In this article, we will explore what inventory variance is and uncover its common causes. We will also share our 10 step process to avoid variance in your inventory. Read on to learn more.
Inventory variance is the discrepancy between the recorded inventory levels and the actual physical count of items on hand. It can result from theft, damage, errors in counting or recording, or other issues impacting inventory accuracy.
Example: A company's records show 500 units of "Widget A" in stock. However, a physical count reveals only 450 units. This indicates a negative inventory variance of 50 "Widget A" units.
Inventory variance can occur for a number of reasons. Here are some of the most common reasons:
Theft or shrinkage occurs when inventory items are stolen or go missing. This reduces the actual stock count which leads to a discrepancy between the recorded and physical inventory.
Damage refers to the destruction or deterioration of inventory due to accidents, mishandling, or environmental factors. It results in a lower actual count of sellable items.
Recording errors arise from mistakes in logging inventory quantities or details often due to human error or system glitches.
Counting errors occur during the physical tallying of inventory which leads to inaccurate counts. Such mistakes can be due to human error, oversight, or misidentification of items.
Supplier errors involve the delivery of incorrect quantities or defective items by suppliers. This can lead to discrepancies in the expected and actual inventory counts and values.
Misplacement results from poor organization or labeling that causes items to be lost or overlooked in the warehouse. It leads to discrepancies between the recorded inventory and the items that are readily locatable.
Wastage is the natural decline in inventory especially for perishable goods or items with limited shelf life.
The inventory variance formula can be used to calculate the difference between the recorded and actual inventory. The formula can be expressed in terms of either the number of units or the value of the inventory. Here are the formulas for both:
Unit Variance Formula:
Unit Variance = Actual Unit Count - Recorded Unit Count
Value Variance Formula:
Value Variance = Actual Inventory Value - Recorded Inventory Value
Example: According to a store’s records, there should be 100 units of "Model X" smartphones, each valued at $500, in stock. However, during a physical inventory count, only 90 units are found. Let’s calculate the inventory variance below.
Using the Unit Variance Formula:
Unit Variance = Actual Unit Count − Recorded Unit Count
Unit Variance = 90 − 100
Unit Variance = -10 units
This shows that there is a unit variance of -10 units which indicates a shortage of 10 "Model X" smartphones.
Using the Value Variance Formula:
Value Variance = (Actual Unit Count × Unit Price) − (Recorded Unit Count × Unit Price)
Value Variance = (90 × $500) − (100 × $500)
Value Variance = −$5,000
This shows that the value variance is -$5,000 which implies that the actual value of the inventory is $5,000 less than the recorded value.
Use our 10 Step process to avoid inventory variance. Simply follow the steps below:
Implementing an efficient inventory management system helps in accurately tracking and managing stock levels and reducing errors. It automates the process of recording inventory transactions and provides real-time updates.
Example: The retail store installs an automated system that tracks sales and updates inventory in real time. As a result, when 20 units of "Model X" smartphones are sold, the system immediately updates the stock levels which reduces the chances of errors.
Regularly audit the inventory to ensure the physical stock aligns with recorded levels. This process helps in identifying discrepancies early and implementing corrective measures.
Example: Every month, the warehouse manager counts the stock of "Gadget Y" and discovers a discrepancy of 10 units. The issue is resolved quickly to prevent a more significant variance in the future.
Enhancing security measures helps prevent theft and unauthorized access to the inventory. Surveillance cameras, alarms, and restricted access can significantly reduce inventory shrinkage.
Example: After installing surveillance cameras, the theft of "Accessory Z" decreased significantly. The actual count during the audit was 98 units which was very close to the recorded 100 units.
Training staff on proper inventory handling, counting, and recording practices reduces human errors. Well-trained personnel ensure the accuracy of inventory records.
Example: Staff trained in proper counting techniques recorded 150 units of "Item W" accurately. During the audit, the count was confirmed which showcases a zero variance.
