Inventory system

economic-dictionary

The inventory system is the group of rules and processes that a company implements to plan and monitor the goods and materials available to it.

That is, the inventory system is the set of procedures that allow the company to know the amount of products it keeps in stock and monitor its rotation.

Another important issue to take into account is that an inventory system not only allows the control of merchandise, accounting for the number of units available, but also assigns a cost to these products.

At this point, we must remember that inventory usually refers to the stock of a company. These consider the raw material, the products in process and the final goods that the firm offers to its clients.

Usefulness of an inventory system

The usefulness of an inventory system is reflected in that it allows, among other things, the following:

  • It helps to calculate the cost of the products sold and those that are in stock.
  • Determines the level of rotation of the different products offered by the company, that is, which goods report greater departures from the warehouse or run out faster and, therefore, it is necessary to replenish more frequently.
  • Identify discrepancies between the physical inventory (manual count of all stocks) and that registered in the system or software managed by the company.
  • Avoid damage losses. This, by being able to find, for example, if there are goods that remain in storage for a long time, even beyond their expiration date (in the case of perishable products or with an expiration date).
  • Reduces the cost of storage. This, by identifying the optimal quantity of a merchandise that should be kept in warehouse, keeping a stock in the event of a possible increase in demand, but without generating unnecessary storage costs. At this point, we must remember that for each unit of product saved, a payment must be made to the warehouse owner.

Inventory types

Among the main types of inventory, we can find, depending on the moment in which it is carried out, the following:

  • Initial: Before starting an action or an accounting period.
  • Final: At the end of an operation or accounting exercise

Similarly, according to the frequency in which it is carried out, it is classified into the following types:

  • Periodic or intermittent: It is done periodically. For example, every month, quarter, or year.
  • Permanent: It tries to account for variations in inventories in real time. That is, the monitoring is continuous.

Likewise, depending on the type of stock, the following inventories can be distinguished:

  • Of raw materials: It counts the inputs that a company has and that will later be used to produce a final good.
  • Of products in process: Includes those products that are still in a manufacturing process, without finishing.
  • Of finished products: Includes all the merchandise that the company has available to sell to its customers.

Inventory valuation methods

Generally accepted inventory valuation methods are as follows:

  • FIFO: First-in, first-out. It means that the first thing to come is the first thing to come out. That is, the oldest units are sold first.
  • LIFO: Last-in, first-out. It means just the opposite of the previous method. Thus, the last units purchased are being sold.
  • Weighted average cost: Using this method, an average of the cost of the units is calculated. Thus, the total cost of the units is divided by the number of units in inventory.

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