Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

11.1.3 Physical Inventory and Inventory Valuation

Intended learning outcomes: Identify physical inventory, inventory adjustment, and inventory valuation. Present an example of a stock inventory list. Differentiate between the periodic physical inventory procedure and the cycle counting procedure.



Inventory accounting is dealing with valuing inventory (cf. [APIC16]).
Physical inventory is the process of determining inventory quantity by actual count. (Note: The term physical inventory can also mean the actual inventory itself. See Section 12.1.1.)
Inventory adjustment is a change made to an inventory record to correct the balance, to bring it in line with actual physical inventory balances.
Inventory valuation involves determining the value of the inventory at either its cost or its market value (cf. [APIC16]).

Physical inventory, inventory adjustment, and inventory valuation are needed to ensure goods on hand, for example. Furthermore, inventory is a company asset: One of the entries on the assets side of the balance sheet is the value ofon-hand balance and in-process inventory. Tax authorities demand an exact physical inventory as well. Figure 11.1.3.1 presents an example of an inventory list that shows the value of the inventory stocks.

Fig. 11.1.3.1       Example of a stock inventory list.

The lists generally class items according to group. Additional statistics at the end of the list, not shown here, group product range items according to certain other criteria.

Even with a very precise recording of book inventory, errors are possible — particularly in the case of unplanned, or unannounced, transactions:

  • Errors in the data media recording inventory transactions
  • Recording of erroneous quantity numbers
  • Duplicate entry or failure to record a transaction
  • Incorrect physical counts at the time of stock receipt
  • Errors in the physical assignment of storage areas (stock sites are entered into the computer that in reality contain no stock)
  • Shrinkage, or reduction of quantities in stock by pilferage, deterioration, or misuse

These errors are relatively difficult to detect. Physical inventory counts are necessary if users are to retain their trust in record accuracy, that is, the accuracy of the data in the computer. Depending on the results of physical counts of inventory, new controls may be established, or controls that have proved to be unnecessary may be dropped.

Particularly difficult is the inventory of items like coffee beans, leaves, seaweed, or gasoline. Such items change weight or volume significantly over time due to moisture or temperature.[note 1101]

Periodic inventory is a physical inventory taken at a recurring, fixed interval, usually at the end of the organization’s fiscal period (for example, the end of the calendar year).

Periodic inventory follows the procedure outlined in Figure 11.1.3.2.

Fig. 11.1.3.2       Periodic physical inventory procedure.

The partial quantities of items to be inventoried are chosen in such a way that any deviations within these partial quantities will be representative for the entire quantity of the items.

For some firms, it is too costly to shut down the warehouse entirely, even for a few days. Sometimes the production rhythm does not permit it, or there is a lack of qualified employees for the physical inventory. Here, cycle counting, or even perpetual inventory, is important.

In Cycle counting, according to [APIC16], physical inventory is counted on a cyclic schedule, a regular, defined basis (often more frequently for high-value or fast-moving items and less frequently for low-value or slow-moving items).

The items determined by the cyclic schedule are mostly counted at the end of a workday, by a procedure similar to the one outlined in Figure 11.1.3.3.

Fig. 11.1.3.3       Cycle counting procedure.

The method of comparison is the same as the one described above. A deviation analysis is performed for every counting cycle. It is also possible to count a random selection of all items for each cycle. After correction of any counting errors, the analysis is accepted, and the items can once again be released.

Some firms close the warehouse at the end of a working day for half an hour. They then in­ven­tory a random quantity of items and perform the deviation analysis. Usually, the same employees who have worked with receipts and issues during the day perform the counting.




Course section 11.1: Subsections and their intended learning outcomes

  • 11.1 Stores and Inventory Management

    Intended learning outcomes: Present characteristic features of stores management. Produce an overview on inventory transactions. Describe physical inventory and inventory valuation.

  • 11.1.1 Characteristic Features of Stores Management

    Intended learning outcomes: Present in detail characteristic features such as storage location ID, storage type, valuation basis, stock organization, embedding in the flow of goods, storage management principle, inventory issuance principle, and inventory control principle.

  • 11.1.2 Inventory Transactions

    Intended learning outcomes: Differentiate between perpetual inventory and book inventory. Produce an overview on the sources of planned and actual inventory transactions.

  • 11.1.3 Physical Inventory and Inventory Valuation

    Intended learning outcomes: Identify physical inventory, inventory adjustment, and inventory valuation. Present an example of a stock inventory list. Differentiate between the periodic physical inventory procedure and the cycle counting procedure.