Page 338 - Accounting Best Practices

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16–2 Modify the Bills of Material Based on Actual Scrap Levels
16–1 AUDIT BILLS OF MATERIAL 327
Some companies use back-flushing as the means of recording changes to inventory.
Under this methodology, inventory is taken from the warehouse without any associ-
ated picking transactions put into the computer. Then, when production is com-
pleted, the total amount of production by item is entered into the computer, and the
software automatically removes the associated inventory amounts from the ware-
house records, using bills of material as the basis for doing so. Though this is a very
simple method for keeping warehouse paperwork to a minimum, an incorrect bill
of material will quickly alter the on-hand inventory balances to such an extent that
inventory accuracy will plummet. In addition, the accounting department uses the
bills of material to determine the cost of any finished goods; an inaccurate bill will
also impact the accuracy of this costing. Thus, the accuracy of a company’s bills of
material impact not only the records for inventory quantities, but also their cost.
The best practice that keeps the bills of material errors to a minimum is an
ongoing audit of them. This practice keeps inventory quantities from becoming
too inaccurate in a back-flushing environment, while making the costing of fin-
ished goods more precise. To do so, a person who is knowledgeable about the
contents of bills of material must be assigned to a regular review of them. Any
problems must be corrected at once. To be the most effective, it is best to concen-
trate the efforts of the reviewer on those bills that are used the most or that are
expected to be included in upcoming production runs. By focusing on those bills
receiving the most usage, a company can be sure of maintaining a high degree of
bill accuracy for the bulk of its products.
The only difficulty in implementing this approach is that it requires the coop-
eration of the engineering manager, who must assign a staff person to the review-
ing process. This assistance is critical, since engineers are the ones with the best
knowledge of bills of material.
Cost: Installation time:

16–2 MODIFY THE BILLS OF MATERIAL BASED ON
ACTUAL SCRAP LEVELS

The typical company relies heavily on its bills of material to determine the cost of
its products. They can be used not only as a reference tool to quickly look up a
cost, but also as the primary means of calculating the remaining on-hand inven-
tory balance if back-flushing is used. Under the back-flushing concept, a com-
pany simply enters the amount of its production for the day, and the computer
will automatically clear this inventory from stock, based on the amount of materials
that should have been used, as noted in the bills of material. Though this
approach is remarkably easy to use, given the reduced volume of paperwork, it
can quickly lead to very inaccurate inventory balances if the underlying bills of