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This hands-on book provides accounting professionals with essential information on how to: About the Author Steven M. Bragg resides in Centennial, Colorado. The Work of the Managerial Accountant, all published by Wiley. Permissions Request permission to reuse content from this site. Table of contents Preface. Inventory and Manufacturing Systems. Please enter your name. The E-mail message field is required. Please enter the message. Please verify that you are not a robot. Would you also like to submit a review for this item? You already recently rated this item. Your rating has been recorded.
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Add a review and share your thoughts with other readers. Similar Items Related Subjects: The next question one might ask is: What information do I need to collect, and how might this vary depending on the manufacturing system in use? This chapter covers the flow of information through a bare-bones manufacturing system using minimal transactions, one organized under a manufacturing resources planning MRP II system, as well as one under a just-in-time system. The differences in transactions required for the various systems, as you will see, are significant. In this home-grown environment, the first required inventory transaction occurs when the fledgling company receives billings from its suppliers subsequent to having ordered supplies, requiring it to record a liability to the supplier and an offsetting inventory asset for whatever was bought.
When the company eventually sells products, it must record another transaction to relieve the inventory account for the amount sold, with an offsetting increase in a cost of goods sold account. The basic transactions are noted in Exhibit at the points in the cost of goods sold cycle where they occur. Although this approach is admirable for its spare style, it is severely lacking from both a control and costing standpoint.
First, the entrepreneur has no idea if there is any scrap in the manufacturing process, because the system does not relieve 1 The MRP II and JIT system descriptions in this chapter were adapted with permission from Chapters 26 and 27 of Bragg, Cost Accounting: Second, the purchasing department staff can order inventory whenever they want and in any quantities without anyone knowing if they are doing a good job, because the system has no way of determining how much inventory is actually in stock. Third, the inventory accountant cannot assign production costs to inventory, because there is no device for tracking the status of inventory through production; instead, all production costs must be charged to expense in the current period, even if the company is deliberately building its inventory stocks, resulting in probable losses in the current period and disproportionately high profits when the inventory is later sold.
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The problems just noted will have a considerable negative impact on the company as it grows, so the entrepreneur is usually forced to add more inventory transactions. These added transactions are noted in Exhibit There is also a journal entry to record any quantity adjustments encountered during a physical count; the related journal entry indicates that either a debit or credit can be used, because adjustment may increase or decrease the on-hand balance.
Note that the entrepreneur has just gone from two journal entries to eight, thereby quadrupling the required volume of transactions. At this point, one should seriously consider the use of bar coding data entry methods as described in the preceding chapter, because transaction errors are likely to increase dramatically at this stage. Although the entrepreneur may have a much better handle on the location of and quantity of his inventory with this more advanced system, the state of his product costs has not improved much: He is now recording scrap as soon as it occurs, but he is not adding costs to inventory for direct labor or overhead costs incurred.
Furthermore, he is not tracking the changing cost of raw materials over time with any sort of cost layering system. Finally, there is no consideration of reducing inventory costs for either obsolescence or the lower of cost or market rule. Without these added calculations, the inventory is not in compliance with generally accepted accounting principles for inventory costing and would fail an audit.
The details of these added transactions are described in detail in Part II Inventory Transactions of this book, and they are illustrated here in Exhibit This reveals the same inventory flow shown in Exhibit , but now shows only costing entries. The costing entries shown in Exhibit are in their most simplified form and do not include cost layering calculations at all, because they are much too complex to list in the simplified journal entry format listed in the exhibit.
The intent of Exhibits and is to present the considerable amount of inventory unit tracking and costing entries required for even a relatively elementary materials flow. In the next section, we explore how a more advanced system, called the manufacturing resources planning MRP II system works, and how the flow of inventory and related transactions are impacted by it. It began with the creation of databases that tracked inventory. This information had historically been tracked with manually updated index cards or some similar device and was highly prone to error.
By shifting to a computer system, companies could make this information available to the purchasing department, where it could be readily consulted when determining how many additional parts to purchase. In addition, the data could now be easily sorted and sifted to see which items were being used the most and least , which yielded valuable information about what inventory should be kept in stock and what discarded.
The purchasing staff now had better information about the amount of inventory on hand, but they did not know what quantities of materials were going to be used without going through a series of painfully tedious manual calculations. To alleviate this problem, the MRP II system progressed another step by incorporating a production schedule and a bill of materials for every item listed on it.
