Advantages and Disadvantages of Continuous / Periodic / Centralized / Decentralized and Perpetual Inventory Systems

Advantages of continuous stock-taking in cost accounting

Advantages – The advantages of continuous stock-taking are :

  1. Closure of normal functioning is not necessary.
  2. Whole time specialized staff can be engaged for the purpose since the work is spread throughout the year. In smaller concerns, duties may be assigned to various officers of middle rank rotation to the checking, say, of 20 items. This would be easy because the store ledger card and the bin card will bear the bin number. The officers concerned need only walk up to the particular bin number, count, weigh or measure the article lying there and enter the quantity on the form provided for the purpose. The rest of the work (comparison with book figures) can be done the stores ledger clerk.
  3. Stock discrepancies are likely to be brought to the notice and corrected much earlier than under the annual stock-taking system.
  4. The system generally has a sobering influence on the stores staff because of the element of surprise present therein.
  5. The movement of stores items can be watched more closely the stores auditor so that chances of obsolescence buying are reduced.
  6. Final Accounts can be ready quickly. Interim accounts are possible quite conveniently.

 

The Disadvantages of the Continuous Inventory System

 

High Cost of Implementation

Unlike the periodic inventory system, the continuous inventory system cannot be maintained manually. Therefore, in order to use the continuous inventory system, a business must first install specialized equipment and software. This typically results in a much higher cost of implementation, especially in large businesses with multiple different locations. Even after the necessary equipment and programming is installed, periodic maintenance and upgrades will still be necessary on an ongoing basis, which will cost businesses even more.

Recorded Inventory May Not Reflect Actual Inventory

In a continuous inventory system, transactions are recorded as soon as they take place. For the most part, this is a good thing. However, it can also be a disadvantage because the recorded inventory may not reflect the actual inventory over time. This is mainly due to the fact that physical inventory counts aren’t used in a continuous inventory system. Therefore, whenever errors are entered into the system, items are stolen, or merchandise isn’t properly scanned, the recorded figures will not match with the actual inventory.

Greater Complexity

Another disadvantage of using the continuous inventory system is that it requires businesses to offer additional training to each of their employees because of the complexity of the system. For example, employees will need to be trained on how to use the company’s specific software programs and also be trained to use special equipment, such as scanners. With a greater number of people entering transactions into the system, the company assumes a much greater risk of mistakes being made due to human error.

More Time-Consuming

When using the periodic inventory system, businesses allocate a certain time when inventories are recorded. Depending on the business, inventories could be done weekly, monthly or even annually. This makes the periodic inventory system much less time-consuming than the continuous inventory system. With the continuous system, each transaction must be recorded immediately, auditors must review transactions to make sure they’re correct and physical inventories must still be completed to cross-reference and find discrepancies in the figures

 

Advantages of Periodic Inventory System

  1. Since no permanent employee is required for physical counting of merchandise inventory under this system it is less expensive.
  2. It is applicable for all business organizations large or small dealing with specific or a variety of goods.
  3. Since stock taking is done at the end of a period under this system the normal activities of the business are not hampered.
  4. Since the stock-taking of merchandise is done on a particular date the quantity of stock of merchandise is reliable.

Disadvantages of Periodic Inventory System

  1. On the very day of the physical counting of merchandise stock, normal activities of business remain almost suspended.
  2. The act of counting merchandise stock is to be completed hurriedly due to a shortage of time.
  3. Under this system chance of fraud and forgery lies, because here continuous control over merchandise is absent.
  4. Under this system on expiry of the particular period, the reasons for differences between merchandise at hand and merchandise shown in the books of accounts can hot be sorted out easily.
  5. Under this system, the stock control device is very weak. Their employees get a chance to adopt corruption.

Difference between Perpetual Inventory System and Periodic Inventory System

The differences marked between perpetual inventory system and periodic inventory systems are stated below:

  1. Under a perpetual inventory system, the act of physical counting of merchandise continues throughout the year. But under periodic inventory system act of physical counting of merchandise takes place at the end of an accounting period.
  2. The perpetual inventory system is used in the business organizations were limited items of goods are traded. The application of this system is very expensive. Relatively small organizations dealing with varieties of goods use periodic inventory system in stock-taking. This system is suitable for a large number of goods – it minimizes the complexity of work.
  3. A group of experienced permanent employees is needed for the application of the perpetual inventory system. But the use of a computer scanner has made merchandise stock recording easier.
  4. Under a periodic inventory system, no separate group of employees is needed for the stocking purpose.
  5. The perpetual inventory system is a continuous process. Accounts of inventory stock are maintained throughout the accounting period under this system.
  6. But the quantity and amount of inventory stock can be known at the end of the accounting period under a periodic inventory system.
  7. Application of perpetual inventory system does not hamper normal operating activities of a business. But the application of a periodic inventory system hampers normal activities of the business on the day of inventory taking.
  8. Since quantity and condition of merchandise under perpetual inventory can be known throughout the year, timely measures can he took to remove discrepancy is detected.

But under periodic inventory system since discrepancy of inventory is detected at the end of the accounting period corrective measures are hampered

 

Decentralized Store, Its Advantages And Disadvantages

Meaning Of Decentralized Stores

A decentralized store is that type of store which receives materials for and issues them to only one department and not to the whole company. The decentralized store may be in many numbers in the company, as each department has its own such store. Purchasing and handling of materials are undertaken each and every department separately. If the volume of material activities is large, this type of store is suitable because each and every branch has their own store for facilitating smooth operations of their production activities.

Advantages Of Decentralized Stores

1. Controlling a and storing function can be accomplished easily.
2. Delay in material handling will be eliminated.
3. Minimizes the chances of loss fire.
4. No need of internal transportation costs.
5. Specific needs of individual departments can be easily fulfilled.
6. Saving in material handling cost.

Disadvantages Of Decentralized Stores

1. Higher cost of supervision.
2. More space is required for individual departments.
3. Higher amount of investment is required.
4. More time for stock taking and taking.
5. Higher cost of staff and stationary.
6. Improved technique is less possible for controlling of materials.

 

Centralized

Location of Store room: The location of stores in an enterprise should be at a place where handling, transportation and the movement of the material is at a minimum level. If there is only single plant or many plants situated in the same area then it is profitable to have one centralize store to service all production operations.

But in case of plants located at distant places it is desirable to have separate store for each plant. Sometimes a policy of maintaining centralized stores for common category of items and decentralized stores for individual items is followed the management. The choice of centralized or decentralized system of stores depends on the degree of control, convenience, reduction in costs of storing, transportation, nature of items etc.

Advantages of Centralized Storing System

The following are some of the advantages and disadvantages of centralized storing :

  • Economy in investments.
  • Reduction in incidental expenses
  • Less storage space.
  • Better security arrangements to safeguard against pilferage and theft.
  • Less man-power required due to which reduction in administrative costs.
  • Economy in transportation costs.
  • More bargaining power due to buying in bulk.
  • The variety of items in the inventory can be reduced due to more scope of standardization of items.

Disadvantages of Centralized Storing System

  • More material handling operations.
  • Chances of bottlenecks and delay are likely to be more.
  • More exposed to loss due to natural calamities like fire, rain, dust etc.

 

Advantages of continuous stock-taking in cost accounting

(Visited 289 times, 1 visits today)
Share this:

Written by 

One thought on “Advantages and Disadvantages of Continuous / Periodic / Centralized / Decentralized and Perpetual Inventory Systems”

Leave a Reply

Your email address will not be published. Required fields are marked *