This section is for the guidance
of State agencies in establishing and maintaining a system
of inventory control over materials and supplies when these
items are stored and issued from a central location. It is
expected that each agency will establish procedures to ensure
that control is exercised over the use of materials and supplies
purchased. Although difference inventory control systems may
be used by individual agencies to meet their specific needs,
each system should meet the basis standards set forth in this
OBJECTIVES AND STANDARDS
objectives of a system of inventory control are to insure
that (1) sufficient quantities of goods are on hand to meet
anticipated needs; (2) funds are not needlessly tied up in
excessive stocks; (3) inventories are safeguarded from loss
due to deterioration, obsolescence and pilferage and (4) materials
are acquired in economic lots and maintained at the lowest
cost commensurate with the risk of loss.
system of inventory control should incorporate the following
standards (1) all materials and supplies received by an agency
must be counted and inspected on receipts, with any discrepancies
promptly reported; (2) issuances from inventory must be supported
by signed requisitions; (3) a periodic physical count must
be taken of all items in inventory; (4) perpetual inventory
records should be maintained and (5) storage areas should
be properly secured to restrict unauthorized access.
PRINCIPLES OF INVENTORY CONTROL
system of inventory control should provide for adequate storage
facilities, wherein the stocks are readily identifiable. Newly
acquired materials subject to early deterioration should be
stored in a manner to ensure their timely issuance. Items
should be segregated by size, kind and grade. This makes it
easier to locate the specific materials needed and facilitates
the taking of inventory. The more frequently used materials
should be stored in the more accessible locations. Valuable
articles should be kept in locked cabinets. All storage areas
should be properly secured so as to restrict admittance to
accounting must be made of all good received, issued and on
hand. Perpetual inventory accounts should be maintained. Periodically,
such accounts must be verified by a physical inventory. To
achieve the desired control, each inventory system should
be governed by the following principles:
Responsibility Must be Fixed - Employees
responsible for administering and implementing the inventory
control system should be well trained and their duties clearly
defied. The agency head should establish general policies
relating to inventory control and formulate the means of
implementing these policies.
Adequate Storage Facilities Must be Provided
- The lack of sufficient storage space could result in a
high cost of handling materials and supplies. The issuance
and inventorying of materials in facilitated by proper segregation
of each commodity. Storage facilities should provide protection
from such dangers as temperature variations, floods, broken
water pipes, fire, smoke, explosion and accidents.
Inventories Must be Properly Identified
- To facilitate handling and to report the movement of inventories
correctly, it is essential that the different items be clearly
identified. Accounting control breaks down if one item is
issued, but another item is reported. Once method of identifying
small items is to place them in labeled bins.
Inventories Should be Standardized and Simplified
- Inventories should be simplified and material costs reduced
by the elimination of excessive types and sized. Standards
should be established to reduce a line of items to fixed
types, sizes and characteristics.
Adequate Records and Procedures Must be Maintained
- The inventory accounting records should be as possible
and still provide the information required to control the
inventory effectively. Extensive and complete utilization
of materials and supplies is made possible from information
generated by a properly maintained inventory system.
Inspection Procedures Should be Instituted
- Procedures should be established to assure that the agency
receives the quantity and quality of goods for which it
pays. Quantity and quality checks involve a comparison of
the number and condition of the goods delivered to the vendor's
bill of lading.
COST OF INVENTORY CONTROL
extent to which inventory controls should be established depends,
in part, upon the cost and sensitivity of the individual items.
As a minimum control, all materials and supplies received
by any agency must be counted and inspected. Materials and
supplies should be issued for use by the operating departments
only on receipt of a properly authorized, signed requisition.
classes of inventories should be grouped in such a way that
different control techniques can be applied to items with
different usage values. This type of inventory control is
frequently referred to as the ABC method. Under this method,
items having the greatest usage are categorized as Class A.
More stringent controls should be placed on Class A items.
For example, there should be frequency of reporting, close
analysis of lead time, precautions taken as to record accuracy,
and frequent physical inventories. The items in Class C would
be considered of such low value that controls on these items
could b minimized. Class B items would fall in a category
somewhere between the two extremes. In order to have an effective
system the agency should analyze the inventories to decide
which items will be placed in a particular class. Records
for a period of a year should be used in determining the usage
value classes so seasonal variations will be taken into account.
should maintain strict control over such items as chemicals,
drugs, etc. These items should be classified in special categories
so that items to be controlled with maximum security may be
easily identified. The more valuable or sensitive items should
be set apart from the rest of the supplies in a locked location.
