Stock accounting/valuation

Stock accounting/valuation

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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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By johngroganjga
16th Jun 2014 11:26

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.

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RLI
By lionofludesch
16th Jun 2014 11:33

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 ?

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By heatherhobbs
16th Jun 2014 12:00

The manual adjustment to closing stock was performed on a monthly basis by the accountants.  They ran a retrospective product valuation report, which values the stock at the date of the month end.. A journal is then put through the accounts to 1001 and 5201 so that the accounts reflect the stock value at the month end.  I have been looking at previous months and the stock valuation tends to raise/lower the closing stock value by up to £20k per month. 

They also use a fair few items for R&D, which is why I think the stock valuation could be higher than it actually is.  I would have thought that when an item is used for r&d it should be taken out of stock and hits the p&L? This is not being done at the moment. 

I know that there are quite a few high value items in the warehouse, that would contribute to the higher figure too. 

How often should we stocktake, is once a year enough at year end?

And is my idea of budgeting for future purposes by working out a cost for each product rather than a % of cost of goods sold, a better way of producing a more accurate cost of goods budget? (Im sure this is what I remember from my cost accounting exams!)

Obviously their profit for this year will differ quite wildly if their cost of goods % ratio differs from what they have budgeted. 

Thanks

 

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paddle steamer
By DJKL
16th Jun 2014 12:12

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.

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Replying to Tax Dragon:
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By heatherhobbs
16th Jun 2014 12:50

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. 

 

 

 

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Replying to Wilson Philips:
paddle steamer
By DJKL
16th Jun 2014 13:44

Thoughts

heatherhobbs wrote:

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

 

 

 

 

 

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By Richard Willis
16th Jun 2014 13:09

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.

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By heatherhobbs
16th Jun 2014 14:55

The way the p&l is calculated

The way the p&l is calculated at the moment

Opening stock

Purchasing

Packaging

Direct Labour

Carriage

Closing stock

All costs included above are actual costs for the month, and there is no WIP calculated. 

So the way the p&l is produced some months we can have a very large profit and others none, as the costs are not associated with the revenues.  This is how the incumbent accountants have been producing the accounts on a monthly basis for the directors of the company.  I am unsure at the moment how they managed to produce year end accounts of any value if they are not matching costs to revenues.  This is why the closing stock could be so large as we can have one order being produced over six months. 

Does anyone know Sage well enough to help me make head or tail of this?  I obviously need to start somewhere.  I am assuming I can print off a report with current sales orders open, and then try and work out the % complete of each of these orders? For each product I would need to know the raw materials that make up the product so that I can move the correct raw materials per sales order to the WIP account.  And then appropriate the right labour costs etc.  So I would need to start at setting a standard cost per product?  (I don't know enough about each product yet, as only been here a couple of weeks, so another way of costing may be appropriate)

Do I have to do all manual journals monthly to appropriate items to WIP (as per my thinking below)?  

From my old accountancy studies, am I correct in thinking that I would move cost of direct materials from stock to WIP, plus any associated labour and overhead costs.  This would stay in the WIP account until the finished item is complete, then we would move to cost of goods sold once the order is completed.  These items are made to order only.  I would move to cogs once the item is complete if all completed within the month , and I would appropriate an estimated percentage until the job is completed (if over say several months)? 

Thanks everyone for your help.  As you can see the accounts have not been run very efficently in the past, and I wold like to get them updated asap.  Obviously first things first is a stock take!!!

 I realise I have a very big job on my hands!!!!!

 

 

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By heatherhobbs
16th Jun 2014 15:02

One more thought.  We are

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?

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Replying to PBH64:
By johngroganjga
16th Jun 2014 15:22

Precisely

heatherhobbs wrote:

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. 

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By leicsred
16th Jun 2014 15:15

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!).

 

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paddle steamer
By DJKL
16th Jun 2014 15:23

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..

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