Expert: Ed McFarland - 6/8/2004

Question
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Followup To
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Followup To
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Hi,
1. Actually Im working in production department,and I do not understand why in every year, the Account Dapartment do not has an internal audit in production stock especially the raw material stock. Their year end report for company stock is get from the stock card and I have already told them that the balance in the stock card is not tally with the actual, but they still ignore. Why? Are they doing something illegally?
2. My second question is if closing stock increase, the profit is increase or decrease?
Answer -
How much is the stock worth?

What is the difference from the actual to the inventory on the stock card?

Who is responsible for inventory control?

Given the values it may not be an amount that is significant.

Reply:
The actual stock worth estimated USD70,000.
The inventory on the stock card estimated USD100,000.
Department Supervisor is responsible for inventory control.

Answer -
Given what you told me, the accountants are using the more conservative number. They are acting prudently, not illegally.

The cost may reflect a strategy of either last in, first out or first in, first out. Neither may reflect the reality of first in, stays here.

While the difference to you appears to be 30% in the costs when you look at the bigger picture of the overall costs, that difference is probably immaterial.

If you think there is something else going on, keep records to who you talk and when and keep track of the answers you get.

Followup Question:
Actually I forget to tell you that the cause of the different between the actual stock and inventory in the stock card is sometimes the department supervisor forget to record the material transaction once they withdrawed the material to fabricate the goods.

If the profit of the year is different with actual, will it affect the taxation? Which party will be benefit?  

Answer
This is a classic problem of inventory control and the reason for regular inventories and random counts to verify that the records match what is on the shelf.

Higher costs mean lower profits, the company will show lower profits.

Everybody loses, lower profits means lower taxes, lower company value because it appears not to be doing as well. 30k might mean somebody's job for layoffs. Certainly makes it look like there is not enough for raises or bonuses. It means more raw stock will get bought when it is not needed or there won't be any and stop the line.

Maybe you want to show the supervisor where there is a huge difference between the 2 numbers.