Within the general area of inventory accounting systems, it addresses data entry for inventory transactions, tracking inventory through different types of man- ufacturing environments, key control points and related fraud problems, several dozen inventory-related measurements, several inventory report formats, and bud- geting for inventory. Inventory Accountingis intended to be an expansive compendium of inventory- related information for the accountant.
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Inventory Data Collection 1
It is possible for the data entry person to enter this identification incorrectly, so bar codes can be added to the routing sheet in place of written identification information. Once all of the transactions have been entered, the computer sends the information to the business partner by modem or broadband connection.
Inventory and
Manufacturing Systems 1
Of even greater importance was the use of the same information to determine the capacity usage of each machine in the facility. The foundation of the MRP II system is the three databases that feed it informa- tion.
Inventory Control Systems
A simple control is to include in the cycle counting review a brief visual inspection of the stacking pattern on pallets to see if any overhang is occurring. A good control is to in- clude in the monthly closing procedure a requirement to evaluate the suffi- ciency of the obsolescence reserve.
Inventory Fraud 1
If the setup cost is $1,000 and the number of parts produced during the production run is 1,000, then the cost of the operation per part will be $1. By doing so, the manager can apply the extra scrap percentage to more inventory, irrespective of the level of sales. The first method is difficult for a fraudulent manager to alter, but the second one is subject to some manipulation, with the assistance of the accounting staff.
Knowing how difficult it is to trace this information, a fraudulent manager can simply delay the backflush processing at the end of a reporting period, so that the inventory is not reduced by it until the first day of the next reporting period. The best way to spot a delayed backflush is to conduct an inventory count at the end of the reporting period, during which any excessive book balances will be spotted and corrected, with the adjustments being charged to the correct reporting period. A growing practice is to remove fittings and fasteners from the warehouse and store them in the pro- duction area, thereby reducing the picking and counting work of the warehouse staff.
Inventory Measurements and Internal Reports 1
Divide the number of approved parts in a new product’s bill of materials by the total number of parts in the bill. To calculate the measurement, divide the number of accurate parts (defined as the correct part number, unit of measure, and quantity) listed in a bill of material by the total number of parts listed in the bill. Then divide the total num- ber of errors by the total number of product kits sampled.
Sum of the [Number of days past the required customer receipt date for each order]. Then divide the re- sult by the total number of hours in the period, multiplied by the number of dock doors. Divide the number of accurate test items sampled by the total number of items sampled.
Budgeting for Inventory 1
Period Quantity Unit Price Total. iii) Class Y.The breakdown of the class Y items may be assumed to be:. The reasonableness of the budgeted inventory level should be tested by comparing it to historical inventory turnover levels. Some margin of safety must be maintained by means of the finished goods inventory so that satisfactory deliveries can be made.
Under this plan, control over the inventory is effected by means of enforcement of the sales and production plans. This may be done by establishing standard rates of turnover for the inventory as a whole or for different sections of the inventory. When the total of the inventory segments is known, the total inventory budget for the company can be summarized as in Exhibit 6-4.
LIFO, FIFO, and Average Costing 1
This method computes a conversion price index for the year-end inventory in comparison to the base year cost. Under this approach, the total extended cost of the inventory at both base year prices and the most recent prices are calculated. The first year is the base year on which the double-extension index will be based in later years.
When multiplied by the base year cost of $32, we arrive at an incremental increase in inventory of $112,000. As was the case for the double-extension method, there is no index for year one, which is the base year. We then determine the value of the year two inventory layer by first dividing the extended year-end price of $241,500 by the cumulative index of 107.8% to ar- rive at an inventory valuation restated to the base year cost of $224,026.
The Lower of Cost or Market Calculation
The remainder of this chapter explores the practical application of the lower of cost or market rule. In the example, the numbers in the first six columns are used to derive the upper and lower boundaries of the market values that will be used for the LCM calculation. By subtracting the completion and selling costs from each product’s selling price, we establish the upper price boundary (in bold) of the market cost calculation.
