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Perpetual Inventory Approach Template
Perpetual Inventory Approach Template
40 Indian Gaming January 2006
Tighten Central Storage Control Using Perpetual
Inventory Approach
FOOD & BEVERAGE
by Bill Schwartz
T
he term “perpetual inventory” is widely used to describe
a method of accounting for inventory by keeping a run-
ning total of the amount in stock at any given time. While
the concept sounds simple, it becomes highly problematic
and lacks sufficient accuracy when used for food and bev-
erage inventories. Calculating perpetual inventory levels
when recipes are involved causes most of the problems, but
using it just for stor
eroom control is feasible and can be
highly accurate, leading to gr
eater control of some of the
most critical inventory areas.
For those not familiar with the concept, perpetual inven-
tory is calculated by starting with a beginning inventory
amount and keeping a running total by adding every time
more of the item comes in, then subtracting every time quan-
tities of the item goes out. For example, if we start with 10
cases of lemons, then receive 10 cases the next day we
would have 20 cases total. If we then transfer 3 cases out
the day after, we should have 17 cases left at that point. The
amount “17 cases” would be our perpetual inventory value
at that point in time. Purchases and incoming transfers are
the events that trigger an addition to the amount on hand,
while sales and outgoing transfers are the events that trig-
ger a subtraction.
Recipes Make It Rough
T
racking purchases and transfers in either direction is typ-
ically not hard, but dealing with sales is another story. In
or
der to properly subtract the correct amount, it first needs
to be clear what the cor
rect amount would be. Since most
food and beverage sales involve recipes, it becomes neces-
sary to break the recipes down to component parts to deter-
mine how much to subtract of a specific item. For simple
recipes (ex: scoop of ice cream) and simple items (ex: 8oz
filet), this may not be an issue. But what about complex
recipes (ex: buffets), recipes which include sauces and other
pr
epared ingredients (ex: Lasagna), or recipes which offer
choices of sides or dressings If all we cared about were the
8oz filets, we would have less of a pr
oblem deter
mining what
to subtract. But if we car
e about an ingr
edient such as let
-
tuce or cheddar cheese, both of which are used in numer-
ous r
ecipes in var
ying quantities, we ar
e faced with a much
different level of difficulty. In addition to these challenges,
we have not even touched upon the effect of yields or the
issues associated with converting between units of measure.
All perpetual inventory approaches require good food and
beverage inventory software. Spreadsheets are not the
appr
opriate tool for inventory control due to the complex-
ity required and the amount of labor needed to keep them
current. But even with the best inventory software available,
operators will have trouble keeping accurate perpetual
inventory values for some areas of casino food and bever-
age. In fact, any profit center or outlet that sells products
requiring recipes is probably going to be difficult to han-
dle. On the other hand, areas of the operation that do not
sell products are relatively easy to control using perpetual
inventory techniques. Food and liquor storerooms fit this
description very well.
Isolate the Central Storage Areas
Not all casino operations have the ability to separate the food
and liquor storerooms from the rest of the operation, and in
those cases, the perpetual approach will be difficult to use. How-
ever, for those who can isolate the storage areas, accurate per-
petual inventory will be fairly simple to implement. Isolation
requires that no sales take place from the isolated area. Instead,
the only transactions affecting the area would be purchases and
transfers.
Consider the example of a liquor storeroom. Purchases
would arrive on a routine basis and be checked into the store-
room. Once there, the outlets can requisition liquor from the
storeroom, and the storeroom can transfer the liquor out. In
cases where liquor in the outlets must be returned to the store-
room, inbound transfers are used. A running total is kept for
each item stored in the storeroom, and it becomes possible to
know at any given time exactly how much of any item should
be on the shelves.
Compare and React
The practice of keeping the perpetual inventor
y is essentially
a waste of time unless the comparisons are made between per-
petual and actual inventory levels. Even more critical is the
requirement that some action is taken to resolve discrepancies
when they occur. Only with action does control take place, and
if the objective is to improve control, action is essential.
Contr
ol is achieved by comparing the amount r
epor
ted by
the system to be on the shelf with the actual amount on the shelf.
This comparison could take place as frequently as desired. In
the event the amounts differ, action is taken to determine the
cause and correct the problem. For example, if the system indi-
cate 20 bottles of Grey Goose should be in the storeroom and
a physical count r
eveals only 18 bottles, it is clear that 2
bottles ar
e missing. The next step would be to deter
mine if all
the transfers were recorded, and if so, the likelihood is that either
a transfer took place without documentation, the invoice stated
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