11.2. perpetual Costing versus Periodical Costing

This system supports perpetual inventory system. Periodic inventory system is not supported at the present time.

This system simutaneously determines both of the costs and quantities of items as a result of transactions rather than seperately.

• perpetual inventory system: The cost calculation business logic processors process every inventory related transacations in the order of every user's posting of these transactions to journal. The most up to date costs and quantities of inventory are thus immediately available after the posts.

  • Only FIFO, LIFO, or weighted moving average costing methods are applicable.

  • Use "Inventory" account to record period begin and purchase transactions for inventory. "Purchase" account is NOT used as the debit account for purchase transaction.

  • When sales transactions occur, use "Sales cost" account for debit and "Inventory" for credit.

  • Physical count must be conducted at least once every year. Adjust the journal accordingly if discrepancies exist.

  • This system provide valable up to date data for users to control the inventory in time.

• periodic inventory system: After physical counts at the end of accounting periods, users run the cost calculation business logic processors in batch to process all inventory related transactions occurred in that period. The order of processing is determined by the transaction dates and times entered by every user for the inventory related transactions. The costs and quantities of inventories are available only after the cost calculation.

  • Only FIFO, LIFO, or weighted average costing methods are applicable.

  • Debit "Purchase" account for purchase transactions. "Inventory" account is not used for purchase transactions.

  • There is no journal posting for inventory changes when sales occurs.

  • Do the physical count at period end and run costing calculation business logic processors to determine the quantities and costs of inventories.

  • First determine the period end quantity of an inventory item and derive its sales cost with the screenula:

    period begin + purchase in this period - period end

  • According to the rule of periodic inventory system, the inventory costs can only be determined after the end of accounting period. This rule and this ERP system's nature result in the limits:

    • The up to date inventory costs are not available before the physical counts followed by the cost calculations being usually conducted in the early next period.

    • The system can not instantly reflect the changes of inventory costs caused by the most commonly seen transactions such as item transfer between bins because the costs of the items in the transfer-from bins are not known in the middle of accounting period. Hence periodic inventory system does not suit the companies which owns multiple bins even though their business is so simple that they only use inventory and accounting modules but not manufacturing module.

    • In the midst of accounting periods,

      • the costs (and accordingly also quantities) of materials can not be instantly reflected by picking orders and picking return, and

      • the costs (and accordingly also quantities) of materials consumed by their parent items completed by manfuacturing or subcontract can not determined, which makes it impossible to derive the quantities of the completed parent items.

  These all together make MPS and MRP runs be unable to yield correct results. As a result, periodic inventory system becomes extermely inapplicable to manufacturing industry.

Accounts "Purchase" and "Inventory" are to be set on screens [M4F3] and [M4F4].

Imagine a company owning multiple sites. The on hand quantity of item "X" is 0 at 09:59 on a specific day. The following transactions occurs on the same day:

1. Transaction 1 occurs at 10:00 that item "X" is moved from bin "A" to bin "B".

2. Transaction 2 occurs at 11:00 that item "X" is moved from bin "B" to bin "C".

The cost calculation business logic processors will certainly aborts due to the exception that the on hand quantity of item "X" being negative if the cost calculation business logic processors process transaction 2 before transaction 1. To avoid such exception, every user must follow these rules:

• The users who adopt perpetual inventory system must post the inventory related transaction data to journal as earily as possible after they have finished the data entry for these transactions.

• The users who adop periodic inventory system must enter the precise transaction dates and times for every inventory related transactions.

From the above analysis, it is obvious that periodic inventory system has no advantage over perpetual inventory system.