Business Finance
addition inventory costing methods

Question Description

 (3) risks and three (3) benefits of using the perpetual inventory management system. Discuss the main types of inventory errors that could occur using the perpetual inventory system, and the major impact to the balance sheet and income statement

Final Answer

Risks -

Perpetual inventory management system requires time and financial investment . 

If automated system is used for recordings training employees is a must . 

Since automated system are used often , there is a chance of hackers trying to make the system go haywire or misuse it . 

Advantages -

Allows for accurate restocking

Produces more accurate interim financial results 

A company doesn't need to maintain physical count of all inventories 

Likelihood of error is minimized due to immediate recording of withdrawals, replenishment etc . 


Common types of inventory errors are -

Incorrect unit count - This is perhaps the most obvious error . It occurs when the physical quantity of the inventory is incorrect . This results in excessively high or low inventory quantity that is then translated into valuation error when you multiply it by unit count . This can cause mild to very severe problems . 

Incorrect unit of measure - This is when you count a certain quantity and enter it into the accounting records , but the designated unit of measure in the item master file for that item is different from what you have assumed . You may be counting in unit individual quantities but the computer set to dozens . Thus there is an error by a factor of twelve .

Incorrect standard cost - In incorrect stand costing system you store the data of the standard cost of the item in the master file . If no one changes this value then the latest values will not be used . This may result in significant losses if the package is huge . 

Customer owned inventory - Sometimes customers may have inventory at your place , you may mistakenly take it as your own inventory . This error many result in delay or unavailability of products in time because you think you have enough of some product until you realise it very late . 

Incorrect part no - You may assume something you are counting has a certain part no and will assume the inventory count to that part no in the computer system . But if it has different part no then you have made not one but two errors by assigning correct count on wrong part and assigning no count at all on wrong part . 

Improper cutoff - Suppose you have received your shipmen but the invoice has not yet been sent due to some delay . But you have recorded the inventory . Thus you have recorded inventory with cost . 



warrenc (144)
New York University

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