Access to this location should be restricted. Physical inventories
of sensitive supplies should be taken often in order to disclose
on a timely basis any irregularities in the level of inventory.
be effective, a good system of inventory control requires
(a) the posting of receipts and issues to individual ledger
accounts; (b) the taking of periodic physical inventories;
(c) the reconciliation of book balances with physical counts;
and (d) the performance of bookkeeping and storehouse functions.
The maintenance of such controls could be costly when related
to the value of the inventory. For example, the cost of maintaining
an inventory system for the sole purpose of controlling the
receipt and issuance of a single commodity, such as office
supplies, could approach or exceed the value of the asset
being inventoried. However, an inventory control system can
also serve to reduce costs of procurement, and the cost of
carrying inventory. An agency's ability to locate and accurately
identify materials on hand as they are needed reduces inventory
costs. The inability to locate or identify materials could
cause the emergency purchasing of otherwise unneeded items.
Savings may also accrue through reduction of pilferage and
loss by obsolescence.
decision as to how much control should be instituted should
be arrived at after a careful evaluation of the increased
costs versus the potential savings.
CONTROL AND MANAGEMENT OF INVENTORY LEVELS
major objective of any inventory management system is to assure
that materials are on hand when they are needed. In order
to maintain adequate control over the level of stock, standard
order quantities and order points must be established. Whenever
stock on hand falls to a minimum level, based on the time
lag between order and the delivery of the item, an order should
automatically be placed for a predetermined amount.
quantity of the order is set at a point which will cause the
stock level to approach but never quite reach the maximum.
In order to have an effective system it is necessary for the
purchasing agent to know the order size and the minimum stock
level at which the order should be placed. The following factors
must be considered in arriving at a determination of proper
order size and stock levels:
Available Storage Accommodation
- Arrangements must be made to see that deliveries, whatever
the quantities ordered, are not too great in amount to be
accepted into the available storage accommodation. If this
point is not considered carefully, goods requiring covered
storage may have to be kept in the open air, or rent may
have to be paid for warehousing facilities.
Establishment of Lead Time - Lead
time is an estimate of the interval between the time that
a determination is made as to the need for material and
the time such material is delivered. The calculation has
two aspects, administrative lead time and supplier lead
time. The former is the time lapse between the requisitioning
of material and the preparation of a purchase order. Supplier
lead time is the additional time lapse before the material
To prevent a stockout, an agency must have an inventory
that is at least adequate for usage during the lead time.
If the lead time is six weeks for an item with a usage of
20 units each week, there must be an inventory of at least
120 units when the order is placed to prevent a stockout.
If usages and lead times could be predicted exactly, it
would be possible to limit maximum inventory of an item
to the order quantity and a new shipment would arrive just
as the last unit of existing stock was used. In practice
this cannot be done. Suppliers may not keep delivery promises
and usage forecasts may be inaccurate. Extra inventory is
needed to protect against these contingencies. This extra
inventory is called "safety stock". The amount
of safety stock required is determined by the consideration
of: (1) lead time and the expected lead time variance; (2)
rate of usage during the lead time and expected usage variance;
and (3) reorder frequency.
Reorder Point - The establishment of proper
reorder point of inventory items is essential to an effective
inventory control system. The reorder point tells the purchasing
agency to replenish a particular item. The reorder point
is the expected usage during the procurement lead time plus
a safety stock provision. The provision for the safety stock
is necessary in case the actual amount of usage exceeds
the estimated amount of usage during the period of lead
RECEIVING AND INSPECTION OF MATERIALS AND SUPPLIES
responsibilities of the receiving department involve the receipt
and proper inspection of materials received from all sources.
Usually, this responsibility is delegated to a single individual
who may be a store clerk, storekeeper, or some other authorized
employee if a full time storekeeper is not employed. A copy
of each purchase order should be filed with the employee responsible
for the receipt of the goods. This employee should be notified
of all changes in the purchase orders. The copy of the purchase
order used for this purpose should have the quantities deleted.