One of the better approaches to enforcement is to have the Board of Directors formally approve a company policy requiring at least an an- nual LCM review, and to then include this policy in the job description of the in- ventory accountant. To avoid this problem, consider including in the accounting procedures manual a clear definition of the calculation to be followed. Have the accounting staff expense the value of the write down in the accounting records.
Applying Overhead to Inventory
On the contrary, much of the overhead is also related to the cost of goods sold. Many of the costs in the overhead cost pool have not the slightest relationship to the allocation measure, and so should not be allocated based on it. The next step is to allocate all of the costs stored in the secondary cost pools into the primary cost pools.
The activity driver must have a direct bearing on the incurrence of the costs in the cost pool. This should flush out all of the costs located in the cost pools and assign them to cost objects in their entirety. Next, we create activity drivers that are closely associated with the costs in each of the cost pools, and derive a cost per unit of activity.
Joint and By-Product Costing 1
A complication to the joint cost concept is that there can be more than one split- off point. The first is based on the sales value of all joint products at the split-off point. In the exhibit, we see that $250 in joint costs have been incurred up to the split-off point.
The first allocation method, based on the eventual sale price of the resulting joint products, is shown beneath the split-off point. The second allocation method, based on the eventual gross margins earned by each of the products, is shown to the right of the split-off point. In other words, incremental changes in prices should be based on the incremental increases in costs that accrue to a product after the split-off point.
Obsolete Inventory
By doing so, the bulk of the excess inventory will still be parked in the warehouse when the contractors are gone. By doing so, it can claim a tax deduction for the book value of the donated items. Third, implement some of the approaches described in the next section to prevent inventory from becoming obsolete.
If this is the case, consider bringing in consultants to conduct an independent evaluation of the inventory. If it is buried in an odd corner of the warehouse, there is not much chance that it will be used up. First, the computer system must have a record of the ending shelf life date for each item in the warehouse.
Inventory Transactions
To shift the cost of completed inventory from work-in-process inventory to finished goods inventory. Adjust inventory for obsolete items: To charge an ongoing expense to the cost of goods sold that increases the balance in a reserve against which obsolete inventory can be charged (first entry). To shift unexpected, one-time scrap or spoilage costs directly to the cost of goods sold, effectively writing off this amount in the cur- rent period.
To transfer manufacturing expenses into one or more overhead cost pools for later allocation to inventory and the cost of goods sold. To shift the amount of costs built up in the overhead cost pool to the work-in-process and finished goods inventory categories, as well as to the cost of goods sold for any inventory sold during the period. Based on the cost assignment method used, to assign manufacturing cost pools to completed joint products.
IRS Inventory Rules
First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year;. An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method. If any of the three preceding taxable years include a short year, that year shall be annualized.
For purposes of this section, a taxpayer is an eligible small business for any taxable year if the average annual gross receipts of the taxpayer for the 3 pre- ceding taxable years do not exceed $5,000,000. For purposes of the preced- ing sentence, rules similar to the rules of section 448(c)(3) shall apply. In the case of a taxpayer which is a member of a controlled group, all persons which are component members of such group shall be treated as one taxpayer for purposes of determining the gross receipts of the taxpayer.
Counting Inventory
This section contains a sequential listing of the steps that must be completed before an accurate system is achieved. One of the main causes of record inaccuracy is removal of items from the warehouse by outside staff. All other personnel entering the warehouse should be accompanied by a member of the warehouse staff to prevent the removal of inventory.
It is more important to have the perpetual inventory system operational before the warehouse activity increases again; any errors in the data will be quickly detected during cycle counts and flushed out of the database. Using this report, have the warehouse staff count blocks of the inventory on a continuous basis. If there are any significant variances be- tween the counted and cycle count quantities, brings them to the attention of the count supervisor for review.