Implementing the FIFO method ensures that the oldest stock is sold first which reduces wastage due to expiration or obsolescence. It helps in maintaining inventory accuracy, especially for perishable goods.
Example: The supermarket sold the older batch of "Brand M milk" first. Consequently, no milk expired on the shelf and the actual count matched the records during the audit.
Clear procedures for receiving inventory ensure that goods are correctly counted, inspected, and recorded upon arrival. It helps in identifying supplier errors early.
Example: The protocol required checking and counting incoming "Widget A" units. An error in delivery quantity was quickly spotted and corrected with 45 units received instead of the invoiced 50 units.
Maintaining accurate records involves ensuring that all inventory transactions are recorded promptly and accurately. It helps in real-time tracking and management of stock levels.
Example: After selling 30 units of "Equipment B", the sales team immediately updated the records. This practice ensured that the records always reflected the current stock levels to minimize variance.
Organizing inventory efficiently ensures easy counting and reduces the chances of misplacement. Proper labeling and storage practices enhance inventory accuracy.
Example: All units of "Product C" were stored and labeled systematically. During the audit, counting was efficient, and all 200 units were accounted for which shows no variance.
Promoting accountability involves assigning responsibility for specific inventory items to individuals or teams. It ensures careful management and immediate identification of discrepancies.
Example: John was responsible for managing "Material D" inventory. He noticed a shortfall of 5 units early and initiated an investigation which quickly resolved the issue.
Using technology like RFID or barcodes for real-time tracking helps reduce manual counting errors. It ensures the accuracy and consistency of inventory records.
Example: RFID tags on "Part E" enabled real-time tracking of each unit. With automated counts, the recorded inventory of 120 units perfectly matched the actual stock during the audit.
TechTrend Electronics is a retailer of tech gadgets that noticed recurring discrepancies in its inventory counts for its "GadgetPro" smartphones. Here’s how they implemented our simple 10 step process:
TechTrend integrates an automated inventory management system to streamline the tracking of "GadgetPro" smartphones. For instance, when 20 units are sold, the system instantly updates. This ensures real-time accuracy and reduces the risk of errors.
Every month, TechTrend conducts a physical count of "GadgetPro" smartphones. During one audit, a discrepancy of 15 units is quickly identified and corrected which maintains accurate inventory records.
TechTrend installs surveillance cameras around the storage area where "GadgetPro" smartphones are kept. This measure effectively curtails theft which ensures that the actual count is consistently close to the recorded numbers.
Employees at TechTrend receive training on accurately counting and recording the "GadgetPro" inventory. As a result, a subsequent audit confirms an exact match between the recorded and actual counts which indicates improved accuracy.
TechTrend adopts the FIFO method to ensure that older "GadgetPro" units are sold before the new ones. This strategy eliminates the issue of unsold, outdated models, keeping the inventory fresh and the counts accurate.
TechTrend enforces strict protocols for counting and inspecting each "GadgetPro" unit upon arrival. During one delivery, an error of 10 extra units is immediately spotted and rectified.
After each sale of "GadgetPro" smartphones, TechTrend’s sales team is diligent in updating the inventory records immediately. This practice ensures real-time reflection of stock levels and minimizes the possibility of variance.
All "GadgetPro" units are systematically stored and labeled at TechTrend. This efficient organization facilitates an easy and accurate count during audits and always confirms the recorded inventory numbers.
John, a store manager at TechTrend, is assigned the responsibility for the "GadgetPro" stock. When he notices a shortfall of 5 units, he initiates an immediate investigation to ensure swift resolution and accurate inventory.
TechTrend incorporates RFID tags on each "GadgetPro" for effortless real-time tracking. With this technology, automated counts are highly accurate which makes the recorded inventory always match the actual stock during audits.
We hope that you now have a better understanding of what inventory variance is and how to implement our process to avoid variance in your inventory.
If you enjoyed this article, you might also like our article on dead stock inventory or inventory vs asset.
