Management Accounting Best Practices: A Guide for the Professional Accountant

Chapter 7

Inventory Decisions

If a company has invested in inventory, the accountant faces a number of key decisions. The issue of most immediate importance is how to gain assurance regarding the accuracy of the inventory, so the inventory valuation can be included in the financial statements. Another accounting concern, though one that is not so immediate, is how to develop a system for reliably locating and dealing with obsolete inventory. This is needed to ensure that inventory is not incorrectly overvalued at year-end, when it will presumably be audited. Once identified, the obsolete inventory must be dispositioned in the most profitable manner possible. Along the same lines, the accountant must set up a lower of cost or market procedure to ensure that inventory items are not overvalued in relation to their current market value.

There are also several systems-related issues to consider. The accountant must determine what type of inventory costing system to use, the controls needed to ensure that costs are correctly recorded, and a set of measurements to monitor inventory levels. Finally, the accountant may become involved in such inventory management issues as the determination of inventory service levels, shifting inventory ownership to suppliers, and the mitigation of price protection costs. This chapter provides answers to all of these key questions. The following table itemizes the section number in which the answers to each question can be found:

Section	Decision