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Inventory Transactions And Billing of Shipped Goods Control

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The greatest bane of maintaining a high level of record accuracy is the massive number of transactions required to process inventory from receipt through put-away, picking, production, and shipping, as well as a myriad of additional potential transactions. With such a large volume of transactions, data entry errors are bound to occur. A central control over this problem is the avoidance of the manual entry of transactions of any type. Here is set of control to teh inventory transaction:

 

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Use bar-coded data entry systems. Although radiofrequency identification systems may eventually supplant bar-coded systems, this is by no means the case yet. The use of bar code scanning remains the single best way to keep a data entry person from keypunching transactions, thereby avoiding the inevitable risk of data entry errors. At its highest level, consider installing radio-frequency bar code scanning, so that transactions are automatically transmitted from portable scanners by radio transmissions and update the inventory database in real time.

Certify suppliers for direct delivery of goods to production. The receiving function involves transactions for receiving, put-away, and transfers to quality assurance for further review. All of these transactions introduce the possibility of record errors. By certifying suppliers in the quality and timeliness of delivery of their goods, there is no need for a receiving function, thereby allowing a company to avoid all receiving transactions and have suppliers deliver goods straight to the production process. This requires the use of back flushing.

Use back flushing. At its most detailed level, inventory transactions can be created for shifting warehoused goods to a pallet for delivery to the production area, movements between individual workstations within the production area, and a transfer back to the warehouse of finished goods—any or all of which may be keypunched incorrectly. An alternative is to enter no transactions at all until a product is finished, and then enter a single back flushing transaction to clear from raw materials stock all of the components of the completed product. This process is especially useful when suppliers are delivering goods straight to the production line, because it can also be used to determine the delivered quantities for which suppliers are to be paid. However, this approach requires extremely accurate bills of material and can result in inaccurate raw material records during the interval when goods have been removed from stock and the back flushing entry has not yet been made.

Eliminate data entry backlogs. The bane of cycle counters is to find a record inaccuracy, correct it, and then find that their correction was unnecessary because someone had not yet entered a transaction that had been physically completed several hours in the past. Thus, an important control is ensuring that transactions are entered in the computer system at once—no data entry backlog of any type is acceptable. This may call for the use of radio-frequency bar code scanners, a dedicated data entry person, or a multitude of fixed computer terminals throughout the warehouse area.

Audit the receiving dock. A significant problem from a record-keeping perspective is that the receiving staff may not have time to enter a newly received delivery into the corporate computer system, so the accounting and purchasing staffs have no idea that the items have been received. Accordingly, one should regularly compare items sitting in the receiving area to the inventory database to see if they have been recorded. One can also compare supplier billings to the inventory database to see if items billed by suppliers are not listed as having been received.

Eliminate the physical count. Although the intent of a physical inventory count is supposed to be an improvement in record accuracy, the reverse is often the case, because the count is conducted in a rush and inexperienced counters are used. Consequently, the physical count usually results in several inaccuracies that may take months to correct. A much better alternative is to use cycle counting (see next control), which is only conducted by the most experienced materials management personnel.

Implement cycle counting. Probably the single most common and necessary inventory control is the use of cycle counting, which is the ongoing counting of small portions of the inventory and the investigation of reasons for any errors uncovered. The key element of this control is not the correction of inventory records to match physical counts, but rather the detailed investigation and correction of any problems causing the errors to occur. This is a tedious and time-consuming process that requires tenacious management support for some time before demonstrative inventory record accuracy gains are achieved.

Create and maintain a procedures manual. An excellent way to avoid having transaction errors is to construct and regularly update a policies and procedures manual that shows employees precisely how to enter transactions into the inventory database. This control should be supplemented by a mandatory training program in the manual’s use for all new hires involved with inventory, as well as periodic refresher training. If there are significant changes contemplated to these procedures, all people involved in the impacted transactions should be consulted for input, because they have the best knowledge of the ripple effect of procedural changes throughout the system.

 

Billing of Shipped Goods Control

From the perspective of a billing system, the main concern is ensuring that a delivery to a customer triggers a billing transaction, which is particularly difficult under a drop shipping arrangement where shipments are made by a third party. Thus, the key control issue is initiation of the billing transaction. The following controls address this issue:

Automate third-party drop shipment notifications. If a company supplier has agreed to drop-ship goods directly to a company’s customers, the company is now relying on the supplier’s accounting system to forward accurate shipment notifications to the company in a timely manner. If drop shipment volumes are large, the company may be relying on the supplier for a considerable proportion of its revenues, so tight controls may be needed in this area. The best approach is to arrange for automated drop shipment notifications (perhaps through electronic data interchange) directly from the supplier’s computer system to that of the company. By eliminating all manual re-keying of data, there is much less chance of a billing initiation error occurring, while also creating a passive yet effective control over the process.

Compare third-party billings to drop shipment notifications. An excellent control over drop shipment billing initiation is to compare the quantity of units noted in a supplier’s invoice to a company to the quantity listed in its drop shipment notifications. The two figures should always match. Although a supplier may have less incentive to provide accurate drop shipment notifications to the company, it will likely spend much more time ensuring that its own invoices are correct, or it will not be paid. Thus, the supplier’s invoice can be considered the more accurate document against which its drop shipment notifications should be matched.

Create an audit report matching the shipping log to billings. The standard billing transaction begins with the receipt of a shipment notice, such as a bill of lading copy, from the shipping department. If this document never arrives in the billing department, customers are never billed. A good control over this issue is to have the computer system automatically match the shipping log file to the billing log and issue a daily report noting any variances. Of course, this requires both the warehouse and accounting departments to either use the same computer system or have an interface across which the requisite information can be exchanged.

Manually match the shipping log to billings. If a companywide computer system is not available to make the preceding control usable, consider performing the same matching task manually. Even if an automated solution is available, it can be useful to conduct a periodic audit comparison, matching both the shipping records to the billing records and vice versa. Such a review may reveal that the automated system is not working as planned or that additional controls are needed for such special situations as re-billings, shipments of free samples, and warranty shipments.

Read also:

Inventory Control Systems

Inventory Costing Control

Inventory Stocking Control

Inventory Storage And Off-Site Storage Control

Inventory In-transit Control 

Obsolete And Scrap Inventory Control  

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