This was an immense step forward, because now the computer system could multiply the units listed on the production schedule by the component parts for each item, as listed on the bills of material, and arrive at the quantities that had to be purchased in order to meet production requirements.
This total amount of purchases was then netted against the available inventory to see if anything in stock could be used, before placing orders for more materials. The lead times for the purchase of each part was also incorporated into the computer system, so that it could determine for the purchasing staff the exact dates on which orders for parts must be placed. This new level of automation was called material requirements planning MRP , because as the name implies it revealed the exact quantities and types of materials needed to run a production operation.
However, the computer programmers were not done yet. This newer version contained all of the elements of the old MRP system, while also adding on several new features. One was the use of labor routings, which itemized the exact amounts of labor required to complete a product, as well as the identities of the machines on which this work must be done.
By multiplying labor routings by the production quantities listed on the production schedule, the computer system could now report on the number of laborers required for a production facility for each day of production and even itemize the skill classifications needed. This was of great assistance in planning out headcount requirements on the production floor.
Inventory Accounting by Bragg, Steven M
Of even greater importance was the use of the same information to determine the capacity usage of each machine in the facility. If the MRP II system revealed that the scheduled production would result in a machine overload in any part of the plant, then the production schedulers could reshuffle the schedule to shift work to other machines, thereby avoiding bottlenecks that would keep the company from meeting its production targets.
By verifying in advance that customer orders would be completed on time, there was no longer any last-minute scrambling to ship out orders for which there was no available machine time. Also, if problems of any kind arose, the computer system would notify the production planners, who could reschedule customer orders and tell the customers as far in advance as possible of changes in their ship dates.
All of these changes led to a major advance in the levels of customer service that companies could offer. Although this is an extremely abbreviated description of MRP II, it touches on the highlights of how the system functions and what kinds of results are obtained by using it. The underlying software is exceedingly complex and requires lengthy hands-on training and course work to fully understand. However, the basic operating principles are the same, no matter what type of software is used, so expert MRP II practitioners do not have great difficulty in learning new MRP II software packages.
It was originally designed to bring structure to the chaos of the manufacturing floor, which it certainly has done in many cases. However, the system was designed to track and plan for existing manufacturing practices, rather than attempt to impose a new methodology for production onto a company. As a result, the same old methods of production still underlie the system—only now everyone knows exactly how those inefficient methods work and can plan around them.
The MRP II system still allows suppliers to ship in low-quality goods, requires periodic quality inspection points, allows work-inprocess to build up, scrap to occur, and machines to have excessively long setup times—all factors that are directly addressed and reduced by the just-in-time JIT manufacturing methodology. Consequently, the MRP II system is much more of a tactical weapon for a company than a strategic one: It will not allow an organization to make great leaps in cost reduction or invested capital, but it can certainly allow it to improve inventory turnover to a significant degree and leads to a much smoother production process.
The most important is the bill of materials database, which consists of a separate record for each product manufactured, with each record itemizing the exact quantities of components, as well as their standard anticipated scrap rates. If there are large subassemblies, then these are usually recorded in a separate record and only referenced in the main record; this practice keeps the bills down to a tolerably short length. The bill of materials database is the driving force behind the material requirements planning portion of the MRP II system, so its accuracy is of the highest importance.
To attain such a high level, access to the database is closely guarded, and the engineering, purchasing, and production staffs are actively encouraged to warn of problems derived from it. The bill of materials database is also an outstanding tool for the inventory accountant, because it contains accurate information about product components. With that information in hand, it is usually a simple matter to reference the most current costs for each item and derive a product cost for anything in the database, which can then be used for a variety of variance and margin analyses.
Another key database is for labor routings. Each record in this database contains a detailed list of the exact times that each labor position needs to complete a product, and usually includes the required machine time, as well. Some small inaccuracies here will not bring down a production facility, but there will be occasional work stoppages caused by inaccurate labor or capacity calculations that cause bottlenecks to arise.
The inventory accountant can use the labor information in these records to determine the standard labor cost of each product, which has applications in the reporting of variances and margins. The information in this database is best used in concert with the bill of materials database, because the two include between them all of the direct costs that are applied to a product. The final database is for inventory. This one records the exact quantity of all items in stock.
Better inventory databases also keep exact track of the usage patterns of inventory for several years. For example, if the inventory database says that there are ten units of a gasket in stock, but there are really only five, then the MRP II system will not place an order for additional gaskets when production is scheduled that calls for ten gaskets.
