Perpetual Inventory System Definition
A perpetual inventory system is a continuously updated inventory management system. This type of system uses technology such as bar coding, computerized production operations, and perpetual inventory software to track and record the costs and flows of inventory at each stage of production, from raw materials, to work-in-process, to finished goods, and finally to cost of goods sold.
Perpetual inventory systems provide continuous and detailed information regarding the location of inventory and the costs of inventory. This type of system can assist companies with financial statement preparation, inventory management, and cost control. Perpetual inventory systems facilitate responses to customer inquiries regarding product availability. They also facilitate effective and efficient inventory purchasing and ordering and decrease the risk of stocking out.
Perpetual vs Periodic Inventory Systems
In cost accounting, there are two methods of tracking and recording inventory costs: periodic inventory systems and perpetual inventory systems.
While perpetual inventory systems continuously update information regarding inventory levels and inventory costs, periodic inventory systems rely on periodic valuations of on-hand inventory. Instead of being continuously updated, inventory costs and levels are only checked and counted periodically.
Whether a company uses a perpetual inventory system or a periodic inventory system will depend on the sophistication of the organization. More sophisticated, larger, and more complex organizations are more likely to use a perpetual inventory system and perpetual inventory software. Meanwhile, less sophisticated companies may still be using periodic inventory systems.
Whether a company uses a perpetual inventory system or a periodic inventory system will also depend on the nature of the business. A company that deals with high volumes of low value products may be more likely to use a periodic inventory system, while a company that deals with low volumes of high value products may be more likely to use a perpetual inventory system.
Click here to download the Know Your Economics Worksheet.
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]