Small business inventory count

Pareto method

The Pareto method, derived from the Pareto principle, is to cycle count inventory by percentage of inventory value. This leads to the expensive items being counted most frequently.

This traditional approach may appeal to accountants by minimizing the variance in inventory value.

Cycle counting by usage

Cycle counting by usage states that items more frequently accessed should be counted more often, irrespective of value. Every time an employee adds or removes an item, there is a risk of introducing inventory variance. Logical inventory zones can be set up to distinguish items depending on how frequently they are touched. Volume consumed and volume transacted and volume moved are all ways of determining this.

ABC codes

When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes.

1. "A class" inventory will typically contain items that account for 60% of total value
2. "B class" inventory will have around 20% of total value
3. "C class" inventory will account for the remaining 20%