As a result, the production line will use all five remaining gaskets and grind to a halt because the remaining five are not in stock, which causes the purchasing staff to place a rush order for the extra gaskets, to be delivered by expensive overnight mail. The inventory accountant will find that this database is also a gold mine of information, because one can extract from it the last dates when inventory items were used and thereby determine component or product obsolescence.
It is also useful for sorting the inventory by total cost always of concern to auditors , as well as for calculating the amount of inventory on hand which highlights any excessive ordering practices by the purchasing department. The key factor to consider here is the extremely high degree of accuracy that is required of these databases in order to make the MRP II system create accurate reports.
If any of the databases falls short of the highest accuracy standards, then the production department will quickly fall into disarray, missing its shipment deadlines. Consequently, the greatest possible attention must be paid to creating and maintaining an exceptional level of accuracy in these databases. However, because the level of inventory record accuracy must be so high, there are not normally any physical count adjustments resulting from a formal count of the entire inventory; instead, companies usually adopt ongoing cycle counting in order to achieve higher levels of record accuracy, and make smaller and more frequent adjustment entries based on those counts.
This also results in significant changes in the types of inventory transactions used. A JIT system has several subcomponents, which are described in this section. To begin, a company must ensure that it receives products from its suppliers on the exact date and time when they are needed. To do this, the purchasing staff must measure and evaluate every supplier, eliminating those that do not measure up to the exacting delivery standards that will now be used.
In addition, deliveries will be sent straight to the production floor for immediate use in manufactured products, so there is no time to inspect incoming parts for defects.
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Instead, the engineering staff must visit supplier sites and examine their processes, not only to see if they can reliably ship high-quality parts, but also to provide them with engineering assistance to bring them to a higher standard of product quality. Once suppliers have been certified for their delivery and product quality, a company must install a notification system, which may be as simplistic as a fax machine or as advanced as an electronic data interchange system or linked computer systems, that tells suppliers exactly how much of which parts to send to the company.
Drivers then bring small deliveries of product to the company, possibly going to the extreme of dropping them off at the specific machines that will use them first. So far, we have achieved a process that vastly reduces the amount of raw materials inventory and improves the quality of received parts. Next, we shorten the setup times for company machinery. In most factories, equipment is changed over to new configurations as rarely as possible, because the conversion is both lengthy and expensive. When setups take so long, company management authorizes very long production runs, which spreads the cost of the setup over far more units, thereby reducing the setup cost on a per-unit basis.
However, this approach often results in too many products being made at one time, resulting in product obsolescence, inventory carrying costs, and many defective products because problems may not be discovered until many products have already been completed. To do this, a videotape is made of a typical setup, and then a team of industrial engineers and machine users peruse the tape, spotting and gradually eliminating steps that contribute to a lengthy setup. It is not unusual, after several iterations, to achieve setup times of minutes or seconds, when the previous setup times were well into the hours.
By taking this step, a company reduces the amount of work-in-process, while also shrinking the number of products that can be produced before defects are identified and fixed, thereby reducing scrap costs. It is not sufficient to reduce machine setup times, because there are still problems with machines not being coordinated properly, so that there is a smooth and streamlined flow of parts from machine to machine.
In most companies, there is such a large difference between the operating speeds of different machines that work-inprocess inventory will build up in front of the slowest ones. Not only does this result in an excessive quantity of work-in-process inventory, but defective parts created by an upstream machine may not be discovered until the next downstream machine operator works his way through a pile of work-in-process to find it. By the time that happens, the upstream machine may have created quite a few more defective parts, all of which must now be destroyed or reworked. There are two ways to resolve both problems.
By using this approach, there is no way for work-in-process inventory to build up in the production system, because it can only be created with a kanban authorization. If a kanban must be used to trigger a delivery from a supplier, this can be done with a simple fax transmission, although there is no way of knowing if it has been received by the supplier.
A better approach is to add a bar code to the kanban card, which can be scanned into a production terminal, triggering an e-mail order to a supplier; the supplier then sends a confirming e-mail back to the company. The second way to reduce excessive work-in-process inventory and reduce defective parts is to configure machines into work cells. A work cell is a small cluster of machines that can be run by a single machine operator.
