Accounting Best Practices, Fifth Edition

16–6. Use Bills of Material to Find Inventory Made Obsolete by Product Withdrawals

When the marketing department investigates the possibility of withdrawing a product from sale, it frequently does so without determining how much inventory of both the finished product and its component parts remains on hand. At most, the marketing staff concerns itself only with clearing out excess finished goods, since this can be readily identified. Those unique parts used only in the manufacture of the withdrawn product will then be left to gather dust in the warehouse, and will eventually be sold off as scrap only after a substantial amount of time has passed.

A better approach is to have the engineering department use the product’s bill of material to create a list of component parts unique to that product. This typically requires a custom program and a fair amount of processing time, since the bill’s components must be compared to the contents of all other active bills, including their subassemblies, to determine which parts are not used in the manufacture of any other products. Once determined, this information can be used to calculate the product withdrawal date, since it may make sense to continue manufacturing the product a bit longer in order to use up expensive stock. Engineers can also use the list to incorporate excess parts into the design of new products, if this makes sense. Worst case, the list at least brings excess parts to the attention of the purchasing department, which can ...