Starting June 1st, 2023 Our warehouse fee will be $0.65/cubic foot per month
In effort to lower the warehouse storage fee during inflation, we have went narrow aisle racking.This construction took us four months but the project is finally completed. With narrow aisle racking, we are able to drop storage by 24%.We as partners will go through this inflation together.
12/24/2024
The periodic inventory system is an effective method for managing inventory that offers simplicity and cost-efficiency, especially for small businesses. By conducting physical inventory counts at regular intervals, businesses can easily track inventory levels and determine the cost of goods sold. This system minimizes the need for continuous updates, making it a popular choice for companies looking to reduce overhead costs. Worldcraft Logistics invites you to read the article we shared to learn more about how this method can benefit your business.
The periodic inventory system is an inventory valuation method used for financial reporting in which a physical count of inventory is conducted at regular intervals, such as monthly, quarterly, or annually. This accounting method involves determining the beginning inventory at the start of a period, adding any new inventory purchases made during the period, and then subtracting the ending inventory at the end of the period to calculate the cost of goods sold (COGS).
In a periodic inventory system, businesses do not maintain real-time records of sales or inventory changes. Instead, inventory updates are logged in a separate purchases account throughout a defined period, such as a month, quarter, or year.
At the end of the period, a physical inventory count is conducted to calculate the ending inventory and determine the cost of goods sold (COGS). This approach simplifies inventory tracking but lacks real-time accuracy.
The periodic inventory system formula is used to calculate the Cost of Goods Sold (COGS) and is as follows:
COGS = Beginning Inventory + Purchases - Ending Inventory
This formula provides a clear method for determining the value of inventory sold during a specific period.
Components of the Formula:
The periodic inventory system formula simplifies inventory management for businesses by providing a straightforward way to calculate COGS. Through examples, it is clear that the formula accurately tracks inventory usage over any defined accounting period.
Here are three periodic inventory system examples to demonstrate how different businesses can apply the periodic inventory method:
Calculation of Cost of Goods Sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $8,000 + $4,500 - $3,500 = $9,000
➡️ Conclusion: The grocery store calculates that $9,000 worth of inventory was sold during the month. The periodic inventory system is sufficient because the grocery store doesn’t need real-time tracking of inventory and can focus on overall monthly inventory updates.
Calculation of Cost of Goods Sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $20,000 + $12,000 - $15,000 = $17,000
➡️ Conclusion: In this case, the clothing boutique sold $17,000 worth of inventory during the month. Since the business focuses on high-value, low-volume products, the periodic system is a cost-effective method to track sales without the need for constant inventory updates.
Calculation of Cost of Goods Sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $50,000 + $25,000 - $35,000 = $40,000
➡️ Conclusion: For this electronics store, the total COGS for the quarter is $40,000, which represents the inventory sold during the period. Despite the higher inventory value and complex items, the periodic inventory system is a simple and effective method for this type of business, especially as it’s not required to track sales and purchases in real-time.
Summary:
✔️ Grocery Store: $9,000 COGS
✔️ Clothing Boutique: $17,000 COGS
✔️ Electronics Store: $40,000 COGS
Each example highlights how the periodic inventory system works across different industries, providing a clear way to track and manage inventory without the need for real-time updates.