Inventory & Production Cycle

Purpose

Safeguard the inventory against theft and damage

Purpose For manufacturing entities

-Control the movement of inventory ( raw material , work - in - progress and finished goods ) during the production process ; and

-Control the production process itself ( e.g. what and how many to manufacture , spillage during the process and quality of the manufactured goods .

Steps in the cycle

1. Place an order (purchases and pmt cycle)

2, Receiving of goods (purchases and pmt cycle)

3. STORE : RAW MATERIALS

4. PRODUCTION

5. STORE : FINISHED GOODS

6. Send (receipts cycle)

INITIATE PRODUCTION

-Production must be planned and controlled by means of production schedules

-Raw materials must be transferred from the store to the factory .

-Dr WIP Cr Raw materials

MOVEMENT OF GOODS

-Transfer of raw materials from the store to the factory .

-Conversion of raw materials into finished goods .

-Transfer of finished goods from the factory to the finished goods store .

-Dr Finished goods Cr WIP

-Includes the protection of finished goods .

RECORD PRODUCTION AND INVENTORY TRANSACTIONS

-Determination and calculation of production costs and cost units .

-Control over inventory balances- quality and value .

Aspects and Internal Controls of importance

-Store : Physical control over inventory : separate isolated area and restrict access .

-Transfer : documentation and records for transfer: Preprinted , numbered and designed , copies of documentation , must be authorised.

-Movement : perpetual inventory records .

-Costing system : unit cost records .

Risks and control objectives associated with the risks

1. Excessive incorrect production: Validity

2. Unauthorised use of inventory: Validity

3. Production hours not captured: Completeness

4. Theft of raw materials , WIP , finished goods: Validity

5. Production costs calculated incorrectly: Accuracy

6. Carrying value of inventory incorrect: Completeness if too low, Accuracy if too high

7. Quantities of stock on hand incorrect: Validity , Accuracy , Control

8. Inventory deteriorates in value: Validity

9. Delays in production: Validity , Accuracy

Storing of raw materials perfect cycle

-Raw materials must be stored and protected until required in production .

-Stock should be barcoded onto the perpetual inventory system ( rather than maintaining A4 pieces of paper ) . To ensure that the physical stock can be checked against the theoretical stock on a frequent basis ( weekly ) and to ensure that there is a tracking system . The system should record the following : Serial number , title , director , description DVD etc. for smaller items ( Just read )

-All raw materials purchased and received must be stored and protected until needed in the production process , the goods should be stored as follows : Stored in a separate isolated area .

-Access to the material must be limited ( Only one entrance from within the shop )

-Any doors or windows from the outside must be secured .

-The shop must have security gate at the entrance that only opens with the press of a button located at the cashier's counter . It must also have an alarm system for the evenings .

-The shop ( salesroom and storeroom ) must be protected against fires and there must be fire extinguishers and sprinklers on the premises .

-Authorised and signed documentation ( requisition ) required for the movement of the raw materials which will be addressed below .

Production cycle: Issuing inventory from the central inventory warehouse to the branches

-Branch managers / manufacturing clerk must place an order at the central inventory warehouse by making use of a pre - printed standard raw material requisition ( order form ) .

-The raw material requisition must be prepared in triplicate : 1 copy must be sent to the raw material warehouse for the warehouse to prepare the correct quantity and type of product for dispatching and to update their records regarding the movement of the inventory ; 1 copy must be sent to the accounting department to update inventory records . 1 copy is held at the branch / warehouse as evidence of quantity and type of product requested ;must be pre - numbered ; contain the date of request ; contain the authorised signature of the branch manager ; indicate the branch name ; accurately explicate the quantity and description of product e.g. code , size , colour , etc.

-The warehouse assistant at the central warehouse prepares the items for issuing to the branch / factory on the basis of the raw material requisition and completes a raw material transfer note ( issue note ) for the materials / products that must be issued .

-A raw material transfer note should be prepared in triplicate : 1 copy must be sent to the branch / factory together with the items so the branch can be sure of the quantity and type of materials / products issued to them ;1 copy is held at the central warehouse as evidence of quantity and type of clothing issued to the branch ; 1 copy must be sent to the accounting division after delivery in order for them to update the inventory records .

-The copy also serves as proof of delivery: contain the dispatching date ; must be pre - numbered ; contain the authorized signature of the warehouse reviewer of the central warehouse after he compared it with the order form received ; indicate the branch name ; contain the quantity an

Recording and processing

-The inventory records must be updated to reflect the transfer of inventory: Raw materials must be decreased. Work in progress must be increased .

