Multiple Bin Inventory

Some businesses require assignment of multiple bins to an item number and to track quantity in each.  However, not all accounting software packages have this feature built into them. The decision maker needs to weigh the cost of canned software that does not have multiple bin inventory tracking against the expense of paying for modifications to an accounting software package that permits enhancing the programming code.

Issues related to multiple bins-

1) Physical inventory count processing must be enacted for each bin of an item.

2) Receiving an item into stock must be recorded to specific bins for that item.

3) A sales order may need to be allocated from each specific bin. The bins appear on the picking slip document so that the warehouse person knows how much to pull from each one. When order is shipped, quantity must be relieved from each specific bin.

 

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Why Cost of Sales Can Go Wrong

It is typical in accounting software for the cost of sales to be assigned at the time the invoice by taking the fifo or oldest purchase or build cost of the item still in stock. This presumes that there is a legitimate item in inventory with a valid unit cost.

Where this can go wrong is when the item being sold is not in stock because the receipt of the item is delayed from being entered into inventory. The system then has to decide on a backup strategy to assign the cost of sale. It is either the last cost or possibly the average cost. It should be set in the system option for one or the other but not left as an arbitrary choice. Inconsistent profit reporting will result if the average or last cost is significantly different than the fifo cost.

What happens if this is the first time the item is being sold and there is no last or average cost?  (Its receipt has not been entered into the inventory on time.) In this case, the cost of sale will be recorded as zero. This will also result in a false sense of profit in the general ledger.

Procedure and discipline should be put into place to not allow an item to be invoiced if there is no quantity on hand or no assigned cost to it in inventory. This may require a bit of customization to the software. If you are using accounting software that does not allow modification, then you must be aware of this issue and not be surprised when it happens. You must also be prepared to have access to reporting that lets you find where zero cost of sales has been assigned as well as when the cost appears to be out of line with the expected cost of sales.

In some situations, the cost of an item may be irregular because it is an item built using a bill of materials. One of the components may not have a correct cost or be out of stock but the work order is still permitted to be generated. The production person may be aware that the raw material is available and ignores its status in the computer. Again, there must be a procedure and discipline to avoid this in order to maintain true inventory costs.

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Bill of Material Options

Two typical options for implementing Bill of Material into an accounting system:

  1. Full-blown MRP (Material Resource Planning) and Work Order system.
  2. After-the-fact Bill of Material module

Option 1- the full-blown solution- can cost into the thousands and requires properly disciplined production personnel to utilize and work the system.

Option 2- an inexpensive solution where material production and maintenance is kept outside the accounting system. In the accounting system, you enter a build assembly record that a quantity is produced after the item is put together . It doesn’t matter if the item is a final or sub-assembly. The computer will subtract the raw components from stock, add the new assembly to stock and calculate the cost of the item by taking the extended cost of each raw component plus optionally assigned overhead and labor costs.

With option 2, the computer will advise you if there is enough raw components to build the item even if it has already been done. If you receive a warning that there is a shortage of a component, it is most likely that the stock on the component is not being properly maintained in the computer. So even if the manufacturing process is being handled outside the accounting system, there still is a check and balance for accuracy in inventory control.

Cost between the two options alone shouldn’t drive your choice. If you have the resources to install the MRP and work order system, you must also have the right personnel willing to and/or capable of maintaining it.

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Accounts Payable Bill Payment Reporting

An accounting software system should allow for these two ways to determine which open invoices to pay:

Cash Flow and Aging.

1) Cash Flow Reporting lists open invoices based on selected periodic intervals based on due date cutoffs.  In other words, how much money is obligated to be used to pay invoices in one week, in two weeks, etc.

The report shows if discounts are taken or lost when paid by the cutoff date. Let’s say you are given a two percent discount when paid by a certain date. It will show up on the cash flow report as a savings if within the selected cutoff date and a loss of discount if paid after that cutoff date.

2) The Aging Report ignores discounts. It ignores due dates. Instead, it looks at how long an invoice is unpaid based on the original invoice date. Those who use this method most likely look at the typical thirty day cycle of cash in and out as more important than taking advantage of discounts and when the vendor wants to be paid.