This person takes each 2 A kanban is described in this text as a card, but it can actually be any form of notification. A common alternative is a container of a particular size. When an upstream machine receives this container, it means that the machine operator is authorized to fill that container with parts—no more, no less—and then send it back to the downstream machine for immediate use.
Also, because the operator can immediately see if a part is defective, it is difficult for any but a perfect product to be created by such a machine layout. This configuration has the additional benefit of lower maintenance costs, because the smaller machines used in a machine cell are generally much simpler than the large, automated machinery that they replace.
Also, because the machines are so small, it is much easier to reconfigure the production facility when it comes time to produce different products, rather than incurring a large expense to carefully reposition and align equipment. Both kanbans and machine cells should be used together—they are not mutually exclusive. By doing so, a company can achieve extremely low product defect rates, as well as vanishingly small investments in work-in-process inventory. Before the preceding steps are fully installed, it will become apparent that a major change must also be made in the workforce.
The traditional approach is to have one worker maintain one machine, which is so monotonous that workers quickly lapse into apathy and a complete disregard for the quality of their work. Now, with full responsibility for several machines, as well as product quality, workers become much more interested in what they are doing.
To enhance this favorable event, the human resources staff must prepare and implement training classes that teach employees how to operate a multitude of different machines, perform limited maintenance on the machines without having to call in the maintenance staff, spot product errors, understand how the entire system flows, and when to halt the production process to fix problems.
In short, the workforce must be completely retrained and focused on a wide range of activities. This usually results in a reconfiguration of the compensation system as well, because the focus of attention now shifts away from performance based on high production volumes and in the direction of performance based on high product quality. A major result of having an empowered workforce is that employees are now allowed to stop their machines when they see a problem and either fix it on the spot or immediately call in a repair team.
In either case, the result is immediate resolution of the bulk of performance problems. Finally, the massive changes caused by the switch to a JIT system also require several alterations to the supporting accounting systems. Because of the large number of daily supplier shipments, the accounting staff faces the prospect of wading through an enormous pile of accounts payable paperwork.
To make the problem worse, there is no receiving paperwork, because the suppliers deliver parts directly to the production operation, so there is no way to determine if deliveries have been made. To avoid the first problem, the accountants can switch to a single consolidated monthly payment to each supplier.
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The second problem requires a more advanced solution. To prove that a supplier has delivered the part quantities it claims to have shipped, the accounting system can determine the amount of finished products created during the period and then multiply these quantities by the parts listed on the bill of materials for each product, which results in a total quantity of each part used. The accountants then pay suppliers based on this theoretical production quantity, which should also be adjusted for scrap during the production process otherwise.
This approach also means that there is no need for suppliers to send invoices, because the company is relying solely on its internal production records to complete payments. The types of journal entries required in an advanced JIT system are noted in Exhibit The exhibit assumes no receiving function, with suppliers delivering goods straight to the production floor.
Inventory accounting : a comprehensive guide
This eliminates the need for an initial receiving or quality assurance review transaction, as well as movements into or out of the raw materials warehouse area. Also, because scrap is spotted by the production staff, no separate quality assurance function is needed after production is completed. There is also no transaction to move goods into the work-in-process area, because there is assumed to be too little inventory in this much leaner area to make it worth bothering with the transaction.
However, scrap tracking is still necessary, as shown by the first journal entry in the JIT process. The primary JIT transaction occurs immediately after production is completed, where finished quantities are counted and used to create a purchasing liability to suppliers, while overhead is also applied to finished goods, which are shifted to a final storage area. The only other required transaction is for shipment of the goods to customers. There is no need for counting adjustments, because there are essentially no raw materials to count, and finished goods turnover is high enough to leave little inventory on hand.
Please note that the process flow and transactions shown in Exhibit represent an extremely advanced and streamlined system. In reality, a JIT system may represent a mix of some JIT components and a more traditional system, so additional transactions may be required. This can be a waste of assets, in the case of unneeded inventory. It can also be a waste of time, in the case of assets that are unused for long periods of time e. It can also be the waste of materials, such as unnecessary levels of obsolete inventory, defective products, rework, and the like. When fully installed, a JIT system vastly reduces all of these types of waste.
For example, by reducing the amount of work-in-process, machine operators can tell immediately if an incoming part from another workstation is defective, and can notify the preceding workstation of the problem before it makes any more parts, which reduces the quantity of rework that must be done. Recognize inventory receipt 2. Move to finished inventory 3. For example, by clustering machines into cells, the materials handling costs that used to be incurred to shift materials among widely scattered machines can now be eliminated.
