Page 339 - Accounting Best Practices

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Inventory Best Practices
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material are incorrect. This is a particularly difficult problem if the true scrap
level is not reflected in the bills of material. If this is the case, the amount of
materials listed in each bill will be too small, resulting in an inadequate amount
being back-flushed out of inventory, which leaves inventory balances too high.
The best practice that resolves this situation is to ensure that the correct scrap
levels are included in each bill of material. By doing so, the amount of material
back-flushed out of the inventory will be much more accurate, resulting in a more
accurate inventory, cost of goods sold, and fewer (if any) material stock-outs to
interfere with production.
To add accurate scrap rates to the bills of material, there must be a scrap
reporting system already in place that notes the precise quantities of scrap that
occur whenever a product is produced. With this information in hand, one can eas-
ily update scrap rates with a great deal of precision. Also, access to the information
in the bills of material must be severely restricted to ensure that no one but an
authorized user is allowed to change the scrap rates in bills; without this security
point, there is no way to ensure that the most accurate scrap rates are indeed in the
computer system. In addition, there must be constant attention to the scrap rates,
for they will change over time as production practices and machinery change.
Without this continual review process, the existing scrap rates in the bills of mate-
rial will gradually depart from actual rates. Finally, there should be a provision in
the computer system for automatically changing large blocks of scrap rates in
many bills of material; given the time needed to alter individual scrap line items in
all existing bills, this is an extremely helpful labor-saving device to have on hand.
If all of these issues are addressed, the accuracy of the bills of material should rise
markedly, along with the accuracy of the inventory and cost of goods sold.
Cost: Installation time:

16–3 REVIEW INVENTORY RETURNED TO THE WAREHOUSE

Most organizations that produce any sort of tangible product will be familiar with
this scenario: the warehouse staff uses a computer-generated picking list to pick a
number of items from the shelf for use in an upcoming manufacturing order,
delivers these items to the production facility, and then finds after the job is com-
pleted that a number of items are returned to the warehouse, even though the pick
list it used was intended to completely use up all items picked. Any returns of this
type indicate that the bills of material used to compile the pick lists are incorrect.
When this happens, the bills of material are listing too high a quantity of materials;
if these bills are also used to calculate the amount of items to be purchased, this
results in an excessive number of purchases being made. From an accounting per-
spective, an inaccurate bill of material leads to inaccurate product costs, which
results in an inaccurate finished goods valuation.
The best way to avoid this issue is to create a procedure for closely examin-
ing the parts returned to the warehouse, in order to determine exactly which line