-The inventory records must be updated by an independent accounting person accountant ) not that of the inventory store or the production division .

Production cycle: receipt of inventory at branches

-The branch manager must be responsible for the receipt of the inventory items from the central warehouse .

-With receipt the branch manager must : compare the quality and quantity of the items with the issue note and order form, initial / sign as evidence that it has been checked and corresponds .

-If there are any deviations between the physical items and the documentation , it must be recorded on the issue note and signed by both the deliverer and the branch manager .

-The branch manager must keep the issue note and file it with the order form

Production cycle: Physical control over the inventory at the branches ( half - finished goods and half raw materials )

-The branch manager must keep records of the inventory on hand . These records must be updated with the issue note and sales invoices .

-The branch manager and sales assistant must frequently hold inventory counts on a sample basis ( rotate the specific items selected ) and compare the counted inventory per item with the quantity according to the inventory records .

-The internal auditor must perform inventory counts at the branches on a surprise basis and he / she must compare the physical inventory with the inventory records . The branch managers must be held liable for any shortages .

-The storeroom of each branch must only have an entrance from within the shop . Any doors or windows on the outside must have security gates / be closed with iron bars .. Staff must have access to the storeroom , but it is very important that staff make sure that no delivery people or clients go into the storeroom .

-The shop ( sales area and storeroom ) must be protected against fires and there must be fire extinguishers and sprinklers on the premises .

-The shop must have a security gate at the entrance that only opens with the press of a button located at the cashier's counter . It must also have an alarm system for evenings .

-Sales assistants must count the amount of items clients want to buy to ensure that they come out with the same amount of items .

-The layout of the shop must be designed in such a way that clients must walk past the cashier before they step outside the door .

-A security guard must be appointed , and all clients ' purchases must be compared with the cash register slip and sales invoice before they may leave the shop .

-The staff's packages must be examined when they leave to ensure that they do not walk out with inventory items .

Production process reports must be generated for various reasons :

-Daily production : materials used , wastage and down time

-Report of goods completed per shift , day , week , month Identify any differences from the production schedule

-Production reports must be authorised and signed

Transfer to finished goods store: Finished goods transfer note

-Record transfer of manufactured goods from the production division to the finished goods store . ( Better to use than an email )

-A pre - numbered finished goods transfer note must be issued in 3 fold by one of the production foremen and must be authorised and signed by the production manager . Contain details on : The quantity and description of goods Date Department sent to .

-3 Copies: One copy should go to the finished goods store whilst accompanying the goods so that they can match to the physical goods received .One copy should remain in own records ( factory ) as proof that the goods have been transferred . One copy should go to the accounting department to update inventory records .

Transfer to finished goods store: stock records

-Inventory records should be updated to reflect the transfer by an independent accounting personal ( accountant ) . -Finished goods should increase

-Work in progress (WIP) decreases .

Transfer to finished goods store: cost system

-Unit costs determined by a variety of methods:

1. Process costing

2. Job costing

3. Standard costing

-Each method requires different ways of accumulating costs and unit cost calculations

Transfer to finished goods store: Determination and calculation of production costs of finished goods

-Production reports ( made up of the calculations within them ) provide information concerning amount of raw materials used in production , labour required to produce goods , and allocation of overheads .

-Production cost will depend on the system in use .

-Calculation of production costs must be checked and authorised ( signed ) by management .

Transfer to finished goods store: Additional ( for that of a perpetual system )

-The stock should be barcoded rather than maintaining A4 pieces of paper .

-The barcoded physical stock must be checked against the theoretical stock on a frequent basis ( weekly ) and have a tracking system , by the sales assistant or branch managers .

-There should be a designated accountant that should be employed to keep record and update the perpetual system , when stock is received , sold , destroyed , etc. This person should not have access to the stock .

-The re - order level should be put into the system so that stock can be re- ordered when the levels are too low .

-There should be frequent stock counts this must be done in conjunction with an independent person and shortages and surpluses must be reported to the general manager for further investigation .

-The general manager must also perform regular surprise stock takes .

Production Cycle Documents: Raw material Requisition ( RM )

-Details: Date of request, Quantity, Description of raw material

-Check: Manufacture clerk prepares and signs, Production manager only authorises by signing , after details on the RM have been agreed to the production schedule

-Copies: 1. Raw material store: Prepare right quantity and type for dispatching and update records w.r.t. the movement . 2. Manufacturing: Evidence of quantity / type of RM 3. Accounting department: Update inventory records .