This reduces the amount of materials handling costs that used to be charged to overhead. Also, machine cells tend to reduce the amount of floor space needed, because there is no longer a need for large aisles for the materials handling people to drive their forklifts through; by reducing floor space, one can also reduce facility costs, which will no longer appear in the overhead cost pool.
Another form of waste is the quality inspections that used to occur for many machines. Under the JIT system, machine operators conduct their own quality checks, so there is less need for a separate group of inspectors; accordingly, the cost of their pay can be eliminated from overhead.
All of these costs and more do not directly add value to a product, so they are wasteful costs that are subject to elimination. By eliminating them with a JIT system, fewer costs are left to charge to a product. For example, all inspection time is stripped from the system by having operators conduct their own quality checks. Similarly, all move time, which involves shifting inventory and work-in-process through various parts of the plant, can be eliminated by clustering machines together in logical groupings.
Third, queue time is eliminated by not allowing inventory to build up in front of machines. Finally, one can eliminate storage time by clearing out excess stocks of inventory and having suppliers deliver parts only as needed. By shrinking the amount of wasted time out of the manufacturing process, a company effectively eliminates activities that do not contribute to the value of a product, which in turn reduces the costs associated with them. As just noted, the costs of material handling, facilities, and quality inspection will decline as a result of installing a JIT system.
In addition, the reduction of all types of inventory will drastically decrease the amount of space required for the warehouse facility. Because all costs associated with the warehouse are assigned to the overhead cost pool, the amount of overhead will be reduced when the costs of staff, equipment, fixed assets, facilities, and rent associated with the warehouse are sharply cut back. Costs will also shift from the overhead cost pool to direct costs when machine cells are introduced.
The reason for this change is that a machine cell generally produces only a small range of products, which makes it easy to assign the entire cost of each machine cell to them. This means that the depreciation, maintenance, labor, and utility costs of each cell can be charged straight to a product. This is much preferable to the traditional approach of sending these costs to an overhead cost pool, from where they will be assigned to products in a much less identifiable manner. Despite the shift of many overhead costs to direct costs, there will still be an overhead cost pool left over that must be allocated to products.
However, given the large number of changes implemented as part of the JIT system, inventory accountants may find that there are now better allocation bases available than the traditional direct labor allocation. For example, the amount of time that a product spends in each work cell may be a better measure for allocating costs, as may be the amount of space taken up by the work cells that create each product. No matter what allocation system is used, it will be somewhat different from the old system, so there will be a shift in the allocation of costs between different products.
In short, overhead costs will decline as some costs are eliminated, while other costs will shift between products as more costs are charged directly to products and the remaining overhead costs are charged out using different allocation methods. A potentially significant one-time cost that many companies do not consider is the impact of JIT on the cost layers in their inventory costing systems. When a JIT system is installed, there is an immediate focus on eliminating inventory of all types. If a company is using some kind of layering method to track the cost of its inventory, such as last-in, first-out LIFO or first-in, first-out FIFO , then it will find itself burrowing down into costing layers that may have been undisturbed for many years.
If so, some unusually high or low costs may be charged off to the cost of goods sold when these inventory items are finally used up. Because of the unusually low cost of goods sold, the gross margin will be higher than usual until these early cost layers are eliminated. Because of the lower-of-cost-or-market rule under which the cost of excessively expensive inventory must be reduced until it is no higher than the current market value , this problem tends to be less of an issue when early cost layers are too high, although the costs charged may still be somewhat different from those for newer layers of inventory.
Once all cost layers have been used up, the only costs that management will see being charged to the cost of goods sold are those currently charged by suppliers. The primary reason for this change is the machine cell. Because a machine cell is designed to produce either a single product or a single component that goes into a similar product line, all of the costs generated by that machine cell can be charged directly to the only product it produces.
To be specific about which costs can now be charged directly to a product, they are as follows: The depreciation cost of each machine in a machine cell can be charged directly to a product. It may be possible to depreciate a machine based on its actual usage, rather than charging off a specific amount per month, because this allocation variation more accurately shifts costs to a product. The power used by the machines in a cell can be separately metered and then charged directly to the products that pass through that cell.
Any excess electricity cost charged to the facility as a whole will still have to be charged to an overhead cost pool for allocation. Most materials handling costs in a JIT system are eliminated, because machine operators move parts around within their machine cells. Only materials handling costs between cells should be charged to an overhead cost pool for allocation. Supplies are mostly used within the machine cells, so most items in this expense category can be separately tracked by individual cell and charged to products.
Nearly all of the maintenance that a company incurs is spent on machinery, and they are all grouped into machine cells. By having the maintenance staff charge their time and materials to these cells, their costs can be charged straight to products. Only maintenance work on the facility will still be charged to an overhead cost pool. If supervision is by machine cell, then the cost of the supervisor can be split among the cells supervised. However, the cost of general facility management, as well as of any support staff, must still be charged to an overhead cost pool. As noted in several places in the preceding list, a few remainder costs will still be charged to an overhead cost pool for allocation.
However, this constitutes a small percentage of the costs, with nearly everything now being allocable to machine cells. Only building occupancy costs, insurance, and taxes are still charged in full to an overhead cost pool. This is a vast improvement over the amount of money that the traditional system allocates to products. With such a higher proportion of direct costs associated with each product, managers will then have much more relevant information about the true cost of each product manufactured.
This is a method for tracking parts as they flow through a manufacturing facility that involves making a separate inventory entry at all key steps in the production process: Because of the very large number of moves of very small quantities and the large number of related transactions to record , a picking system is difficult to maintain in a JIT environment.
Instead, companies use the backflushing system. As described in the preceding chapter, backflushing requires no data entry of any kind until a finished product is completed. At that time, the total amount finished is entered into the computer system, which multiplies it by all of the components listed in the bill of materials for each produced item. This yields a lengthy list of components that should have been used in the production process, and which is subtracted from the beginning inventory balance to arrive at the amount of inventory that should now be left on hand.
Backflushing is technically an elegant solution, because data entry only occurs once in the entire production process. Given the large transaction volumes associated with JIT, this is an ideal solution to the problem. However, some serious problems with backflushing must be corrected before it works properly.
They are as follows: The total production figure that is entered in the system must be absolutely correct, or the wrong component types and quantities will be subtracted from stock. This is a particular problem when there is high turnover or a low level of training in the production staff that records this information, which leads to errors.
All abnormal scrap must be diligently tracked and recorded, because these materials will otherwise fall outside of the backflushing system and will not be charged to inventory. Because scrap can occur anywhere in a production process, a lack of attention by any of the production staff will result in an inaccurate inventory. Once again, high production turnover or a low level of employee training will exacerbate this problem.
Lot tracing is impossible under the backflushing system. Lot tracing is needed when a manufacturer needs to keep records regarding which production lots were used to create a product, in case all items in a lot must be recalled. Only a picking system will adequately record this information. Some computer systems will allow a picking and backflushing system to coexist, so that pick transactions for lot tracing purposes can still be entered in the computer, so lot tracing may still be possible if the right software is available—this feature is generally only present on high-end systems.
Of all the issues noted here, the worst is any situation where the production staff is clearly incapable of providing sufficiently accurate scrap or production reporting for the backflushing system. If there is an easily traceable cause, such as a lower quality of staff on a particular shift, then moving a few reliable employees into those positions will provide immediate relief from the problem.
It may even be possible to have an experienced shift supervisor collect this information. However, where this is not possible for whatever reason, computer system users will experience backflushing garbage in, garbage out GIGO. Entering inaccurate information will rapidly eliminate any degree of accuracy in the inventory records, resulting in a great many physical inventory counts to correct the problem. We use control systems to make it less likely that the units and costs associated with inventory are incorrect.
This chapter begins with a discussion of control systems and then describes a list of 68 possible inventory controls in such areas as in-transit inventory, inventory storage, obsolete inventory, and inventory transactions. When dealing with inventory, one should be concerned about three issues: 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.
This does not mean that a vast array of controls should be installed that make it impossible to lose inventory, but at the price of burdening the materials management process with a multitude of non-value-added activities. On the contrary, one must customize the control system so that sufficient controls are in place to mitigate the greatest risks of inventory loss, while avoiding those controls that have comparatively little impact on inventory losses.
Second, the control system should ensure that costs are fairly and consistently applied to inventories. Many of these controls do not require additional labor to maintain once they are set up, so there can be considerably more controls over inventory costs than may be the case over quantities. Third, it should ensure that goods shipped are appropriately billed to customers.