A Blog written by Abhishek Sriram, CA, Chennai.
For clients that deal with manufacturing or trading materials, you should keep in mind that inventory becomes one of their most important assets. Keeping track of how much stock they have and how much has been sold covers a substantial part of their business and directly impacts their revenue.
As part of your accounting job or even as an auditor, taking a close look at inventory processes is a fundamental part of your job.
The Inventory Management Process
Though the extent of the processes will differ based on the nature of the company, here are some practical procedures that you should know in your accounting job.
- Don’t halt internal cycles.
For large inventories where the inflow and outflow of stock are rapid, halting operations to count the stock will hamper business. Therefore, consider a cut-off date or time while planning the stock count. Any stock you cannot find should match with the stock sent out of the warehouse after your cut-off time. Any stock you found in excess should match the list of stock that entered the warehouse.
- For multiple locations, deploy multiple staff and cover the most significant inventory.
Custodians in different warehouses spread across many locations would have their inventories. Plan the count in such a way that it covers maximum ground quickly.
Segregate the total inventory into three categories using ABC Approach where A category would mean high value Inventory and C category would mean Low value Inventory. Focus your attention on A category as this would constitute the most significant portion of Inventory.
Check if the list of actual counts matches the copy of inventory quantities from the general ledger using a print-out that clearly states the item and quantity. Excel at your accounting job by preparing and formatting this list beforehand.
- Assess the percentage of completion for work-in-progress.
Some inventories might be in different stages of development. In this case the inventories can be divided into Raw Materials, Work in Progress and Finished Goods and they will be classified based on the percentage yet to be completed.
For example, if 4 out of 10 floors of the building are constructed, its real estate company will record 40% of project done as Finished Goods and recognize the balance 60% of the building as work-in-progress in its account books.
- You cannot measure/count everything.
You don’t have to measure every bottle, count every screw or weigh every plank. Stock counts always keep a margin of error. Most stock is also held in batches. You can pick one batch at random to count meticulously and base the rest on assuming that it completes the batch. For example, if you are counting pharmaceutical drugs and each box contains 500 strips, and each tablet strip contains 10 tablets, you can count the strips present in a few boxes chosen at random and then count the number of boxes in total, assuming each box will have 500 strips.
Accounting jobs encompass inventory management governed by the Indian Accounting Standard 2. Here are some features of the regulations.
- The cost of inventories should include all costs incurred in bringing the inventory to their present location and condition. Therefore, import duties and taxes, fixed and variable overheads, storage costs necessary for production process, etc., should be included in the cost of inventories.
- Always follow the FIFO (First-in, First-out) method or weighted average cost formula for ascertaining the cost of the inventory unless the regulations allow other methods for special cases. A different method can be used only if the goods are not interchangeable or if the inventory was assigned to a dedicated project.
- The cost of damaged inventories or the ones that cannot be sold must be valued at a net realisable value only and not at actual cost. The loss, if any, will affect the profit and loss account.
Managing inventory is a detailed process carried out carefully by professionals who are well versed with the regulations. Many companies require professionals to help them value their inventory effectively.
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