Chapter 13


Inventory can be one of the largest dollar items listed on the balance sheet. It can also be the cause of large and unexpected adjustments in the year-end financial statements, due to unexpected amounts of obsolete and missing stock. In fact, supporters of just-in-time (JIT) manufacturing systems consider inventory to be a liability since it is expensive in terms of insurance, storage space, moving costs, obsolescence, shrinkage, tracking costs, and working capital. Under the JIT system, minimal inventory reduces all of the above costs. Because minimal inventory and highly accurate inventory records are critical under any manufacturing system, this chapter focuses on installing inventory tracking systems, which can then be used to pinpoint inventory problems and lead to smaller inventories. In addition, this chapter discusses the valuation of inventories, the physical inventory procedure, and inventory fraud.

Inventory Management Systems

Inventory management systems are a topic of considerable debate, as JIT systems gradually supplant material requirements planning (MRP) and various reorder point systems. This section examines:

  • The turnover statistic, which is the most universally used benchmark for analyzing the performance of an inventory management system
  • Overviews of each management system, as well as the advantages and disadvantages of each one
  • The cost of carrying inventories, as well as where responsibility for inventory systems should lie

Turnover ...

Get The Controller's Function: The Work of the Managerial Accountant, 4th Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.