory means the system of records, whereas continuous stock-taking means the physical checking of those records with actual stocks.
Inventory System: Type # 3.
Periodic Stock Verification:
Periodic Stock verification is another system of inventory control. Under this system the entire stock is verified all at a time at periodic intervals, usually once in a year. The verification of physical stock at the close of the financial year facilitates the valuation of stores for depicting in the final accounts.
Periodic stock taking is to be completed as soon as possible since it necessitates the shut down of the factory resulting in stoppage of production and increased costs. Periodic verification is necessary for stores that do not find a place in the perpetual inventory records, such as work-in-progress, consumable stores, capital assets, loose tools and spare parts lying in the shop.
Wixon, Kell and Bedford compare both the methods in these words:
“Perpetual inventory assists management in planning future purchases, reduces possibilities of stock shortages and aids in the reduction of waste, spoilage etc., but more costly. The periodic inventory system is simple in concept and application. Yet it normally requires the shut down of operation while it is carried out; it is error-prone due to inexperience of inventory takers; it cannot pin-point shortages resulting from theft or waste”.
Thus, we can differentiate between Perpetual Inventory system and Periodic Inventory system in the following way:
(i) Perpetual Inventory system is a management tool which helps the management in planning purchase and reduction of waste and spoilage. But this system is somewhat complex and more costly.
(ii) Periodic Inventory system is simple in concept and application but this is error- prone. Like Perpetual Inventory System it fails to identify shortages resulting from theft or waste.