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How To Calculate Your Shrinkage Rate ?

The Stock Valuation

Inventory valuation is determined by the perpetual inventory which follows stocks (following of the actual flows of entry and exit of goods stored). The following is made in quantity and value.

1. Input valuation

For items purchased, the evaluation is done at the purchasing cost or at the acquisition cost :
Amount on the invoice (HT)
+    External Purchasing Costs: Delivery, Insurance, Customs
+    Internal Supply Costs: Reception fees, Storage expenses
For produced items, the evaluation is the cost of production.
The costs of carrying stock(financial costs) and the costs keeping stock (warehousing, maintenance of stock) are not taken into account.

The initial quantity of stock and value compare to the final stock of the previous period.

2. Output Valuation

The stored items will leave the site at a cost with which they came. This poses no problem for the perfect individualized goods(unique pieces) or individualized( identical pieces isolable). However, this technique is more difficult for fungible goods(wheat, wine, oil…), which is the majority of cases in the industry.

3.Calculate your shrink rate

Calculate the theoretical stock: initial stock + input - output - known shrink
Calculate the physical stock: real stock valued during the inventory

Shrink :  Theoretical Stock – Physical Stock
(Shrink rate : Shrink     * 100) /  Sales

The result found is a percentage : : the higher the number, the higher the shrink.
To count your real stock with real objectivity and transparency, it is necessary to complete good physical inventories.

4. Stock valuation calculation methods

Weighted average cost method (CUMP)

CUMP : non-perishable materials (goods that can be storage for long periods), the method of CUMP has two variants:
  • The periodic method CUMP. The output is valued at a weighted average cost of goods + beginning inventory entries, calculated over a monthly, quarterly or annually, depending on the choice of the company.
  • The CUMP method after each entry. The outputs are valued at weighted average cost last calculated after each input goods.
  • CUMP = Total quantities (SI + entries) / Total values ​​(after entry)

The  First In, First Out Method (PEPS / FIFO)

The method first in first out, based on a sequential and chronological consumption of lots placed in storage areas. The first batch entered will be consumed first.

The FIFO method used for the valuation of output of perishable products with an extended storage is not recommended because of the loss of value or quality (milk products, agro food ...). However, the main drawback is that it reflected a delay in price changes or actual prices of goods purchased.

The Method Last In, First Out(DEPS / LIFO) 

Unlike the FIFO method, the method of last in, first out is to calculate the value of consumption by assuming that the last batch will come out first. Referring particularly to the technical function of the stocks, it is clear that using this method of valuation is not just  juggling the accounting records to get away from price.
The storage of certain classes of goods strictly obeys this rule. The longer their stay in storage areas, the longer the products acquire the quality and value. The LIFO method has the advantage of docking with the price change. In times of inflation, it smooths out losses by applying the current market price.

The Replacement Value Method(NIFO)

Adapted for the valuation of stock speculation, this method is to evaluate the outputs to their replacement values. To enhance the exits and existing stocks, the benchmark will, for example, the price of the last bill, the course of the day ...

Novastock solutions to calculate your actual stocks.
 Source : www.logistiqueconseil.org
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