Inventory accounting a comprehensive guide phần 5 pps

The two-part form shown in Exhibit 5-6 can be filledout by the production or materials management staff whenever scrap or reworkoccurs, with one copy being attached to the inventory and

Inventory Measurements and Internal Reports / 91 Exhibit 5-2 Inventory Tag

Exhibit 5-3 Cycle Counting Report

Exhibit 5-4 Inventory Accuracy Report

Aisles Responsible Person 2 Months Ago Last Month Week 1 Week 2 Week 3 Week 4

damaged on the production floor When any of these issues arise, the warehousestaff should record all related transactions on an inventory sign-out and return form,such as the one shown in Exhibit 5-5 It is useful not only as a written record oftransactions that must be entered into the inventory database, but also as a record

of prospective adjustments to erroneous bills of material

Production operations frequently result in either scrapped inventory or tory that must be reworked in some manner before it can be completed The ac-counting department needs to know as soon as scrap is created, so it can charge offthe related cost to the cost of goods sold Many companies give the same treatment

inven-to items requiring rework, only reassigning a cost inven-to them once they are fixed andsent back into production The two-part form shown in Exhibit 5-6 can be filledout by the production or materials management staff whenever scrap or reworkoccurs, with one copy being attached to the inventory and the other being forwarded

to accounting The form is prenumbered, in case the accounting staff wants to ify that all forms are submitted If the “Scrapped” block is filled out, accountingcharges off the inventory cost to the cost of goods sold If the “Sent to Rework”block is filled out, accounting must also shift the related inventory to a rework in-ventory category in the inventory database, where it will stay until rework activi-ties are completed The form can later be sent to the production or engineeringmanagers, in case they wish to review the reasons why scrap or rework occurred.When standard costs are used to create an inventory valuation, there will inevitably

ver-be some differences ver-between standard and actual costs that will create variancesthat appear in the cost of goods sold The report shown in Exhibit 5-7 itemizes thesevariances

Standard costs will be altered from time to time in order to bring them more inline with actual costs When this happens, it is useful to show the changes on a re-port, along with the reasons why costs were changed If management is particu-larly sensitive about altering standard costs, one could also add a manager sign-offsection to the report in order to record formal approval of the changes An example

of this report is shown in Exhibit 5-8

More parts than are normally needed may be taken from stock to complete variousitems in production, which will unexpectedly reduce inventory levels and increasethe cost of goods sold Given its potentially large impact on inventory valuation,this issue may require a separate report, such as the one shown in Exhibit 5-9 Ifexcess parts usage continues over time, the report can also be used as proof of aneed for changes to an item’s underlying bill of materials

92 / Inventory Accounting

Exhibit 5-5 Inventory Sign-Out and Return Form

Description Part No Quantity Issued Quantity Returned Job No Date

Inventory Measurements and Internal Reports / 93 Exhibit 5-6 Scrap/Rework Transaction Form

7403

Date: _

Item Number: _

Description:

Exhibit 5-7 Standard to Actual Cost Comparison Report

Standard Actual Variance Unit Extended Part Description Cost ($) Cost ($) ($) Volume Variance ($)

One of the easiest ways to detect obsolete inventory is to create a list of tory items for which there has been no usage activity The version shown in Exhibit5-10 compares total inventory withdrawals to the amount on hand, which by itselfmay be sufficient information to conduct an obsolescence review It also listsplanned usage, which calls for information from an MRP system, and which in-forms one of any upcoming requirements that might keep one from otherwise dis-posing of an inventory item An extended cost for each item is also listed, in order

inven-to give report users some idea of the write-off that might occur if an item is clared obsolete In the exhibit, the subwoofer, speaker bracket, and wall bracket ap-pear to be obsolete based on prior usage, but the planned use of more wall bracketswould keep that item from being disposed of

de-94 / Inventory Accounting

Exhibit 5-8 Standard Cost Changes Report

Beginning Ending

Exhibit 5-9 Excess Material Usage Report

(d) Wrong speed drilling

(e) Maintenance technician dropped case

Inventory Measurements and Internal Reports / 95 Exhibit 5-10 Inventory Obsolescence Review Report

Quantity Last Year Planned Extended Description Item No Location on Hand Usage Usage Cost

in inventory is sometimes so large that a more detailed approach is warranted Thischapter discusses how to apply a variety of budgeting techniques to the three mainareas of inventory: raw materials, work-in-process, and finished goods.

