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Saturday, May 22, 2010

Accounting Impact on Cost Control

There are significant differences between financial accounting and management accounting goals. Financial accounting depends on accurate and consistent inventory valuations. Both methods require perfect purchase cutoffs. I consider the cutoff of purchasing activity to be the highest priority.

I am amused at operators who go to great lengths in valuing inventory items (3 places to the right of the decimal point) and also allow deliveries during the inventory count. My early career inventory work involved an inventory count during an active delivery time of day. The food cost percentage was sky high. An entire shipment of meat was included in purchases and excluded in the inventory counts.

Since the operation had shifted into meal service, the recently received meat was being consumed in meal production. The solution used by management involved adding the meat purchases to the inventory counts on the sheets. OK So why bother with increased accuracy on the average purchase price of a case or pound when you are careless with the actual count you use in your valuation? This is more common than many people realize.

A liquor thief used to begin his counts early in his shift while the dinner meal was in progress. All he had left at the end of the meal was the partial bottles in the main bar area. His Excel sheets were a complete joke. He had a count of 30 bottles on an item. I asked where the cases were and he said he meant to put 3 bottles. Since the company paid no attention to specific bottles, an error like this would allow him to steal 2 full cases undetected by the "inventory control" report.

At some time, usually once a year at year end, the higher ranking accountants enter the inventory fray and beat up the team on average purchase costs and a selection of inventory counts. They recommend 2 people on every month end count and careful price look-ups for average purchase prices.

Most theft occurs in central storage and in the top consumption areas: kitchen and main bar. In operations where the menu items are placed in service area storage for self-service, late shift over production is a often undetected form of theft. Good managers should take a count one hour before closing and a second count 10 minutes before closing time. If your count went up, you have a possible theft problem.

If your operation takes a truly accurate inventory only once a year, you are possibly burning 3 to 5 percent of sales in theft and waste (conservative estimate).

Some people purchase software systems to track perpetual inventory. Accurate beginning inventory counts are required in any perpetual calculation. Purchases must be entered immediately upon receipt if you need shift based reports.

A powerful cost accounting report may be produced weekly. Accurate counts taken during periods when deliveries are prohibited and the kitchen is closed are the key. Valuing these accurate counts should be consistent. If you use the last price paid, look up this cost. Software solutions may automatically use the last cost. Some of the more sophisticated solutions use average cost or FIFO.

If you follow this straight forward approach, your annual financial inventory valuation will be a snap.

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