Accounting Best Practices, Fifth Edition

16–18. Cycle Count Based on Usage Frequency

The standard way to determine which inventory should be cycle-counted is to count the most expensive items the most frequently. Accountants recommend this approach, because it ensures the accuracy of the most expensive items in stock, which gives them some reasonable assurance that the inventory value they record in the financial statements is approximately correct.

The problem with this approach is that the accuracy of low-cost items is considered less important, even though the absence of those items could potentially keep an order from shipping, which negatively impacts revenue.

The solution is to base cycle-counts on the frequency of item usage, which means that an item that is used continually is counted the most frequently. This approach still satisfies accountants, because a high-cost item that does not move much will still be accurate with just a few counts per year, since very little can possibly happen to it if it just sits on a shelf. Conversely, an item that is constantly cycling in and out of the warehouse will be counted a great deal, which will hopefully ensure a high level of accuracy and therefore assist in avoiding stockouts that could halt shipments.

Creating a cycle-count sample under a frequency-of-usage approach will require a custom report from a materials planning system. To do so, accumulate the number of putaways and picks per stock keeping unit on a rolling basis over the past few months (possibly up to a year, ...