A common practice among companies with significant amounts of inventory is to perform cycle counts instead of a year-end count. A company with significant amounts of inventory that comprise of small, identical items with high turnover might be a good candidate for cycle counts and should consider making the switch. Choosing cycle counts over a year-end count could result in the following benefits:
- Improved accuracy of perpetual inventory quantities.
- More reliable financial reporting as inventory adjustments are investigated and recognized throughout the year.
- Better decision making in regards to reorder points, out-of-stock inventory, and excess inventory.
- Reduced personnel costs and plant downtime.
- Improved internal controls over the movement of inventory.
There are many ways a company can perform cycle counts throughout the year but the most common approach is an “ABC” cycle count.
ABC cycle counting consists of grouping inventory items into three categories: A, B, and C. As an example, “A” category items may make up the top 20% of inventory items that make up 70% of the cost of goods sold and may be counted as frequently as multiple times per month. Whereas, “C” category items might be the bottom 50% of inventory items that make up 5% of the cost of goods sold and might only be counted one time per year.
Companies could also consider going with a “hybrid” cycle count that uses the ABC cycle count method yet supplements those cycle counts with a smaller year-end count of the high-risk and high-value items in inventory.
The decision whether to replace the traditional year-end inventory count with year-round cycle counts is not one to be taken lightly. Companies with an inventory consisting of large bulky items with low turnover or items requiring complex measurements and calculations may find it to be more efficient to count at the end of the year. The process of implementing a cycle count system also requires a significant initial investment in the development of the cycle count system, training of employees and commitment to the continual documentation of the cycle counts.
For more information, contact your MarksNelson professional or call 816-743-7700.
About the author
Matt Schulte provides assurance services to clients in the manufacturing and distribution industries.