Controls for Inventory (#8)

In this episode, we discuss the controls associated with inventory. This is a massive area that encompasses many controls, so we split them up in the episode into controls for inventory storage, inventory costing, and inventory handling. The point is made that inventory is really a liability, since it puts the company at risk of inventory obsolescence, requires significant resources to track, and involves a large working capital investment.

Key points in the podcast relating to inventory storage are:

  • Fence in the warehouse and lock the gate in order to minimize pilferage

  • Restrict warehouse access to authorized personnel

  • Tie the pay of the warehouse staff to inventory record accuracy

  • Be orderly in regard to how inventory is bagged, boxed, and stored

  • Implement cycle counting, including investigations of any errors found

  • Conduct a weekly audit of inventory record accuracy, post the results in the warehouse, and pay bonuses based on it

Key points in the podcast relating to inventory costing are:

  • Schedule a periodic obsolete inventory review

  • Run the “where used” report to see if any on-hand inventory is not being used on products

  • Conduct a quarterly lower of cost or market review, to spot valuation problems early

  • Lock down access to the bill of materials and labor routing records, to keep them accurate

  • Track the identifications of anyone who alters inventory records

  • Monitor the period-end cutoff of inventory counts, using an on-site person

  • Compare monthly overhead charges on a trend line to spot anomalies

  • Conduct a periodic detailed analysis of the cost of goods sold to search for unusual entries

  • Run a report that shows any inventory items with negative unit balances

  • Run an extended inventory valuation report and look for unusually high or low values

  • Compare per-unit costs on a trend line to spot anomalies

Key points in the podcast relating to inventory handling are:

  • Enforce rapid data entry for inventory moves

  • Update the bill of material records as soon as changes are made to product designs

  • Always pick from inventory using a copy of the original customer order, to ensure that picks match what was actually ordered

Related Courses

Accounting Controls Guidebook
Accounting for Inventory
Inventory Management