Those who use the Cash Flow Report to decide which invoices are paid are not as concerned with the thirty day cycle but rather take advantage of discounts as well as maintaining a steady cycle of paying bills.

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Accounts Payable Invoice Payment Options

A computerized accounting software system should consider that:
1) bills may be paid up front as well as on a scheduled basis;
2) there must be protection against paying a bill before its time;
3) not all payments are the result of a printed check.

When entering an AP invoice, there should be an option to
record that it has already been paid or to be able to print a
check while entering it. There should also be an option to
subsequently reflag an open invoice as already paid to avoid
accidentally printing a check for it.

The best method to protect against paying an invoice not intended
until later is to mark it when it goes into the open invoice file as
HELD. Subsequently, there should be a maintenance routine that
allows the user to reflag selected invoices as RELEASED and only
print checks for the RELEASED invoices.

Not all invoices need to be printed. Some payments are made
electronically. A good accounting software system should provide
the option to generate an ACH formatted file that will be accepted
by the bank as an advisory to remit payment to the vendor.

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EDI Implementation Choices

Today, just about anyone who wants to sell to a mass retailer is required to implement EDI , Electronic Data Interchange, to communicate with their trading partner. EDI has been around for a long time. In the 1970s it emerged as the electronic option of choice for railroad piggyback freight forwarders to track where their rail cars were at any given moment. By the 1980s it morphed into system-wide acceptance by major retailers for use as advance shipper notices, purchase orders and invoices.

Pricing Components:
1. Fee charged per transaction/document.
2. Monthly fee for maintaining an electronic mailbox or VAN for sending and receiving docuements.
3. Some solution providers also charge for the number of bytes sent.

Method of Access:
In-house EDI transalation software vs. Web-based document form service.

Translation software may cost a few thousand dollars to install and set up bridges to existing accounting software. It gives you control of both inbound and outbound documents in a way that eliminates the locked in procedures for web-based
forms.

With web based forms, you will still need to program how to take data in and out of your accounting system with the push of a button rather than enter the information twice. Having an in-house EDI translator makes the process more seamless after the required enhancements are programmed.

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Work Order Processing Decisions

A manufacturing business uses work orders whether it is generated manually or using software. When manual, pieces of paper documents are passed from one factory area to another to identify the process being performed, the end product and the quantity. If the foreman or a salesperson wants to know the status of the production, he or she has to chase around to find out where it is, what has been done so far and when it will all be ready.

In the computerized model, as the paperwork travels in stages to its final destination, someone records its status. The foreman or salesperson simply checks its status using the designated software.

Some items are built for stock, others for specific customer orders. Those that need a faster track to finished production status can be a dilemma to the decision maker on the method to speed up the process.

Should a customer order for an item that needs to be produced automatically trigger the creation of a production work order? Or should it trigger a report that helps a factory worker decide to create the work order?

If a sales order triggers an automatic work order it may cause issues related to being able to produce the item especially if raw material is allocated for previously generated work orders. If a work order is only generated when human interaction decides so, then the business is reliant on properly trained workers to make the proper decision making on a timely basis.

There is also a third choice- no automatic linkage of work orders to sales orders and no manual assignment of work order. Instead, Manufacturer Resource Planning (MRP) is used to evaluate how many of an item is required for production based on commitments and prior sales along with how much raw material is available in stock. Even if MRP is performed once a week, it may still delay delivery of a customer order but it keeps workflow disciplined.

Or maybe a business uses all three options depending on the situation. The decision maker at a manufacturer type business establishes the policy rules for production and relies on computer support personnel to help achieve the results that works best for them.

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FIFO vs LIFO Costing of Inventory

Computerized accounting systems allow one to choose the method of costing inventory. The two most common methods are FIFO (first in, first out) and LIFO (last in, first out).

Most businesses utilize FIFO as it represents the truest evaluation of inventory. Every time an item is received into stock, the computer stamps the date and unit cost. It keeps track of it until the quantity received at that date stamp has been exhausted. If one receives stock of the item multiple times before it is sold or used in the manufacturing process, one will be able to see the variations on the cost of items on hand from purchase to purchase. When one sells the item, it will use the oldest time stamp to relieve from inventory and assign the cost of that purchase as the cost of sale.

