inventory internal controls - accountingtools

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Inventory Internal Controls - AccountingTools http://www.accountingtools.com/inventory-internal-controls[3/29/2015 11:13:35 AM] CPE Books Financial Accounting Operational Accounting Podcast Q&A Dictionary About Home Search the Site 1,000+ Accounting Topics! Accounting Bestsellers Accountants' Guidebook Accounting Controls Accounting for Managers Accounting Procedures Bookkeeping Guidebook Budgeting Business Ratios Cash Management CFO Guidebook Closing the Books Controller Guidebook Corporate Finance Cost Accounting Cost Management Guidebook Credit & Collection Guidebook Financial Analysis Fixed Asset Accounting GAAP Guidebook Hospitality Accounting IFRS Guidebook Interpretation of Financials Inventory Accounting Investor Relations Lean Accounting Guidebook Mergers & Acquisitions Nonprofit Accounting Payables Management Payroll Management Public Company Accounting Operations Bestsellers Constraint Management Human Resources Guidebook Inventory Management Purchasing Guidebook Sign Up for Discounts Your E-Mail Address * Receive monthly discounts on accounting CPE courses & books Home >> Inventory Accounting Topics Inventory Internal Controls A company's investment in inventory is usually a large one, and it may be comprised of a large number of merchandise items that can be readily stolen and resold. If the inventory contains mostly raw materials, keeping track of it is essential for ensuring that the production processes using it will not run short of materials. This means that you need to implement an array of controls, either to prevent theft or to ensure that the manufacturing operation does not run short of inputs. We will describe below a number of the key controls you should consider for your inventory investment. Key internal controls for your inventory are: Fence and lock the warehouse. The single most important inventory control is simply locking down the warehouse. This means that you construct a fence around the inventory, lock the gate, and only allow authorized personnel into the warehouse. Organize the inventory. It may not seem like a control to simply organize the inventory in the warehouse, but if you cannot find it, you cannot control it. Thus, a fundamental basis for inventory internal control is to number all locations, identify each inventory item, and track these items by location. Count all incoming inventory. Do not just take the word of the supplier that the quantity stated on the delivery is the correct one. Count the inventory before recording it as received. This keeps errors from being introduced into the inventory records. Inspect incoming inventory. Verify that all incoming inventory is of the correct type and is not damaged. All items that fail inspection should be returned at once, and the accounts payable staff notified that the returned items should not be paid for. Tag all inventory. Every scrap of inventory in the warehouse should be identified with a tag, which states the part number, description, unit of measure, and quantity. Otherwise, inventory items are bound to be mis-identified. Segregate customer-owned inventory. If there is inventory on-site that customers own, the warehouse staff will likely count it as though it is owned by the company, so have a procedure in place for labeling these items as customer-owned when they arrive, and segregate them in a separate part of the warehouse. Standardize record keeping for inventory picking. When an item is picked from the shelf in the warehouse, for use either in the production area or for sale to customers, have a standard procedure for recording the picks as soon as they leave the warehouse (which is easier if there is a warehouse fence, and inventory can only pass through a single controlled gate). Sign for all inventory removed from the warehouse. If inventory items are being removed from the warehouse for reasons outside of the normal picking process, have the person removing the inventory sign for the removal, so that there is a record of who is responsible. Audit the bill of materials. The bill of materials is a record of the parts used to construct a product. The bill of materials is used to pick items from stock, so if the bill is incorrect, pickers will pull incorrect amounts from the warehouse. This calls for a periodic audit of Operational Accounting Topics

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  • Inventory Internal Controls - AccountingTools

    http://www.accountingtools.com/inventory-internal-controls[3/29/2015 11:13:35 AM]

    C P E B o o k s F i n a n c i a l A c c o u n t i n g O p e r a t i o n a l A c c o u n t i n g P o d c a s t Q & A D i c t i o n a r y A b o u t H o m e

    Search the Site

    1,000+ Accounting Topics!

    Accounting Bestsellers

    Accountants' Guidebook Accounting ControlsAccounting for Managers Accounting ProceduresBookkeeping GuidebookBudgetingBusiness RatiosCash Management CFO GuidebookClosing the Books Controller Guidebook Corporate Finance Cost AccountingCost Management Guidebook Credit & Collection GuidebookFinancial AnalysisFixed Asset AccountingGAAP GuidebookHospitality Accounting IFRS Guidebook Interpretation of Financials Inventory Accounting Investor RelationsLean Accounting GuidebookMergers & AcquisitionsNonprofit Accounting Payables Management Payroll ManagementPublic Company Accounting

    Operations Bestsellers

    Constraint Management Human Resources Guidebook Inventory Management Purchasing Guidebook

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    Home >> Inventory Accounting Topics

    Inventory Internal Controls

    A company's investment in inventory is usually a large one, and it may be comprised of a

    large number of merchandise items that can be readily stolen and resold. If the inventory

    contains mostly raw materials, keeping track of it is essential for ensuring that the

    production processes using it will not run short of materials.

