Inventory represent a significant portion of current assets and they should be managed effectively. Generally Accepted Accounting Principles (GAAP) and Internal Revenue Service (IRS) rules mandate companies to count complete inventory level on an annual basis or implement a perpetual counting system. The key difference between cycle count and physical inventory is that cycle count is referred to as a perpetual inventory counting system where a set of selected items of inventory is counted on a specified day whereas physical inventory is an inventory counting method where all types of inventory in an organization is counted at a certain point of time, typically on an annual basis.
CONTENTS
1. Overview and Key Difference
2. What is Cycle Count
3. What is Physical Inventory
4. Side by Side Comparison – Cycle Count vs Physical Inventory
5. Summary
What is Cycle Count?
Cycle count is referred to as a perpetual inventory counting system where a set of selected items of inventory is counted on a specified day. The company can have an inventory plan to decide how the counting should happen based on different types of inventory.
E.g. PQR is a manufacturing company that holds 4 types of inventory. The cycle count will begin in January and one type of inventory will be counted per month. Thus, the first cycle count will end in April and the same cycle is continued for two more times for the year.
With a cycle count, it is convenient to validate the inventory as records are updated on a continuous basis. This method of counting is widely used in large-scale organizations that have a large number of items in inventory and cannot be closed for a long period of time to perform an annual physical inventory count.
Advantages and Disadvantages of Cycle Count
The following benefits are obtained through a cycle count.
- Less costly compared to physical inventory counting
- Reduce interruption in operations
- Less complexity
However, the main drawback of this method is that it is difficult to conclude the correct value at the end of the financial year since all inventory records are not updated at the same time.
What is Physical Inventory?
Physical inventory is an inventory counting method where all types of inventory in an organization is counted at a certain point of time, typically on an annual basis. This is conducted by shutting down operations temporarily at the end of the financial year and counting all types of inventory.
Advantages and Disadvantages of Physical inventory
Physical inventory method allows the company to begin the new financial year with an accurate inventory amount which contributes to more accurate financial information and decision making. While useful, this method is rarely used since its costs overweigh the benefits where the former (costs) are,
- Once the inventory count is started, the warehouse cannot receive or distribute inventory; thus the operations must be shut down to count the inventory referred to as ‘inventory freeze’
- Both time and resource consuming
- If the inventory counting is done manually, there is an increased possibility of errors
Figure 01: Inventory counting is an essential exercise for many types of organizations.
What is the difference between Cycle Count and Physical Inventory?
Cycle Count vs Physical Inventory |
|
| Cycle count is a perpetual inventory counting system where a set of selected items of inventory is counted on a specified day. | Physical inventory is an inventory counting method where all types of inventory in an organization is counted at a certain point of time, typically on an annual basis. |
| Inventory Freeze | |
| Cycle count does not require a warehouse inventory freeze. | Physical inventory requires a warehouse inventory freeze. |
| Nature | |
| Cycle count is conducted for different types of inventory at different times. | Physical inventory method requires the business to count all items of inventory at a certain point of time. |
| Flexibility | |
| Under cycle count method, the company can decide how the inventory count should happen as in which order the inventory should be counted, which types of inventory should be counted first etc. | Physical inventory has limited flexibility since it can only be initiated in one way. |
| Complexity and Time Spent | |
| Cycle count is a less complex activity and can be completed within a limited time. | Physical inventory method is highly complex and time-consuming. |
| Suitability | |
| Cycle count is ideal for companies that maintain significant amounts of inventory. | Physical inventory counting is more suitable for companies that maintain small amounts of inventory. |
Summary – Cycle Count vs Physical Inventory
The difference between cycle count and physical inventory is that cycle count is a method of perpetual inventory counting while physical inventory method counts inventory periodically, typically on an annual basis. Implementing an effective inventory counting system helps to avoid stock out situations and reduce inefficiencies and errors. Some organizations perform both types of inventory checking; however, cycle count method is the one that is preferred and widely used by many.
Reference:
1. Courter, Jeanna. “Cycle Count vs. Annual Physical Count – Which one is right for you?” PBD Worldwide Home – 2. Order Fulfillment Services. N.p., n.d. Web. 26 May 2017. <http://www.pbd.com/blog/bid/313809/cycle-count-vs-annual-physical-count-which-one-is-right-for-you>.
2.Murray, Martin. “What You Should Know About Cycle Counting in the Warehouse.” The Balance. N.p., n.d. Web. 26 May 2017. <https://www.thebalance.com/cycle-counting-in-the-warehouse-2221188>.
3. Taking a physical inventory count. N.p., n.d. Web. 26 May 2017. <http://www.numbercruncher.com/t-Taking-a-physical-inventory-count.aspx>.
Image Courtesy:
1. “Vendor in Soap Shop – Mardin – Turkey” by Adam Jones (CC BY-SA 2.0) via Flickr