Functions in the Inventory and Warehousing CycleProcesspurchaseordersReceiverawmaterialsStorerawmaterialsProcessthegoodsStorefinishedgoodsShipfinishedgoods ReceiverawmaterialsPutmaterialsinstoragePutmaterialsinproductionPutcompleted goods in storageShipfinishedgoods Flowofinventory Purchase requisition Purchase order Receiving report Vendor’s invoice Raw materials perpetual inventory master file Raw materials requisition Cost accounting records Finished goods perpetual inventory master file Cost accounting records Shipping document Finished goods perpetual inventory master file Cost accounting records Related documen tation

Flow of Inventory and Costs Raw Materials Raw MaterialsBeginninginventoryRawmaterialsused Purchases Endinginventory Direct Labor Actual Actual Applied Applied Manufacturing Overhead Work in Process Beginninginventory Endinginventory Cost of goodsmanufactured goods sold Finished Goods Beginninginventory Endinginventory Cost of goods sold

Cost accounting controls 1 physical controls over raw materials, work- in-process, and finished goods inventory 2 physical controls over perpetual inventory master files 3 existence of adequate IC that integrate production and accounting records for the purpose of obtaining accurate costs for all products

1 physical controls over inventories to prevent loss from misuse and theft ① Limited access to storage areas ② Assignment of custody of inventory to specific responsible individuals (responsible custodian) ③ Approved pre-numbered documents for authorizing movement of inventory eg, approved materials requisition for obtaining raw materials from the storeroom approved shipping document for transferring inventory from the storeroom ④ Copies of these documents sent directly to accounting dept by the persons issuing them, bypassing people with custodial responsibilities

2 physical controls over perpetual inventory master files perpetual inventory master files ♫maintained by persons who do not have custody of or access to inventory. ♫kept Separately for raw materials and finished goods, normally not used for work-in-process. ♫Information included about the units of inventory acquired, sold, and on hand. Or also Unit cost in well-designed computerized system. ♫Reasons for maintaining perpetual inventory master files: ① They provide a record of items on hand, which is used to initiate acquisition of additional materials. ② They provide a record of raw materials available for production and finished goods available for sale, which can be reviewed for obsolete or slow-moving items. ③ They provide a record that can be used to pinpoint responsibility for custody as part of the investigation of differences between physical counts and the amount shown on the records.

3 existence of adequate IC that integrate production and accounting records for the purpose of obtaining accurate costs for all products An aid to mgt in pricing, controlling costs, and costing inventory. Costing accounting records consist of master file, worksheets and reports* that accumulate material, labor, and overhead costs by job or process as the costs are incurred. * When jobs or products are completed, the related costs are transferred from work-in-process to finished goods on the basis of production department reports.

Control objectivesInternal Controls Recording of inventories All inventory movements are authorized and recorded Inventory records only include items that exist and belong to the entity Cut-off procedures are properly applied to inventories goods received is inspected for quantity and quality Segregation of duties-custody and recording of inventories Inventory records supported by appropriate documentation Maintenance of inventory records (units of inventory acquired, sold and on hand; unit costs in well-designed computerized system) Protection of inventories Inventories are safeguarded against loss, pilferage or damage Precautions against theft, misuse and deterioration Restriction of access to storerooms (Authorization of goods outwards and inwards)

Control objectivesInternal Controls Valuation of inventories The costing system values inventories correctly Allowance is made for slow-moving, obsolete or damaged inventories Check condition of inventories purchased and value them at original cost Check condition of inventories at year end and value them at lower of cost and realizable value Treatment of slow-moving, damaged and obsolete inventories Regular inventory counts Fair coverage so that all inventories that belong to the entity are counted at least once a year Counts by persons independent of warehousing adjustments Reconciliation of inventory count to book records Set re-order quantities and levels Inventory-holding Levels of inventories held are reasonable

Tests of controls: …..

Dec 2007 Q1ac June 2010 Q1c