    This means that you need to implement an array of controls, either to prevent theft or to

    ensure that the manufacturing operation does not run short of inputs. We will describe

    below a number of the key controls you should consider for your inventory investment.

    Key internal controls for your inventory are:

    Fence and lock the warehouse. The single most important inventory control is simply

    locking down the warehouse. This means that you construct a fence around the

    inventory, lock the gate, and only allow authorized personnel into the warehouse.

    Organize the inventory. It may not seem like a control to simply organize the inventory

    in the warehouse, but if you cannot find it, you cannot control it. Thus, a fundamental

    basis for inventory internal control is to number all locations, identify each inventory

    item, and track these items by location.

    Count all incoming inventory. Do not just take the word of the supplier that the quantity

    stated on the delivery is the correct one. Count the inventory before recording it as

    received. This keeps errors from being introduced into the inventory records.

    Inspect incoming inventory. Verify that all incoming inventory is of the correct type and

    is not damaged. All items that fail inspection should be returned at once, and the

    accounts payable staff notified that the returned items should not be paid for.

    Tag all inventory. Every scrap of inventory in the warehouse should be identified with a

    tag, which states the part number, description, unit of measure, and quantity.

    Otherwise, inventory items are bound to be mis-identified.

    Segregate customer-owned inventory. If there is inventory on-site that customers own,

    the warehouse staff will likely count it as though it is owned by the company, so have a

    procedure in place for labeling these items as customer-owned when they arrive, and

    segregate them in a separate part of the warehouse.

    Standardize record keeping for inventory picking. When an item is picked from the shelf

    in the warehouse, for use either in the production area or for sale to customers, have a

    standard procedure for recording the picks as soon as they leave the warehouse (which

    is easier if there is a warehouse fence, and inventory can only pass through a single

    controlled gate).

    Sign for all inventory removed from the warehouse. If inventory items are being

    removed from the warehouse for reasons outside of the normal picking process, have

    the person removing the inventory sign for the removal, so that there is a record of who

    is responsible.

    Audit the bill of materials. The bill of materials is a record of the parts used to construct

    a product. The bill of materials is used to pick items from stock, so if the bill is incorrect,

    pickers will pull incorrect amounts from the warehouse. This calls for a periodic audit of

    O p e r a t i o n a l A c c o u n t i n g T o p i c s

  • Inventory Internal Controls - AccountingTools

    http://www.accountingtools.com/inventory-internal-controls[3/29/2015 11:13:35 AM]

    every bill, as well as password-only access to the bill of material records in the

    computer system.

    Trace extra requisitions and returns. If the production staff asks for extra issuances of

    parts, or returns excess amounts to the warehouse, then there is an error in the picking

    records (possibly in the bill of materials, as just noted).

    Conduct a periodic obsolete inventory review. The warehouse can eventually become

    choked with obsolete inventory that cannot be used, which requires high storage costs

    and also interferes with the components that are needed in production. Form a

    materials review board that periodically combs through the inventory records to

    determine which items should be sold off or otherwise eliminated.

    Conduct cycle counts. Have the warehouse staff conduct small, frequent counts of a

    small portion of the inventory, and investigate and correct any errors they find. This

    gradually improves the inventory record accuracy.

    Investigate negative-balance inventory records. If the accounting records show that

    there is negative inventory on hand, then there is obviously a transactional flaw that

    caused the negative balance. This is a prime target for a detailed investigation.

    Record scrap transactions. Do not just throw scrap in a scrap bin when it occurs. If you

    do, the accounting system still thinks the scrapped item is in stock, and so will

    overstate the amount of inventory. Instead, create a procedure to track scrap on a

    regular basis.

    A number of problems may still arise with inventory record accuracy despite these controls,

    so be prepared to add more controls if the problems are persistent.

    Related Topics

    How do I ensure a proper inventory cutoff?

    How do I improve inventory record accuracy?

    How do I reconcile inventory?

    Inventory audit procedures

    Types of inventory errors

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