Page 180 - Accounting Best Practices

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9–2 Audit Labor Routings
The best practice that improves the situation is following an ongoing pro-
gram of auditing bills of material. By doing so, errors are flushed out of the bills,
resulting in better inventory quantity data, which in turn results in more accurate
financial statements. The best way to implement bill audits is to tie them to the
production schedule, so that any products scheduled to be manufactured in the
near future are reviewed the most frequently. This focuses attention on those bills
with the highest usage, though it is still necessary to review the bills of less fre-
quently used products from time to time. The review can be conducted by the
engineering staff, the production scheduler, the warehouse staff, and the produc-
tion staff. The reason for using so many people is that they all have input into the
process. The engineering staff has the best overall knowledge of the product,
while the production scheduler is the most aware of production shortages caused
by problems with the bills, and the warehouse staff sees components returned to
the warehouse that were listed in the bills but not actually used; the production
staff must assemble products and knows from practical experience which bills are
inaccurate. Thus, a variety of people (preferably all of them) can influence the bill
of material review process.
Measuring a bill of material includes several steps. One is to ensure that the
correct part quantities are listed. Another is to verify that parts should be included
in the product at all. Yet another is that the correct subassemblies roll up into the
final product. If any of these items are incorrect, a bill of material should be listed
as incorrect in total. For a large bill with many components, this means that it will
almost certainly be listed as incorrect when it is first reviewed, with rapid
improvement as corrections are made. The target that a company should shoot for
when reviewing bills of material is a minimum accuracy level of 98 percent. At
this level, any errors will have a minimal impact on accuracy, cost of the inven-
tory, and cost of goods sold. Thus, it is not uncommon for a company to record an
initial overall bill of material accuracy of zero.
If a controller can effectively work with the engineering, production, and
logistics staffs to create a reliable bill of material review system, the result is a
much more accurate costing system.

Cost: Installation time:

9–2 AUDIT LABOR ROUTINGS

The labor a company charges to each of its products is derived from a labor rout-
ing, which is an engineering estimate of the labor hours required to produce a
product. Unfortunately, an inaccuracy in the labor-routing information has a
major impact on a company’s profitability for two reasons. One is that the labor
hours assigned to a product will be incorrect, resulting in an incorrect product
cost. By itself, this is not usually a major problem, because the labor cost is not a
large component of the total product cost. However, the second reason is the real