Page 352 - Accounting Best Practices

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16–15 Track Inventory Accuracy
16–15 TRACK INVENTORY ACCURACY 341
A controller is always concerned about the accuracy of the inventory. If it is off
by even a few percent at the end of the year, the annual physical count may result
in a large alteration in profits that will cost the controller his or her job on the
grounds that inaccurate financial statements have been issued. Furthermore, the
purchasing staff cannot properly order replacement parts if it does not have an
accurate idea of what is currently in stock, while the production department never
knows when parts that it needs for current jobs will not be in stock. Thus, all
these departments are deeply affected by the accuracy of the inventory.
The way to gain some assurance about overall levels of accuracy is to
track inventory accuracy with periodic audits. By doing so, one can determine
if there is an accuracy problem, resulting in further steps as outlined elsewhere
in this chapter, such as locking down the warehouse and shifting inventory
into the floor stock area. To review accuracy, one must be able to print out a
report from the computer system that shows the inventory in each warehouse
location. Then an accounting person should take a sample of items from this
list and verify that the items listed on it are indeed in stock in the correct
quantities, and that they are stored in the correct locations. Similarly, a small
sample of items should be traced from the shelf to the computer report to
verify that all items are being tracked in the computer system. The total of all
correct items should be divided by the total amount sampled to determine the
accuracy percentage. For even the largest warehouse, a sample size of 30
items is usually sufficient to determine the accuracy of the entire facility. This
information should be reported to management and posted for the warehouse
staff to see. By showing this information to the warehouse staff and tying a
series of bonus payments to it, one can be assured of an improvement in the
overall level of accuracy.
There is little resistance by anyone to tracking inventory accuracy, though
there are two systemic problems that may interfere with it. One is that the com-
puter system must be able to produce a report that sorts inventory by location—if
not, the auditing person will not be able to find items in the warehouse without a
long search, turning the audit into a tedious affair that can last hours. The other
problem is that the computer system must store location information for each
part. If parts are scattered throughout the warehouse with no record of their pre-
cise location, it will be exceedingly labor-intensive to track down anything. If
these two problems can be overcome, the auditing process becomes a simple and
mechanical one that only takes an hour or so to complete.
Cost: Installation time: