Inventory Essentials, Part 2

Inventory Essentials is a two-part series. The first article focused on the basics of inventory and counting systems. This article addresses concerns you may have after completing a physical inventory or cycle count.

Your manufacturing business has completed its physical inventory or cycle count and reconciled the count to your accounting system inventory. The reconciliation may reveal that you have some issues to resolve. If this is the case, it is critical that you address these issues and prevent future reoccurrence.

Tackling Errors
Despite best efforts to ensure an accurate inventory, errors will likely occur, especially in systems that are not highly automated. First, inventory errors should be corrected in the accounting and/or inventory tracking system. The process for completing this task will be dependent on the software your company uses.

Next, determine the root cause, especially for significant errors. Consider how to prevent the issues from reoccurring. Further, think ahead to other ways that you may be able to reduce future or ongoing errors. Considerations include:

  • Process improvements as your inventory flows through your system. This may include improvements to your warehouse management or production reporting system.
  • Checks and balances to ensure accurate transactions. Internal controls go beyond taking an inventory count.
  • Whether your physical or perpetual inventory system is right or sufficient for your inventory. There are advantages and disadvantages to both physical inventories and cycle counts.
  • Possible fraud. While we do not recommend hasty accusations of fraud, it is important to rule out this potential cause of inventory discrepancies and ensure you have the controls in place to prevent it.

Obsolete or Excess Inventory
Manufacturers should consider when inventory items lose their usefulness. This may occur if inventory is damaged, beyond its shelf life, obsolete, or considered excessive. Excess inventory occurs when on hand quantities are greater than the expected usage or sales for a given period, which may vary based on your business.

Companies that face these issues on a regular basis may consider implementing a reserve to offset future write offs. Manufacturers should develop processes to help them address both financial and physical changes in inventory. It is good practice to review slow moving or obsolete inventory during your physical inventory process, if applicable, or at least once per year.

For questions or to discuss your company’s inventory, contact a member of the HBK Manufacturing Industry Group at 330-758-8613.

About the Author(s)
Amy Reynallt is a Manager in the Youngstown, Ohio office of HBK CPAs & Consultants. She joined the firm in 2019 following 13 years in the manufacturing industry. Amy is experienced in navigating the strategic and financial matters associated with manufacturing and works closely with manufacturers to help them plan, execute, and meet their short- and long-term financial goals.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.