This will ensure that the merchandise received is actually
counted and inspected.
times, a late shipment or a sensitive item (e.g. drugs) will
not be taken into the receiving area, but will be delivered
directly to the operating department which requisitioned the
goods. In a case such as this, the receiving clerk would designate
a person to accompany the shipment. He inspects and counts
the shipment as if it were taken into the receiving area.
Purchase Order Used as a Receiving Report -A
copy of the purchase order maybe used as a receiving report.
This use of the purchase order has the obvious advantage
of not requiring preparation of a separate record of the
goods received. Also, it ensures the correctness of vendor's
name, description of goods and order reference numbers.
The receiving clerk is required to enter on the purchase
order the date of delivery and quantities received and then
sign the order as a certification to the correctness of
Accounting for Partial Shipments
- It is sometimes impossible for the vendor to fill an order
completely in one shipment. In cases such as this, once
the receiving report is sent to the department responsible
for payment of vouchers, that department should notify the
receiving department that there will be another shipment
on the order. A special form or another copy of the purchase
order should be used for this purpose.
Receipt of Perishable Goods - Upon receipt
of perishable goods, a date received stamp should be placed
on the merchandise. These items should be stored in such
a manner that the oldest item in stock would become the
next item to be issued.
Special Form Used as a Receiving Report
- In a large agency where there may be numerous
shipments to the central warehouse, it may be more practical
to use a special form as a receiving report instead of the
carbon copy of the purchase order as described above.
The receiving forms must be controlled by prenumbering.
All unused lines on each report should be voided by drawing
a diagonal line. This will help prevent the insertion of
unauthorized entries at a later time.
The quantity, delivery condition and description of each
item received, referenced by the purchase order number,
should be entered on the receiving report. The date of delivery
and receiving report number should be entered on the storeroom
copy of the purchase order. All items for which delivery
was refused should be entered on the receiving report with
a statement as to the reason for non-acceptance.
The receiving report should be signed as a certification
to its correctness. The signed original record should be
forwarded to the business office and the duplicate filed
in the storeroom.
Processing of Receiving Reports by Business Office
- As previously mentioned, a copy of the receiving
report should be forwarded to the unit responsible for certifying
the payment of vouchers. The quantities indicated as being
received should be checked to the purchase orders. The receiving
department should be notified of any partial shipments.
After the receiving reports have been processed by the
payment unit they should be forwarded to the unit responsible
for the maintenance of the individual inventory ledger accounts.
The quantities reported as received should be posted to
the particular accounts, referenced by date and number of
the receiving report.
Return of Goods - Once the receiving clerk
has inspected the goods and compared the quantities received
to the shipper's bill of lading, he should reference evidence
of damaged packages on the bill of lading before signing
for the merchandise received. In this way, the receiving
clerk will be able to return materials which, when physically
inspected, do not meet acceptance standards. For this purpose,
a "Record of Outgoing Shipments" should be maintained,
in duplicate, by the storeroom. For each business day a
separate record, prenumbered, dated and signed should be
kept. The quantity, description, purchase order number and
destination for each item returned should be entered on
the record. In addition, the reason for the return of the
item should be shown. Unused lines in each record should
be voided by drawing a diagonal line.
The original of each record should be forwarded for processing
by the payment authorization unit and the unit responsible
for the maintenance of the inventory ledger accounts. The
necessary adjustments should be made by these units to vendors'
invoices and the inventory ledger accounts. The duplication
records should be filed in the storeroom.
CONTROL OF ISSUES FROM INVENTORY
Stores Requisitions: In order to account
for the issuance of materials and supplies other controls
are required. The stores requisition provides the basis
for such control.
Approval of Requisitions: Before goods
can be issued there must be proper authorization. The
best means of ensuring authorized issue is to use a requisition
form containing spaces for the quantity, description of
the item, signature of the person authorized to approve
the request, name of the requesting unit, name of the
person receiving the merchandise and date of the receipt.
Proper control techniques would include signature specimens
of persons empowered to requisition materials being filed
in the business office. For some materials, it might be
necessary to restrict issuance to certain levels of management,
e.g., use of drugs, chemicals or explosives must be restricted
to authorized individuals.
Processing of Requisitions: As materials
and supplies are needed they should be requisitioned by
the operating departments. For this purpose a requisition
form should be prepared. This form should be forwarded
to the business office for approval. The approval should
be by the agency head or an employee authorized by him
for this purpose. Each requisition, as it is approved,
should be controlled by numbering. A new series of numbers
may be started each month or at longer intervals, if desired.
