I have recently started a new job in a company that uses stock accounting. I have only ever worked in service companies, so I am finding it very hard to get my head round it, as it is over 20 years since I studied this in my CIMA exams!
We buy in goods, some we resell as they are, some we use to manufacture our own products.
We have a very high opening/closing stock each month of about £600k. I'm not sure if there has ever been a stock take. The company is too small to be audited, but turning over about 2.5mil
Currently the closing stock per month is calculated by running the retrospective product valuation in Sage for the month (we use Sage 50 2014), and then a manual adjustment being made to the stock account and the closing stock account.
There has been some attempt at setting a budget for the following year. This has been based on an increase in certain sales from last year, and using the same percentage ration for the cost of goods sold. I am thinking of redoing the budgeting process by calculating a cost per product, and estimating a cost of goods sold based on their estimation of sales on each product. Im not sure that they can accurately predict this, as sales can be based on events taking places within the country, and can fluctuate quite a lot.
Could you please let me know if the accounting treatment that is currently being used is correct?
Is there any pointers/useful reading information that anyone could give me, so that I can start getting my head round this.
Any help much appreciated.
Replies (12)
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What you describe sounds like
What you describe sounds like a reasonable basis for estimating stock for the purposes of monthly management accounts. But if there has never been a stocktake it may all be pie in the sky. I would have thought that for a business of your size a full annual physical stock count would be an absolutely essential management control.
Stock Take
You definitely need a stock-take from time to time. I don't see how you can cope without one. What happens if you need a widget from stock and your computer says there are 20 in the warehouse but you can't find one ?
If the stock you carry really is physically vast (just because there's a lot of money there doesn't mean that there's a lot of items), the work can be on-going throughout the year - but somewhere along the line, you need to ensure that the computer agrees with reality.
What's this "manual adjustment" to closing stock ?
Management information
Given there are two stands of sales, good just resold at a margin (or different margins) I presume and goods adapted/ incorporated into a manufactured product/products and then sold, possibly at a different margin/ margins, does your stock system/ management accounting appropriate stock to a manufacturing account? If not I would be somewhat concerned that the business might be diluting its efforts and not concentrating on the area that actually drives profits, without accurate work in this area it is a risk.
Given the manufacturing process is there waste within this process? If there is does the stock system takes account of this? If not I would be concerned that "system" stock might be overstated.
Without any idea of margin it is difficult to draw any conclusions, and it may be a vast range of products gives rise to a high stock figure, but presuming the stock figure of circa £600k is at cost this must represent a fair number of days sales, at say a 20% GP on sales of £2.5m circa 109 days, my first review would be does this seem reasonable?
Is a review made of the stock for slow/ obsolete items or is the computer system followed blindly, in the absence of an audit process this could readily be overlooked?
Are the items purchased readily resold by individuals (are they consumer goods), if they are then given the risk of misappropriation a stock count is essential, audit or no audit. A long time ago I was Financial Controller of a retail clothing small chain of shops (10) ,stock losses due to both customer and on occasion staff were not unknown. Doing monthly physical counts and sometimes no notice visits was a way of reducing the staff incentive, if staff know checks will be made they are less easily tempted.
Like earlier posters I would be very concerned at no physical stock count; I obviously have no knowledge re reported profits but at circa £600k if margins are low then even say a 20% write down could easily eliminate the profit for a year.
Thoughts
Current gross margin is 42% - including purchases/packaging/carriage and direct salaries.
Current net margin is 13%
Rough net profit after tax last year £185k
Manyfacturing process produces no or minimal waste.
There are a lot of high value items in stock, ie a sale to a customer can total £50k-£100k at a time.
I don't believe there is any review of stock at present, ie for slow or obsolete items. I'll find out for certain when the last stock take was taken, but I don;t believe up until now it has been deemed a necessity. There are only a handful of people working here, who have worked here since the beginning, so old habits die hard! But they are now trying to become cost effective, by forecasting, and costing products etc.
The items are not consumer goods, so it is unlikely that goods would be misappropriated, but who knows with ebay nowadays!!
They do take items out of stock for r&d, which I assume should hit the p&l as they take them, rather than staying in stock, which is why I don't have confidence in the stock value.
So on £2.5 million sales and a 42% GP % the Cost of Sales re goods used could be a max of £1.45 million ignoring carriage, direct wages etc, with these accounted for a bit less. So it is possibly reasonable to guess that £600k covers circa 5- 6 months sales, or not far away.
As another aside, if manufactured goods have labour input how is this dealt with in arriving at year end stock/ WIP figures?
Also if no R &D adjustment made has this carried on over a number of years?
Re your original questions I am sure someone else has far more current knowledge of implementing systems to deal with manufacturing entities, I have not dealt with any business in that line since the 1990s, however aims ought to have remained the same over the period, it is probably just more sophisticated systems are now used, so it sounds like you will be on the right track if you :
Accommodate within the system stock appropriated for R & D and for manufacturing
Look at manufacturing vis a vis wage cost/other cost absorption. If standard items made think about Standard Costing.
Review for obsolete items
Ensure physical counts are made
You are sitting on a time bomb!
Knowing the value of your stock is a fundamental and should never be put aside! If you are the finance senior I would insist that a stock take is carried out as soon as possible. If you have a December year end the end of June would be a logical time. It is always good to have an interim stock count, possibly nearer to Y/E, so that you don't catch an almighty cold AT Y/E! And yes, R&D items should be taken out to P&L or to intangibles, depending on your accounting policies.
Precisely
One more thought. We are obviously paying corporation tax over. If HMRC decided to check up on this, without a stock take, how would we prove that our stock is correct, and that the profit we are accountng for is not understated deliberatley to pay less tax?
That's the whole point. If the management of the company have no idea how much stock they have, because they have never taken the trouble to count it, they will never be able to satisfy anyone else - HMRC included - that they have put the right figure in the accounts.
Stock take
As others have said, I think the first thing to do is to organise a full stock take, asap, as until you do that you are speculating about what might be the case. If you do one, and it is pretty much the same as the book, then you can relax a little bit, if it is way out though it is better to find out as soon as possible so you have more time to look into the reasons why and to sort it out.
Without you knowing if there is a major issue you will just worry about what might be (if you are anything like me that is!).
I would be more concerned re overstatement?
If there is a bank involved I would be far more concerned with overstatement, the R & D certainly appears to overstate the stock.
At least if the stock used is supported by the "system" figures there is some justification for its use re HMRC.
The WIP or rather lack of WIP adjustment, if that is the case, would worry me more re HMRC. I am afraid my knowledge of accounting for stock and long term contracts still resolves around SSAP9 from the 1980s ,which has no doubt been supplanted by some obscure accounting convention/ standard that I have never bothered reading as I have never needed to know, so someone else will need to advise re current acceptable practices..