What are the merits & demerits of perpetual inventory system in cost accounting?

The Merits and Demerits of Perpetual Inventory System In Cost Accounting.

Perpetual inventory system is defined as "a system of records maintains by controlling department which reflect the physical movement of stocks and their current balances". Bin card and store accuracy, physical verification may also be made which must have to agree with the balances of Bin Card and store ledger.

Merits of perpetual inventory control:

  • It ensures availability¬† of material as & when required.
  • There will be continuity in the flow of production.
  • Only required quantity of material will be purchased.
  • It avoids physical verification of each and every item of store.
  • Investment in purchasing raw materials will be minimized.
  • A proper system of material control will save the¬† organisation from losses like wastage and obsolescence.
  • A detailed & reliable check on the store is obtained.
  • Planning of the production can be done as the management is continuously in forward about the store position.

Demerits of perpetual inventory system:

  • This method is introduced by big organisation as the cost of maintenance is high.
  • There is a possibility of clerical errors. Because many records are to be maintained synonymously.
  • Besides recording day to day records physical verification of stock also required. It is a delayed procedure.
  • If physical verification does not agree with the balance of bin card and store ledger there is a suspicion for there, is appropriation etc.
  • Each and every item of materials is not verified keeping in confidence with the stock records, so there may be changes of mismanagement in record keeping.