Accounting Best Practices, Fifth Edition

16–1. Audit Bills of Material

Some companies use back-flushing as the means of recording changes to inventory. Under this methodology, inventory is taken from the warehouse without any associated picking transactions put into the computer. Then, when production is completed, the total amount of production by item is entered into the computer, and the software automatically removes the associated inventory amounts from the warehouse records, using bills of material as the basis for doing so. Though this is a simple method for keeping warehouse paperwork to a minimum, an incorrect bill of material will quickly alter the on-hand inventory balances to such an extent that inventory accuracy will plummet. In addition, the accounting department uses the bills of material to determine the cost of any finished goods; an inaccurate bill will also impact the accuracy of this costing. Thus, the accuracy of a company’s bills of material impact not only the records for inventory quantities, but also their cost.

The solution that keeps bill of material errors to a minimum is an ongoing audit of them. This practice keeps inventory quantities from becoming too inaccurate in a back-flushing environment, while making the costing of finished goods more precise. To do so, a person who is knowledgeable about the contents of bills of material must be assigned to a regular review of them. Any problems ...