Page 78 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes shown in the bin card or stores ledger account should be verified by means of physical stock
verification. Physical stock verification may be conducted in the following two ways:
(a) Periodic stock verification: It refers to a system where physical stock verification is
normally done periodically, i.e., once or twice in a year. Under this method, value of
stock is determined by physical counting of the stock on a particular date, usually at
the end of the year.
It is a simple and economical method of stock-taking and is adopted in small
concerns. This type of verification is good only for the items which do not find
place in the perpetual inventory records, e.g., works-in-progress, components and
consumable stores at site etc. But there are many limitations of this method. Stores
may’ be closed down for a few days to facilitate stock-taking. There is possibility of
fraud] discrepancy, etc.
(b) Continuous stock verification: This system comprises counting and verifying in number
of items at random daily throughout the year so that all items of stores are verified
several times during the year. Notice of the particular stock to be verified each day is
given to the store-keeper only on the date of actual verification.

As there is an element of surprise check in this system of stock-taking, effective
control over the items of stores can be exercised. The system does not necessitate the
closing down of the stores to facilitate stock-taking. There is also less possibility of
fraud and discrepancy, but the method is expensive and is adopted by big concerns
only.

The actual stock of material should not differ from the recorded stock under normal
circumstances. But sometimes differences arise due to the following reasons:
(i) Breakage and wastage of materials due to improper handling.

(ii) Shrinkage and evaporation.
(iii) Losses due to accident, fire, etc.
(iv) Losses arising out of breaking up bulk materials.
(v) Losses due to theft.
(vi) Misrouting in bin card or stores ledger account.
(vii) Over or short-issue.

Advantages

Advantages of perpetual Inventory System are as follows:

(i) Easy detection of errors: Errors and frauds can be easily detected at an early date. It helps
in preventing their occurrence.
(ii) Better control over stores: The system exercises better control over all receipts and issues
in such a manner so as to give a complete picture of both quantities and values of stock in
hand at all times.

(iii) No interruption of production process: production process is not interrupted as the physical
verification of stock is made on a planned and regular basis.
(iv) Acts as internal check: Under the system, records are made simultaneously in the bin cards
and stores ledger accounts which acts as a system of internal check for detection of errors
as and when they are committed.

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