Inventory and Stock-Taking
9 minute read
What you will learn
- Define inventory and explain why it is managed
- Describe how a stock-take is carried out
- Compare continuous and periodic stock-taking
- Value stock and deal with differences found
- Explain ABC and VEN analysis
- Calculate stock turnover
Key points
- Inventory is the stock of goods held, and the list that records it.
- A stock-take is a physical count of the stock, compared with the records.
- Continuous (perpetual) stock-taking counts a few items regularly. Periodic stock-taking counts everything at set intervals.
- Differences between the count and the records are investigated and corrected with approved entries.
- ABC analysis ranks items by the money they use. VEN analysis ranks them by how vital they are.
- Stock turnover = cost of goods sold ÷ average stock value.
- Fast turnover means less money tied up and less expiry. Very slow turnover is a warning.
What is inventory?
Inventory is the stock of goods held by a store or pharmacy, and the list that records it: item, quantity, batch, expiry date and value. Managing inventory means holding enough stock to meet need, without tying up too much money or letting stock expire.
Stock-taking
A stock-take (or stock verification) is a physical count of the stock, compared with the records. It shows whether stock is lost, damaged, expired or wrongly recorded. Auditors, both internal and external, carry out checks too.
Types
| Type | How it works | Strength | Weakness |
|---|---|---|---|
| Continuous (perpetual) | A few items are counted each day or week, so all are covered over the year | Less disruption, problems found sooner | Needs a plan and good records |
| Periodic | All stock is counted on a set date, for example yearly | The whole store is checked at one time | The store may have to close, and errors are found late |
Steps for a stock-take
- Plan: choose the date, the team and the areas. Tell the staff.
- Stop movement: finish all issues and receipts, and post the records up to date.
- Count: two people count each item. One counts and one records.
- Record the count on count sheets, with the batch and expiry date.
- Compare with the ledger and bin cards.
- Recount any differences.
- Investigate differences that remain.
- Correct the records with approved entries, and report to the person responsible.
- Remove expired or damaged stock and record it.
- Value the stock and sign off the report.
Differences
| Result | Meaning | Action |
|---|---|---|
| Count is less than the record | Deficiency | Investigate: missing entry, loss, theft |
| Count is more than the record | Surplus | Investigate: missed receipt, wrong issue |
Example. The ledger shows 450 units. The count is 440. The unit cost is ₦44.
- Deficiency = 10 units. Value = 10 × 44 = ₦440
Valuing stock
value of stock = quantity × unit cost, added up for all items
See the lesson on store accounting for the methods of pricing stock.
ABC analysis
ABC analysis ranks items by the money value of their yearly use. It helps to put effort where the money is.
- A items: a few items that account for most of the value. Check them closely and often.
- B items: a middle group. Check them regularly.
- C items: many items that use little money. Check them less often.
Worked example
Yearly use value of six items:
| Item | Value | Share | Cumulative share |
|---|---|---|---|
| 1 | ₦600 000 | 60% | 60% |
| 2 | ₦250 000 | 25% | 85% |
| 3 | ₦70 000 | 7% | 92% |
| 4 | ₦40 000 | 4% | 96% |
| 5 | ₦25 000 | 2.5% | 98.5% |
| 6 | ₦15 000 | 1.5% | 100% |
| Total | ₦1 000 000 |
The total is 600 000 + 250 000 + 70 000 + 40 000 + 25 000 + 15 000 = ₦1 000 000.
- A: items 1 and 2, which make up 85% of the money.
- B: items 3 and 4.
- C: items 5 and 6.
The exact cut-off points vary, so use the rule your textbook or workplace follows.
VEN analysis
VEN analysis ranks items by how important they are for health, not by cost.
| Category | Meaning | Example |
|---|---|---|
| Vital (V) | Life-saving, or serious illness without them. Never be out of stock | Emergency medicines, essential vaccines |
| Essential (E) | Effective against less severe but significant illness | Common antibiotics, many analgesics |
| Non-essential (N) | Minor illness, or of doubtful value | Items used for minor or self-limiting complaints |
Use VEN to decide what to protect first when money is short. ABC says where the money goes. VEN says what matters most for patients. The two can be combined.
Stock turnover
Stock turnover shows how many times the stock is sold and replaced in a year.
stock turnover = cost of goods sold ÷ average stock value
months of stock held = 12 ÷ turnover
Worked example
Cost of goods sold in a year = ₦600 000. Average stock value = ₦100 000.
- Turnover = 600 000 ÷ 100 000 = 6 times a year
- Months of stock held = 12 ÷ 6 = 2 months
- High turnover: money is not tied up, and there is less expiry. Too high may mean frequent stock-outs.
- Low turnover: money is tied up, and expiry is likely. Check for slow-moving items.
Good practice
- Keep the inventory up to date, and keep it in an organised way.
- Do regular counts, and have a second person do the checking.
- Use FEFO, and remove expired stock.
- Act on slow-moving and overstocked items.
- Use records to order the right amounts.
All amounts are made up for practice.
Exam focus
- Define inventory, and describe the steps of stock-taking.
- State the difference between ABC and VEN analysis.
- Calculate stock turnover and the number of months of stock held.
- Common mistake: confusing VEN (importance to health) with ABC (money value).
Quick check
Test yourself before you move on. Pick an answer to see the explanation.
1.Inventory is best described as:
2.A stock-take is:
3.In VEN analysis, 'V' stands for:
4.Cost of goods sold in a year was ₦600 000. Average stock value was ₦100 000. What is the stock turnover?
5.If stock turns over 6 times a year, about how many months of stock are held on average?