Page 184 - Accounting Best Practices

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9–5 Follow a Schedule of Inventory Obsolescence Reviews
9–5 FOLLOW A SCHEDULE OF INVENTORY 173
OBSOLESCENCE REVIEWS
A great many companies find that the proportion of their inventory that is obso-
lete is much higher than expected. This is a major problem at the end of the fiscal
year, when this type of inventory is supposed to be investigated and written off,
usually in conjunction with the auditor’s review or the physical inventory (or
both). If this write-off has not occurred in previous years, the cumulative amount
can be quite startling. This may result in the departure of the controller, on the
grounds that he or she should have known about the problem.
The best practice that resolves this problem is adopting and sticking to a
schedule of regular obsolete-inventory reviews. This is an unpopular task with
many employees because they must pore over usage reports and wander through
the warehouse to see what inventory is not needed and then follow up on disposal
problems. However, these people do not realize the major benefits of having a
periodic obsolete-inventory review. One is that it clears space out of the ware-
house, which may even allow for a reduction in the space this department needs,
resulting in a possible reduction in the overall square footage that a corporation
requires. Also, spotting obsolete inventory as early as possible allows a company
to realize the best salvage value for it, which will inevitably decline over time
(unless a company is dealing in antiques!). Further, a close review of the reason
why an inventory item is in stock and obsolete may lead to discoveries concern-
ing how parts are ordered and used; changing these practices may lead to a reduc-
tion in obsolete inventory in the future. Thus, there are a number of excellent rea-
sons for maintaining an ongoing obsolete-inventory review system.
The composition of the obsolete-inventory review committee is very impor-
tant. There should be an accountant who can summarize the costs of obsoles-
cence, while an engineering representative is in the best position to determine if a
part can be used elsewhere. Also, someone from the purchasing department can
tell if there is any resale value. Consequently, a cross-departmental committee is
needed to properly review obsolete inventory.
The main contribution of the accounting department to this review is a peri-
odic report that itemizes those parts most likely to be obsolete. This information
can take the following forms:

• Last usage date. Many computer systems record the last date on which a spe-
cific part number was removed from the warehouse for production or sale. If
so, it is an easy matter to use a report writer to extract and sort this informa-
tion, resulting in a report that lists all inventory, starting with those products
with the oldest ‘‘last used” date.
• No ‘‘where used” in the system. If a computer system includes a bill of
materials, there is a strong likelihood that it also generates a ‘‘where used”
report, which lists all of the bills of material for which an inventory item is