Cost benefit analysis: Perpetual inventory System Vs annual stock check

Introduction

Cost benefit analysis is a management tool that is used when determining how well or how poorly an action will turn out to be if undertaken. Managers in their daily functions are faced with complex managerial problems that require proper analysis of the available actions. For in stance, a production manager would be in dilemma as whether to hire additional production staff or work overtime to meet a given target. The answer to these decisive situations can be found through cost benefit analysis.

To carry out a cost benefit analysis, one is required to list down all the benefits (positive factors) and the costs (negative factors) which then are summed and to find the net benefits. This paper presents a dilemma: a perpetual inventory count or the annual stock check.

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In Perpetual stock count, (continuous Inventory) “information on stock availability and quantity is updated in a day-to-day basis” (Boardman, Greenberg, Vining, & Weimer 2005 p. 67). Annual stock check (periodic inventory system) on the other hand, does not require a frequent update on the quantity or availability of stock but rather this is done at the end of the year (Nas 1996 p.136).

The actual inventory at the end of the period is established by physical count and this figure is used in computing the amount of stock sold (Hadley & Whitin 1963 p.224). The two systems possess a range of advantages and disadvantages, as enumerated below.

Perpetual inventory system Annual inventory check
Cost of goods sold and inventory accounts are updated daily and maintained all through the year

Purchases made are reflected in the inventory account.

Purchase return account is not maintained such is reflected in the inventory account.

Inventory is modified after every single sale deal made.

Goods returned after sale lie in the inventory and their sale value subtracted from the total cost sale value.

Inventory and Cost of goods sold accounts are not prepared until the end of the year

Keeps a purchase account for recording purchases made

Keeps a purchases returns account for the purchases returned.

The value of sales is settled at end of year.

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