After comparing the signatures of requesting personnel
to the authorized signatures, the business office will
forward one copy of the approved requisitions to the stockroom
for filling of the order. The other copy of the requisition
is retained in the business office for control purposes.
Stockroom personnel will fill the requisition ensuring
that correct articles and exact quantities are withdrawn
from stock. If any requested item cannot be furnished
exactly as listed, the stockroom supervisor will list
any change or deletion on the requisition. The stockroom
supervisor will sign the requisition once he ascertains
that the correct goods are ready for delivery. The supervisor
will forward the filled requisition to the ordering department
along with the supplies.
Receipts by Operating Department of Materials and
Supplies Requisitioned: When delivery
is made, all items should be counted and inspected by
the ordering department. Assurance should be made that
the articles requisitioned are being delivered in the
quantities requisitioned. Any discrepancies or evidence
of damaged items should be entered on the requisition
form before it is signed by the person accepting delivery.
After the delivery has been accepted, the signed requisition
form should be forwarded to the business office. Under
no circumstances should be completed requisition be returned
to the custody of the storehouse.
In order to have a more even flow of work in the stockrooms,
it may be beneficial for large agencies to schedule particular
ordering days for each operating department. Also, as
part of the requisition approval procedure, requisitioned
items may be reviewed to determine if they are in accord
with the needs of the ordering department. As a result,
some items may be deleted or reduced in volume before
The filled requisition form will be forwarded to the
unit responsible for maintaining the inventory ledger
accounts to record the reduction of stock.
PERPETUAL INVENTORY RECORDS
inventory record should be maintained by the business office
for each item of materials and supplies to be controlled.
This record should consist of a) description of items; b)
storage location; c) minimum and maximum quantities to be
kept on inventory; d) reorder quantity; e) date and quantity
of additions to inventory; f) date and number of inventory
requisition; g) quantity deleted from inventory and h) inventory
large agencies where the number of items being received and
issued is voluminous, it may be expedient to summarize requisitions
before posting the quantities issued to the inventory records.
ensure that the inventory ledger records are properly arranged,
a systematic classification of titles of inventory items should
be developed. Use of anumber code in arranging inventory records
would be extremely beneficial. There should be a master ledger
card containing a summary description of all specific items
in a group that are carried on inventory. Individual ledger
cards for each item in a group would show the receipts, issuances
and balance on hand for the item. For example, a general grouping
titled "Paint Brushes" would consist of a master
ledger record showing each kind and size of paint brush carried
in inventory along with the corresponding code number. Each
individual ledger card would show the number of paint brushes
on hand in each specific category.
accuracy of perpetual inventory records is tested by periodic
physical inventories determined by count, weight or some other
measure. This check will disclose the possibility of theft
or loss and reveal any weaknesses in the system for the custody
and control of stock. All items may be inventoried at the
same time or different segments of the inventory may be counted
at stated intervals. A physical count of the more critical
items, e.g., drugs, chemicals, explosives, etc., should be
taken frequently. Al least annually, a complete physical inventory
supervised by the business office should be taken of all merchandise
agency should appoint individuals to count the stock on hand.
Once method is to designate a particular section of the storeroom
to a certain individual. The items would then be counted and
recorded on serially numbered stock sheets controlled by the
business office. These sheets would contain information such
as a) the date; b) location; c) description; d) unit of issue;
e) quantity of stock found; f) stock taker's signature and
g) remarks column for comments about the condition of stock,
etc. After the items have been counted, all the stock sheets
should be collected, accounted for and arranged in classification
order. The stock sheets would then be forwarded to the business
office for comparison of the totals for each item inventoried
to the inventory ledger balances. If there are minor differences
between the actual count and the inventory record, the physical
stocktaking figure is the factual one. Therefore, the physical
balance takes priority and the book balance on the card must
discrepancies require additional investigation. Remedial action
should be taken to correct the cause of the differences as
disclosed by the investigation. After the necessary review
and investigation, the book balances should be brought into
agreement with the actual count. Any adjustments made to the
inventory ledger cards should be done by use of an adjustment
requisition approved by a responsible official. Such changes
should be highlighted on the inventory records by use of a
red ink posting or in some other manner.