-Number sequence: Production manager review number sequence sequence of raw material requisitions and investigate missing or outstanding numbers .

Production Cycle Documents: Raw material Transfer Note ( RMT )

-Details: Despatch date ( transfer Quantity Description of raw materials despatched, Cost of item

-Check: 2 storemen pick and prepare RMT and sign . Match ( compare ) raw material requisition to raw materials transfer note and physical goods prepared . ( Raw materials foreman ) QQD Signed by storeman and head storeman .

-Copies: 1. Raw material store: Evidence of quantity and type of raw material issued . 2. Manufacturing: To be sure of quantity and type of raw materials issued by raw materials store . 3. Accounting department: Update inventory records -Number sequence: Head storeman review number sequence of RMT ( issue note ) and investigate missing or outstanding numbers .

Production Cycle Documents: Finished goods Transfer Note ( FGT )

-Details: Despatch date ( transfer ), Quantity, Description of order

-Check: The factory storeman must compare the RMTs quantity and description to the FGT and then ; Compare it to the physical goods and sign as evidence . QQD Signed by the factory supervisor and the production manager

-Copies: 1. Finished goods warehouse: Evidence of quantity and type of finished goods issued .

2. Manufacturing: As evidence of the quantity and type of finished goods issued ..

3.: Accounting department Update inventory records . Number Production manager must do a sequence check for any outstanding or missing numbers .

INVENTORY COUNT PROCEDURES Before the count :

-Planning meeting & teams: store preparations, time & date, counters & teams, count instructions

-Stationery: Count sheets, Issue of count sheet

INVENTORY COUNT PROCEDURES During count :

-Identification of inventory which is counted, Inventory is identified separately

-Control over inventory movements: Access, Cut - off, Property

INVENTORY COUNT PROCEDURES After count :

-Count sheets

-Differences

INVENTORY COUNT PROCEDURES: Before the count : Planning & preparation

-Decide on a date ( when ): Interim more than 1 x per year, Year end : as close as possible

-Inform parties involved early: When count takes place, Inventory movement will be limited, Enough staff that can count

-Written instructions: auditor review before hand, provide to all parties

- Warehouse packed neatly: Count easier = similar items together, No open spaces, Inventory marked

INVENTORY COUNT PROCEDURES: Before the count : Count sheets

-Control with hand out and receiving back of count sheets: Pre - numbered count sheets, Register of count sheets

-Information on count sheets: Complete in ink as you Can erase pencil, No tippex

-Changes authorised by supervisor: Counters sign where figures were scratched out, Supervisor recounts & initialise

-Cancel open spaces

-All counters sign count sheets: As proof that count was performed correctly, Allocate responsibility

INVENTORY COUNT PROCEDURES Counters and teams

-Allocate responsibility: Counters , Supervisors & co - ordinator, Who counts what, Who counts differences again

-Count in pairs and rotate often: Two - two to ensure it is correct, A + B from 08:00 - 10:00, C + D from 10:00 - 12:00

-Second team checks: Recount all items, Allocate responsibility

INVENTORY COUNT PROCEDURES Movement

-Limit movement in people during count: Only counters , supervisors and co- ordinator

-Limit movement during count & note movement properly & seperately: Count after hours or over weekends, Demarcate areas, Keep all new inventory received or send seperate

-Other movements: Supervisor identifies, excludes from inventory, included inventory kept on behalf of a third party, remember goods in transit

INVENTORY COUNT PROCEDURES During Count

-Count all stock e.g. ( identify warehouses ): Counted all stock & counted only once, Outside warehouses & warehouses elsewhere

-Number shelves , award to counters , work systematically: Start left , on top of shelve and floor, After count compare with each other persons in count team, Follow up on differences

-Mark item as soon as it has been counted: Stick sticker on it, To prevent double counting

INVENTORY COUNT PROCEDURES After the count

-Supervisor receives back all count sheets , checks: All count sheets received back, No unauthorised changes, Follow up on differences

-Supervisor signs hand over to co- ordinator: Co - ordinator responsible for count, Supervises over whole inventory count

-Obselete / damaged stock: Identify during count ( damaged / reach expiry date ), Count seperate- decide on a later stage how to handle it ( valuation )

-Compare two count teams ' count sheets & follow up differences: Reconciles with inventory records & follows up differences, ask questions of: Agree with perpetual stock records ? Reason for difference ? Theft of Stock ? Incorrect records ?