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New York State Accounting System User Procedures Manual

Volume Name
CONTROLS AND SPECIAL PROCEDURES
Volume
XI
Date
3/15/85
Section Name
Internal Controls - Materials and Supplies
Section
3.0500
         

      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 section.

OBJECTIVES AND STANDARDS

          The 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.

          Each 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

          The 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 authorized persons.

          An 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

          The 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.

          Different 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.

          Agencies 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.

          To 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.

          The 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

          A 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.

          The 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 is delivered.

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 time.

RECEIVING AND INSPECTION OF MATERIALS AND SUPPLIES

          The 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.

          At 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 the information.

  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 issuance.

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

          An 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 balance.

          In 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.

          To 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.

PHYSICAL INVENTORIES

          The 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 in stock.

          The 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 be amended.

          Major 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.