WHOLESALE & MANUFACTURING UPDATE:

ANALYZING INVENTORY DISCREPANCIES - PART II

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In a continuation from the previous issue’s article on analyzing inventory discrepancies, this issue will focus on improving future inventory accuracy by analyzing why the current adjustments were necessary. Investigating the root cause of the discrepancy is a vital step in improving your procedures in order to minimize the need for future adjustments.

Once the count has been reconciled and needed adjustments have been identified, entering these adjustments into your system will correct the current inventory balances to reflect accurate quantities. Why were these adjustments needed Typical inventory adjustments are needed because there is less inventory physically counted than is recorded in the computer system, there is more inventory counted than is in the computer system, or because inventory physically present is determined to be damaged, expired or otherwise obsolete or nonsaleable. Let’s examine the underlying causes of these types of adjustments and so that they may be prevented from recurring in the future.

Less inventory physically counted than is in the system:
If inventory is missing, often the first suspicion is theft. However, there are many other causes that should be investigated.

• Receiving inaccuracies – inventory quantities recorded as received are more than the quantities actually received. Receipt was recorded twice.
• Material was returned to vendor for a credit, but the reduction in inventory was not recorded.
• Materials from inventory are being used, rather than sold, and such usage is not being recorded. The usage might include demos, samples, R&D, warranty replacements, repair parts or internal use.
• Shipping inaccuracies – items shipped do not match items recorded as sold in the system. An order was filled with the wrong item. An order was filled twice, or more quantities may have been shipped than were invoiced. Possibly one item was substituted for another without recoding the change in the system.
• Sales inaccuracies – the sale was entered for the wrong item. Orders are being filled and shipped without the corresponding sale being recorded.

More inventory physically counted than is in the system:
These adjustments are less common, but still indicate procedural problems that need to be addressed. Here are some common causes:

• Receiving inaccuracies – inventory is being physically received but not recorded in the system. Inventory quantities recorded as received are less than the quantities actually received.
• Merchandise was returned from customer but not recorded.
• Sales inaccuracies – sales have been entered for items not yet shipped.

Damaged, obsolete or otherwise nonsaleable inventory:
The following are common causes for nonsaleable inventory write-offs:

• Receiving procedures – the items were damaged when received, but receiving failed to identify it as damaged.
• Stock is being damaged in your warehouse.
• Items are being damaged during shipment to your customer.
• Items with a limited shelf life are expiring because of poor stock rotation.
• Items are expiring due to excess inventory – purchasing quantities are too high.
• Soon-to-expire inventory is not being identified when it could possibly still be sold at a reduced price.
• Obsolete, or dead stock inventory, was discussed in a previous newsletter. Slow-moving inventory needs to be periodically identified, considered for discontinuation and disposed of.

As you can see from the list of common causes, elimination of these causes will improve not only your inventory accuracy, but many will have a true economic impact as well. When inventory adjustments are traced to their root cause, procedures can be improved that will lead to greater corporate profitability and better customer service. Learning from your past mistakes by improving the procedures that caused them will minimize the chances of the same mistakes recurring in the future.

- Kim Gregoris, CPA, MS (Tax)
Inventory Group Leader