5 Major Techniques of Stock Taking (Including Merits and Demerits)

3. Spot checks

4. Stock out stores verification

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5. Annual stock taking.

1. Periodic Stock Verification:

Periodic stock taking is quarterly or half yearly checking of the entire stock in one or two days. This takes where the stock comprises a few but expensive items. The method followed is similar to the annual stock taking i.e., physical stock of various items is recorded on inventory sheets or inventory card and then compared with the bin card balance.

While inexpensive items may be checked once a year, expensive and attractive items should be checked three or four times a year. The physical balance obtained at the end of the financial year will form the inventory for final accounts.

Merits:

1. For balance sheet purposes, it gives correct value of closing stock. The balance sheet is thus accurate.

2. No extra staff for the stock taking purpose alone has to be posted.

3. It is simple, convenient and satisfactory for a small store house.

Demerits:

1. Since discrepancies are detected only towards the end of the accounting period, no thorough investigation of the discrepancies noticed is possible. This defeats the very purpose of stock taking.

2. The system is suitable for a small store house only where stock taking can be completed in a day or two. For a medium store house, where store taking has to spread over a number of days, work suffers seriously if store house operation has to be suspended for the full period. Alternatively, more staff have to be drawn from elsewhere and such staff will necessarily be inexperienced. Stock taking results will then be unsatisfactory.

3. If the stock taking is not completed in time, preparation of final accounts and balance sheet gets delayed.

2. Continuous, Perpetual or Automatic Stock Verification:

Under this system, verification is done throughout the year as per a pre-determined plan of action. A — items may be verified thrice a year, B-items twice a year and C-items once a year. It, therefore, presupposes that a perpetual inventory record for each item is maintained showing all transactions so that reconciliation can be done. The advantages here are:

Work can be independently carried out by materials audit department staff. Investigation with regard to discrepancies is spread over the year and hence detailed analysis is possible. Final accounts can be prepared expeditiously if continuous verification is done as per plan.

There is no need to freeze the entire operations of the stores as verification is done throughout the year based on perpetual inventory records. Any time stock records are more up-to- date when compared with the periodic verification system.

Merits:

1. Deviations from set replenishment levels come to notice and are corrected. Since stock figures are correct, replenishment is made at the correct time avoiding production hold up or other maintenance activities.

2. Obsolete and surplus items are detected and timely action taken towards their disposal.

3. Based on the average quantum of work, a few verifiers may be appointed for this work and trained. Since there is no sudden increase in work, staff need not be withdrawn from other sections and thus work will be carried out by trained staff only and will be efficiently executed.

4. These staff can perform the work more diligently as there is a uniform load of work of verifying a few items each day.

5. If stock taking is completed according to the programme, final accounts and balance sheet can be prepared without delay.

6. There is no need to close down store house operation. Materials can be continuously made. Also normal posting of receipts and issues transactions can continue without interruption.

7. Wastage and spoilage due to carelessness of the store- keeping staff is avoided. It acts as an effective deterrent towards malpractices and reduces theft and pilferage.

8. Clerical posting errors are detected immediately and rectified. Also, deviations from set procedures are noticed quickly and remedial action taken.

9. There is adequate time to probe into discrepancies.

Demerits:

1. The information about actual stock of a particular item on a particular day may not be available; only book figures are available. It means that a particular item may be on the bin cards and store ledger and may not be found in stores when actually needed.

2. This system of continuous stock-taking is expensive and a small enterprise cannot adopt it.

3. Spot Checks:

Spot checks are made by the store keeper at the time of receiving first stock or while issuing store items. This method is voluntarily carried out by the stores’ staff for their own satisfaction and for accuracy of store materials. Moreover, it is not a regular method of verification and there is no set method of doing it.

This method also does not get any official recognition because it does not provide any information to management regarding to storages excess etc. This is certainly over and above the normal methods of stores verification being used by the store house. This method of stock verification is generally adopted in all those organisations where a continuous system of stock verification is not functioning.

4. Stock out Stores Verification:

This method of stores verification is resorted to when a particular item of stock is out of stock. Again, when the stock has touched the danger level or it has come down to a level where replenishment may become an emergency, then also low point stores verification is done. Generally, this type of verification is done by stores house staff. The store keeper maintains a record of such verification. He is also obliged to report to the replenishment and’ or purchase section including accounts department and his seniors about the result of such verification for soliciting instructions and applying correction, if there is any need for the same.

5. Annual Stock Taking:

Where periodical stock taking by stores staff or continuous stock verification by accounts staff is not in force, complete checking once a year is very desirable.

Annual stock taking is done in the last month of the financial year. In certain places, the factory will be closed for a few days and in other places the receipts and issues will be suspended until the stock taking is over.

Circulars are also sent in advance to the suppliers not to deliver any material during stock taking days. Closing of the work, suspension of receipts and issues etc. might be possible in small plants but would involve serious loss of production to a large organisation.

Similarly, checking of a large number of items within a limited period of three or four days will be a rush job and may entail lack of concentration, misplacement of materials, etc.

A system of annual stock taking which does not involve the closing of the factory or suspension of issues and receipts is described below. Two weeks or a month may be taken for the checking, depending upon the number of items to be checked and persons available for the job.

The theory behind this method is that if the bin card balance and physical balance agree on the day of the checking, they should generally tally on the last day of the financial year and if there is any shortage or excess on the day of the checking, then the same shortage or excess should exist on the last day of the financial year.

And the physical balance on the last day of the financial year is obtained not by counting the stock of all items on a single day but by deducting the shortage from or adding the excess, found during the course of the checking over three or four weeks, to the bin card balance on the last day of the financial year. This theory must be clearly understood in order to follow the system in detail. An example of the bin card entries is shown below (Table 13.1) to illustrate this.

Suppose the checking is done on 10th Dec. and the bin card balance, physical balance and shortage are 40, 36 and 4 respectively, the physical balance as on 31st Dec. when the bin card balance in 21 will be taken as 17. The surplus will also be treated in a similar manner.

By following the above theory, the physical balance as on the last day of the financial year can be calculated by counting even immediately after that day. In fact, the auditors carry out snap check and ascertain the accuracy of the annual inventory on this principle, as some issues and receipts will take place between the preparation of the annual inventory and the checking by the auditors.

Merits:

1. It gives the quantity of actual stock of all items held in stock on a particular day and, therefore, stock figures are authentic and reliable.

2. Irregularities in stores are exposed. It also provides check on the employees.

3. It is a cheaper and economical method as it does not require a permanent stock taking staff.

4. It is most suitable for small businesses.

Demerits:

1. The stock verifiers are not experts or trained in stock taking, therefore, the work is not perfect.

2. Production or work has to be stopped or suspended during stock-taking period.

3. Since the date of stock-taking is fixed well in advance which gives the dishonest employees an opportunity to commit frauds?

Reasons for discrepancies between actual stock and book stock cannot be traced easily due to passage of time.