Page 347 - Accounting Best Practices

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Inventory Best Practices
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10. Audit inventory accuracy. Audit the inventory once a week. A small sample
of the total inventory is sufficient to determine the total accuracy of the
inventory, which should be posted for the review of the warehouse staff. It
may be necessary to post accuracy by aisle, in case some sections of the
warehouse are particularly prone to mistakes. If so, the best cycle-counters
should be assigned to these aisles.
11. Use a bonus program. The entire warehouse staff should receive a bonus at
the end of each month, based on the audited accuracy of the inventory. A
good measure above which bonuses should be given is 95 percent accuracy,
with any item being defined as accurate if the counted quantity is within 2
percent of the amount listed in the computer (though this may not be a good
measure in some industries, such as diamond processing). This is an
extremely effective way to maintain the interest of the warehouse staff in the
continuing accuracy of the inventory records.

Though cycle-counting will certainly allow one to avoid a physical inventory
count, it is equally important to investigate why errors are occurring, not just to
change inventory balances if they are wrong. If one can get to the bottom of a trans-
action problem and fix the underlying error, it is possible to greatly increase record
accuracy and require less work by the cycle-counting staff to keep it that way.
Cost: Installation time:

16–11 LOCK DOWN THE WAREHOUSE AREA

The single most important cause of inventory inaccuracy is parts ‘‘walking out
of the warehouse.” This means that the physical layout of the warehouse allows
anyone to wander in and take any parts they need for the production process.
When this happens, there is no record that any item was taken from stock, so no
one knows what is left on the shelf, or even if there is anything left, which ren-
ders any automated reordering system useless. From the accountant’s perspec-
tive, the physical inventory count will probably be significantly different from
what the accounting records show, resulting in a large inventory variance at the
end of the year.
All of these problems can be eliminated by segregating the warehouse. This
is done by setting up a fence around the entire storage area and locking the gate
when there are no warehouse personnel on hand. In addition, there must be iron-
clad rules about who has a key to this gate. If too many keys are handed out, any-
one will still be able to enter the warehouse after hours. To prevent this, there
should be no more than one key given to the production personnel, and then only
to the most responsible person, who will faithfully mark down anything taken
from the warehouse. If possible, even this should be avoided by prepositioning
any needed parts outside of the warehouse for use by the production staff when