Advantages & Disadvantages of Each Method
- Better Overall Control.
- Allows you to monitor your inventory levels and provides information for helping determine optimum inventory levels and ordering requirements.
- You know what you have on hand at all times-better customer service.
- No need to estimate or count inventory when preparing financial statements.
- Helps prevent stock out conditions.
- Information is available for determining profit by customer and product lines.
- Detailed records required.
- Simple to use.
- Less record keeping is required-but don't be fooled !
- Determining cost to assign to your ending inventory can be quite a hassle.
Purchase orders and invoices normally contain many different products and their associated unit costs. Determining what cost(s) to use for valuing ending inventory may require a substantial effort.
- Less overall management control-theft, etc.
- Information is not available for determining optimal inventory levels.
- Stock outs may occur.
- Information is not readily available for determining profitable customers and product lines.
- Information is not readily available for preparing financial statements.
As a general rule, the perpetual method should be used for high dollar value products such as jewelry, cars, boats, lawn mowers, mink coats, etc. . The periodic method is acceptable for low dollar value products and items where the cost of maintaining detail records is greater than the benefits derived. An example would be a hardware store's nuts, bolts, screws, and, nails.
Observation:In the ole manual record keeping days (I know some businesses still don't use a computer), I could probably present a better case for using the Periodic and not using the Perpetual Inventory Method. Now, however, when you can purchase a computer and the necessary software for less than $1000 its difficult (except for the smallest businesses) for me to make that case.
What's Next ?
Inventory Methods Video