Inventory Control Systems Chapter 4 PDF

INVENTORY CONTROL SYSTEMS CHAPTER 4 INTRODUCTION Use control systems to make it less likely that the units and costs associated with inventory are incorrect. inventory controls areas : in-transit inventory. inventory storage. obsolete inventory inventory transactions. WHAT IS AN INVENTORY CONTROL SY...

INVENTORY CONTROL SYSTEMS CHAPTER 4 INTRODUCTION Use control systems to make it less likely that the units and costs associated with inventory are incorrect. inventory controls areas : in-transit inventory. inventory storage. obsolete inventory inventory transactions. WHAT IS AN INVENTORY CONTROL SYSTEM? When dealing with inventory, one should be concerned about three issues: 1. The physical quantity of goods in stock. 2. The cost at which they are valued. 3. The proper billing of shipped goods. INVENTORY CONTROL SYSTEM An inventory control system should be based on these issues. First, its design should minimize the risk that inventory will be lost through any number of means (e.g., pilferage, scrap losses, natural disasters). Second, the control system should ensure that costs are fairly and consistently applied to inventories. Third, it should ensure that goods shipped are appropriately billed to customers. INVENTORY CONTROLS AREAS in-transit inventory. Inventory Stocking Scrap Inventory inventory storage. Inventory Costing Off-Site Inventory Storage Billing of Shipped Goods obsolete inventory inventory transactions. INVENTORY IN TRANSIT Inventory in transit is an area that is customarily ignored by control system designers, because they tend to think only in terms of on-site inventory. However, this can be a major problem area if the terms of inbound or outbound shipment specify that the company retains ownership of the goods either before or after its arrival at or departure from the company premises. Thus, the key control issues include : 1. identification of the ownership of any in-transit inventories 2. mitigation of ownership risk 3. inclusion of owned in-transit items in inventory valuations. INVENTORY IN TRANSIT The following controls address these issues 1. Record intercompany inventory transfers in a central inventory database. 2. Audit both sides of all intercompany transfer transactions. 3. Require a customer signature on every bill-and-hold document. 4. Verify the existence of insurance coverage for owned in-transit goods. 5. Compare shipping log dates to shipper documentation. INVENTORY STOCKING Many of the problems associated with inventory originate with the initial decisions to set safety stock levels, add product options, and design new components into products. All controls noted relate to the addition of stock to inventory. 1. Reject all purchases that are not preapproved. 2. Revise safety stock levels for seasonal items. 3. Reduce the number of products and product options. INVENTORY STORAGE Inventory storage tends to be the area in which the most controls are implemented. Traditionally, the key control targets have been over the loss of inventory through pilferage, as well as the record accuracy for inventory contained within the warehouse. Possible controls are as follows: 1. Restrict warehouse access to designated personnel. 2. Pick from stock based on bills of material. OFF-SITE INVENTORY STORAGE When there is not sufficient on-site space available in which to store inventory, it is typically kept in storage trailers or leased off-site premises. One control issue is the loss of inventory in these locations Another problem is the accuracy of inventory records in the off-site locations. Both control issues are dealt with through the following controls: 1. Include off-site storage locations in the inventory database. 2. Access control. OBSOLETE INVENTORY Obsolete inventory can constitute a large proportion of the total inventory. Controls fall into four areas: 1. prevention of obsolete inventory. 2. Detection of existing obsolete inventory, 3. Rapid disposal of obsolete inventory before its value drops to minimal levels, 4. Appropriate recognition of obsolescence reserves. SCRAP INVENTORY Many production processes generate a considerable amount of scrap, which requires controls over its prevention, tracking, costing, and sale. The following controls address these issues: 1. Qualify and track supplier quality levels. 2. Use computer tracking for items with a short shelf life. 3. Require transaction forms for scrap and rework transactions. 4. Require check payments by scrap haulers. INVENTORY COSTING There are so many components to inventory cost calculations, involving so many cost records, that there is a high risk of costing error. Principal control system targets include : 1. ensuring a proper cost roll-up 2. appropriately assigning fixed costs to inventory, and both consistently 3. appropriately assigning overhead costs to inventory. BILLING OF SHIPPED GOODS From the perspective of a billing system, the main concern is ensuring that a delivery to a customer triggers a billing transaction, which is particularly difficult under a drop shipping arrangement where shipments are made by a third party. The key control issue is initiation of the billing transaction. The following controls address this issue: 1. Billing initiation: Automate third-party drop shipment notifications. 2. Compare third-party billings to drop shipment notifications. 3. Create an audit report matching the shipping log to billings. then Manually match the shipping log to billings. INVENTORY TRANSACTIONS The greatest bane of maintaining a high level of record accuracy is the massive number of transactions required to process inventory from receipt through putaway, picking, production, and shipping, as well as a myriad of additional potential transactions. With such a large volume of transactions, data entry errors are bound to occur. A central control over this problem is the avoidance of the manual entry of transactions of any type. Controls in this area fall into : 1. Transaction automation by Use bar-coded data entry systems. 2. Transaction avoidance: Certify suppliers for direct delivery of goods to production. 3. Error investigation: Create and maintain a procedures manual.