There are two methods of developing the raw materials inventory budget First,budget each important inventory item separately based on the production plan Sec-ond, budget materials as a whole or classes of material, based on selected produc-tion factors Practically all companies must use both approaches to some extent,although one or the other predominates The former method is always preferable

to the extent that it is practicable, because it allows quantities to be budgeted moreprecisely

The following steps should be taken in budgeting the major individual items ofraw materials:

1 Determine the physical units of material required for each item of goods to be

produced during the budget period

2 Accumulate these into total physical units of each material item required for the

entire production plan

1Adapted with permission from pp 585–594 of Bragg and Roehl-Anderson,

Controller-ship 7E, John Wiley & Sons, 2004.

3 Determine for each item of material the quantity that should be on hand

period-ically to fulfill the production plan with a reasonable margin of safety

4 Deduct material inventories that are expected to be on hand at the beginning of

the budget period to ascertain the total quantities to be purchased

5 Develop a purchasing plan that will ensure that the quantities will be on hand

at the time they are needed The purchasing plan must consider such factors aseconomically sized orders, economy of transportation, and margin of safetyagainst delays

6 Test the resulting budgeted inventories by standard turnover rates.

7 Translate the inventory and purchasing requirements into dollars by applying

the expected prices of materials to budgeted quantities

In practice, many difficulties arise in executing the foregoing plan In fact, it ispracticable to apply the plan only to important items of material that are used regu-larly and in relatively large quantities Most manufacturing companies find that theymust carry hundreds or even thousands of different items of raw materials to whichthis plan cannot be practically applied Moreover, some companies cannot expresstheir production plans in units of specific products This is true, for example, wheregoods are partially or entirely made to customers’ specifications In such cases, it isnecessary to look to past experience to ascertain the rate and regularity of movement

of individual material items and to determine the maximum and minimum quantitiesbetween which the quantities must be held This necessitates a program of continu-ous review of material records as a basis for purchasing and frequent revision ofmaximum and minimum limits to keep the quantities adjusted to current needs.For those raw material items that cannot be budgeted individually, the budgetmust be based on general factors of expected production activity, such as total bud-geted labor hours, productive hours, standard allowed hours, cost of materialsconsumed, or cost of goods manufactured To illustrate, assume that the cost ofmaterials consumed (other than basic materials, which are budgeted individually)

is budgeted at $1 million and that past experience demonstrates that these materialsshould be held to a turnover rate of five times per year; that an average inventory

of $200,000 should be budgeted This would mean that individual items of rial could be held in stock approximately 73 days (one-fifth of 365 days) This couldprobably be accomplished by instructing the executives in charge to keep on hand

mate-an average of 60 days’ supply Although such a plmate-an cmate-annot be applied rigidly toeach item, it serves as a useful guide in the control of individual items and preventsthe accumulation of excessive inventories

In the application of this plan, other factors must also be considered The tionship between the inventory and the selected factor of production activity willvary with the degree of production activity Thus, a turnover of five times may besatisfactory when materials consumed are at the $1 million level, but it may be nec-essary to reduce this to four times when the level goes to $750,000 Conversely, itmay be desirable to hold it to six times when the level rises to $1.25 million More-

rela-98 / Inventory Accounting

over, some latitude may be necessitated by the seasonal factor, because it may benecessary to increase the quantities of materials and supplies in certain months inanticipation of seasonal demands The ratio of inventory to selected production fac-tors at various levels of production activity and in different seasons should be plot-ted and studied until standard relationships can be established The entire processcan be refined somewhat by establishing different standards for different sections

of the raw materials inventory

The plan, once in operation, must be closely checked by monthly comparisons

of actual and standard ratios When the rate of inventory movement falls below thestandard, study the records of activity for individual raw material items to detectthe slow-moving items

Some of the problems and methods of determining the total amount of expectedpurchases may be better understood by illustration Assume, for example, that thisinformation is made available regarding production requirements after a review ofthe production budget:

Class W Material of high unit value, for which a definite quantity and

time program is established in advance, such as for stockitems Also, the inventory is controlled on a Min-Max inven-tory basis for budget purposes

Class X Similar to Item W, except that, for budget purposes, Min-Max

limits are not used

Class Y Material items for which definite quantities are established for

the budget period but for which no definite time program isestablished, such as special orders on hand

Class Z Miscellaneous material items grouped together and budgeted

only in terms of total dollar purchases for the budget period

Budgeting for Inventory / 99

In actual practice, of course, decisions about production time must be made

re-garding items using Y and Z classifications However, the bases described later in

this chapter are applicable in planning the production level Further discussion of

each inventory class follows:

(i) Class W Where the items are budgeted on a Min-Max basis, it usually is

nec-essary to determine the range within which purchases must fall to meet production

needs and stay within inventory limits A method of making such a calculation is

shown next:

Units For Minimum Inventory For Maximum Inventory

Within these limits, the quantity to be purchased will be influenced by such factors

as unit transportation and handling costs, price considerations, storage space,

avail-ability of material, capital requirements, and so forth

A similar determination would be made for each month for each such raw

mate-rial, and a schedule of receipts and inventory might then be prepared, somewhat in

this fashion:

Units

Period Inventory Receipts Usage Inventory Unit Value Budget

(ii) Class X It is assumed that the class X materials can be purchased as needed.

Because other controls are practical on this type of item and because other

procure-ment problems exist, purchases are determined by the production requireprocure-ments A

simple extension is all that is required to determine the dollar value of expected

purchases:

100 / Inventory Accounting

Period Quantity Unit Price Total

(iii) Class Y The breakdown of the class Y items may be assumed to be:

Past Experience

Period Manufactured Y-1 Y-2 Y-3 Y-4 Total Budget

inas-to individual units In practice, if the units are numerous regarding types and are

Budgeting for Inventory / 101

of small value, the quantities of each might not be determined in connection withthe forecast.

(iv) Class Z Where the materials are grouped, past experience again may be the

means of determining estimated expenditures by the period of time Based on duction hours, the distribution of class Z items may be assumed to be (cost of suchmaterials assumed to be $2 per production hour):

deter-Exhibit 6-1 relates to raw materials A similar approach would be taken with spect to manufacturing supplies A few major items might be budgeted as the class

re-W or X items just cited, but the bulk probably would be handled as Z items.Once the requirements as measured by delivery dates have been made firm, it

is necessary for the finance department to translate such data into cash disbursementneeds through average lag time and so forth

102 / Inventory Accounting

Exhibit 6-1 Sample Purchases Budget

The Blank Company

Purchases Budget For the Year 20xx

6-3 Budgeting for Work-in-Process Inventory

The inventory of goods actually in process of production between stocking pointscan be best estimated by applying standard turnover rates to budgeted production.This may be expressed either in units of production or dollars and may be calcu-lated for individual processes and departments or for the factory as a whole Theformer is more accurate To illustrate this procedure, assume the following inven-tory and production data for a particular process or department:

Process inventory estimated for January 1 500 units (a)Production budgeted for month of January 1,200 units (b)Standard rate of turnover (per month) 4 times (c)Average value per unit of goods in this process $10

With a standard turnover rate of four times per month, the average inventoryshould be 300 units (1,200 ( 4) To produce an average inventory of 300 units, theending inventory should be 100 units:

500 + 100

———–— = 3002

Using the symbol X to denote the quantity to be budgeted as ending inventory,the following formula can be applied:

Control over the work-in-process inventories can be exercised by a continuouscheck of turnover rates Where the individual processes, departments, or plants arerevealed to be excessive, they should then be subjected to individual investigation.The control of work-in-process inventories has been sorely neglected in manyconcerns The time between which material enters the factory and emerges as thefinished product is often much longer than necessary for efficient production Anextensive study of the automobile tire industry revealed an amazing spread of timeamong five leading manufacturers, one company having an inventory float six timesthat of another This study also indicated, by an analysis of the causes of the floattime, that substantial reductions could be made in all five of the companies withoutinterfering with production efficiency Thus, budgeting for work-in-process inven-tory is an excellent area in which to incorporate an active program of inventory

Budgeting for Inventory / 103