STORES VERIFICATION, CLASSIFICATION & CODIFICATION
No matter how diligently a store-keeper performs the custodial job or how carefully a ledger clerk maintains records (computerized or manual), some discrepancy between the actual and book balances of inventory is bound to occur. The system is operated by people, and people do commit mistakes. For this reason, every inventory item should be physically counted and checked against its book balance at least once in a year. The books are subsequently adjusted to match the actual count. Most companies create an â€˜inventory discrepancyâ€™ or â€˜inventory short and overâ€™ account to absorb such discrepancies. This account is eventually closed by transferring the balance to the manufacturing overhead account.
Stock verification can be conducted in one of the three ways:
1. Periodic verification or fixed annual inventory.
2. Perpetual or continuous inventory.
3. Low point inventory.
Under the low point inventory, method companies take physical inventory when the stock is the lowest, irrespective of the period. Stock taking is naturally irregular. The low point approach minimizes the time required for actual inventory work because of the small quantities of materials involved. However, it has the disadvantage of producing an irregular inventory schedule, which tends to peak the work load for stores personnel.
In the continuous inventory approach, at the beginning of each year, some firms divide their inventory into 52 equal groups and assign one of them to be physically counted each week. Thus, the physical inventory operation goes on without interrupting production operation or upsetting store room activities. This approach has three advantages. It can be planned and worked into scheduled activities without a shutdown. It can be conducted in an orderly and relaxed manner; these conditions are also conducive to accurate work. Secondly, there is the possibility of detecting and eliminating causes for discrepancies without allowing them to continue throughout the year. Finally, this approach facilitates efficient utilization of stores personnel. In many store rooms, withdrawals are heavy early in the day and are much lighter on. Thus, when the issue clerkâ€™s busy work slacks he will have a backlog of inventory work to do.
In some companies separate staff is appointed for the purpose of continuous stock taking. This approach involves extra cost and only very large companies can afford it.
In the fixed or periodic inventory, inventory is taken once a year, generally coinciding with the financial year. This necessitates shutting down the production operation and organizing a special crew for the inventory job. This approach is ideal for seasonal businesses It is troublesome, because, it is a major task which must be accomplished in a short time, interrupting production operations.
Classification and Codification
Good store-keeping requires proper classification and codification of various items stored in stock. . Proper classification and codification offer several advantages such as:
1. Systematic grouping of similar items for correct identification of each and every item.
2. The usage of long descriptions is simplified and possible confusion avoided.
3. Avoids duplicate stocks of the same item being held under different names, descriptions, brand names, part number and different stores.
4. Enables reduction in sizes and varieties.
5. Helps in standardization of materials and helps in finding substitutes
6. Can be used as a basic for setting up different stores.
7. To arrange bin cards and records in stores, accounts and inventory control sections in the same uniform manner.
8. Ensures accuracy in correspondence, records and posting of receipts and issues in appropriate records.
Principles of Classification and Codification
The following principles should be observed while establishing an effective classification and codification system:
I. There must be a consistency in the point of view so that, the basis of classification should remain unchanged for all items.
II. The system of classification must cover the entire range of items for which, it is devised and at the same time, allow reasonable scope for extension. This principle is that of comprehensiveness.
III. The third principle is that of mutual exclusiveness which means, that there must be only one code number possible for any item.
IV. The system developed should be simple enough to be understood and easily adopted by the non-specialist personnel. This also means that the codification basis when once understood, the code numbers should be self-explanatory to a certain possible extent.
Methods of Classification and Codification
Stores are generally classified on the basis of their nature or usage, the former being the most common method used. Based on nature, stores are classified into specific groups as shown below:
* Raw materials
* Consumable stores
* Spare parts
* Packing materials
* Finished goods
* CKD Completely knocked down items.