## Physical Control of Inventory

### (i) Two-Bin System

Each storage location is physically divided into two bins:

Larger bin: Working stock — issues are made from here.
Smaller bin: Reserve stock (= reorder level quantity).

When the larger bin is emptied, a fresh purchase order is triggered and issues continue from the smaller bin until the replenishment arrives. This is a simple, visual trigger for reordering that supplements Bin Cards and Stores Ledger.

### (ii) Inventory Budgets

Forecasting inventory requirements for a defined period (usually a year) based on production plans and schedules. The Inventory Requirement Budget specifies quantity and timing of needs, discouraging unnecessary investment in stocks.

### (iii) Perpetual Inventory Records

A system of continuous record-keeping maintained by the stores department:

Bin Cards: Physical quantity record at the storage location.
Stores Ledger: Value-based record maintained by accounts.

Both are updated after every receipt and issue. Quantity balances are reconciled regularly.

Advantages of Perpetual Inventory:

1. Real-time stock adjustments

2. Quick preparation of interim Profit & Loss Accounts

3. Early detection of discrepancies

4. Identification of surplus, obsolete, or slow-moving materials

5. Optimal stock levels; timely purchase requisitions

### (iv) Continuous Stock Verification

Physical verification of a portion of items at random intervals throughout the year (without prior notice), rather than one annual shutdown count.

Advantages of Continuous Over Annual Stock-Taking:

Annual/Periodic	Continuous
Production disruption or shutdown	No disruption to operations
Incomplete checks due to time pressure	Discrepancies detected early
Staff can hide errors until count day	Surprise element deters malpractice
Delayed financial reporting	Faster interim accounts
Higher obsolescence risk	Closer tracking reduces obsolescence

Worked example

### Example 1

Two-Bin System in Practice

Reorder Level for Item M = 200 units; EOQ = 800 units.

Bin Setup:

Small bin: 200 units (reserve)
Large bin: 800 units (working stock)

Issues are made from the large bin. When it is exhausted, a purchase order for 800 units is placed and issues begin from the 200-unit small bin. By the time the small bin reaches zero, the replenishment (lead time covered by the 200-unit reserve) should have arrived.

### Example 2

Perpetual Inventory Reconciliation

Bin Card shows: Closing balance = 450 units

Stores Ledger shows: Closing balance = 450 units @ ₹10 = ₹4,500

Physical count during continuous verification: 435 units

Shortage = 15 units (₹150). Discrepancy is investigated immediately — could be pilferage, measurement error, or unrecorded issue. Under annual stock-taking this gap might only surface months later.

⚠️ Common exam mistakes

Confusing Bin Card (physical quantity only, kept at store) with Stores Ledger (value record, kept by accounts department).
Thinking perpetual inventory means continuous physical counting — it means continuous record-keeping; physical verification under continuous stock-taking is done by sampling.
Assuming the Two-Bin system eliminates the need for Bin Cards — it supplements, not replaces, existing records.
Treating continuous stock verification as the same as perpetual inventory — perpetual inventory is a records system; continuous stock verification is the physical count procedure.

Reference:

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Physical Control of Inventory (Two-Bin System, Budgets, Perpetual Inventory, Continuous Stock Verification)

Worked example

⚠️ Common exam mistakes