Physical Inventory and Cycle Count – An overview

Physical Inventory and Cycle Counting are methods used by organizations for stock verification with a goal to maintain the minimum level of discrepancy between the system and the actual physical stock. The “Physical Inventory and Cycle Count” business component facilitates planning and execution of physical inventory and cycle count processes.

Cycle Counting is the periodic counting of individual items at pre-specified intervals in a year to control and systematically improve the inventory quantity accuracy. Physical Inventory involves physical counting of all items in all storage locations in a particular organization unit.  Though the objective is similar, the former is normally used to improve the inventory record accuracy and the latter is used before financial year closing or financial postings.

The primary purpose of Cycle Counting is “Stock Reconciliation” and “Inventory Accuracy” whereas that of Physical Inventory is “Stock Records” and “Inventory valuation”.

Cycle Counting Process

Cycle counting is the process of counting inventory items throughout the year on a “performance dependent” schedule. This inventory control method checks and controls the variation between the system inventory records and the actual inventory levels. The primary focus is on items that are more valuable (and/or items that move very frequently) with less attention given to items that are less valuable (and/or items that move less frequently). Cycle count can uncover process faults that produce inventory inaccuracies and can thus systematically improve the inventory accuracy. Update on stock quantity and status, as a result of such frequent counting mechanism, helps update the inventory valuation. It also helps reduce the stock transactional problems arising out of the difference between the stock records and the stock actuals. Cycle counting process involves the following steps:

• preparation of cycle count plan for parts

• generation of cycle count sheets

• entry of count results into system records

• update current inventory accuracy

• adjustment for any discrepancy between the system stock and the physical stock.

A diagrammatical representation of the Cycle Count Process

Physical Inventory Process

Physical Inventory is a warehouse (or WH-Zone) level exercise, which is normally carried out  once a year, to post the current stock records for valuation. Physical Inventory process involves the following steps:

• preparation of physical inventory plan for a storage location

• generation of tags

• actual physical count operation

• entry of count results into the system records

• adjustment for any discrepancy between the system stock and the physical stock.

A diagrammatical representation of the Physical Inventory Process

Getting familiar with the activities