For example: item XYZ sells for 5.00 each. The oldest date stamp
still in stock shows it is purchased at a cost of $3.00 each. There may be more recent purchases at $3.25 each, but the cost of goods sold for the sales transaction is $3.00 when using FIFO. Even if the cost is higher on the older dated transaction than on more recent purchases, it still uses the oldest date still in stock.

On an inventory valuation report, the extended total of all dated records for an item that correspond to what is on hand is its value when using either the FIFO or LIFO method. If using average cost method, the computer will grab the calculated average unit cost and extend it against the on hand to determine its valuation. This reporting method is useful when looking more at the big picture than exact numbers.

LIFO is used by some businesses who determine that the recent cost of an item reflects the most reasonable value especially in times of inflationary price pressure. The IRS, however, does not allow a business to switch back and forth between LIFO and FIFO to suit their pleasure.

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Cash vs Accrual Accounting Method

Cash basis accounting is used by a business that generally does not stock inventory but rather provides services. Taxable income is not recognized until money has been received. Expense that reduces taxable income is not recognized until money has been paid out.

Accrual basis accounting is used by a business that maintains inventory. In this type of scenario, it may take a while to turn inventory into a sale. The taxing authority allows the business to reduce the taxable income at the time the vendor’s invoice is received even if it will take a while until it is paid. To offset this graciousness, a sale regardless if paid or not becomes taxable
income at the point the customer invoice is generated.

Why doesn’t every business just uses the cash basis method of accounting? It is because the government prefers that income be recognized sooner than later.  They want the tax money as quickly as they can grab it.

QuickBooks let you establish the preference for how you want to run subsidiary A/R and A/P journals as well as look at the General Ledger trial balance and Profit and Loss statements. You simply tell QuickBooks you want Cash or Accrual method and it does the rest.

Many more expensive accounting systems are written presuming that businesses that purchase their software have inventory and therefore need the Accrual method. Customization may be required to generate cash basis reporting. In some cases, it may mean setting up a separate company GL and have the subsidiary data flow into it on a cash basis via ancillary processing.

If you run a business that is service oriented rather than turning over stock, you may still consider the accrual method. If you wait to accumulate a customer’s invoice and collect the fees rather quickly, it will be to your advantage to use the accrual method especially if you are given a full thirty days to pay your regular expenses. You are using the tax break even when you haven’t paid the piper.

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Accounting Software Pricing Options

In today’s ever-changing business climate, a new pricing option has emerged for the purchase of accounting software:

This new rental or monthly subscription concept has emerged due to the utilization of the “cloud” as the storage device of preference. The “cloud” is not a special place. It is just another name for web-based servers. Rather than maintain one’s sensitive business data on a local computer or server, space is rented on a remote server addressable via Internet protocol addressing. The benefit is that the cloud host is responsible for making sure access is available twenty-four hours a day. The cloud people maintain your data backup as well.

Try to purchase Microsoft Office® or Intuit’s QuickBooksTM today. You are steered to an online, cloud hosted solution. For Office 365, the pricing goes from $5 to $15 a month. Extended to a full year, it can be a $60 to $180 expenditure. This may not seem like much but until a short time ago, you could buy an Office product for no more than $150 and use it forever until your computer crashed and needed a new one. With the subscription model, the moment you give it up, you lose access to the program. Microsoft has you locked in. They save money on distribution costs such as dvd’s and retail outlet stores sharing the profits.

Quick Books on-line cloud model is priced from $10 to $40 a month subscription depending on how many features you need and whether it has to be multiuser capable.

The limitation of QuickBooks is that it is not customizable. Well, maybe it is but the source code is made available only to those software consulting firms that are producing add-ons for a large base of users and not just one user’s enhancement need.

The jump in pricing from QuickBooks to a more robust accounting software product can be quite dramatic. With QuickBooks you are spending less than $500 a year. Getting a more involved accounting product may cost a business from $10,000 on the low end to $200,000 on the upper reaches.

The vast majority of small businesses can get away with using QuickBooks. At such a relatively low expense, they can better afford to pay for someone to help them set up their in-house accounting system and seek this outside advice when needed. The outside help more likely will not be the regular cpa as his or her hourly rate may be more expensive compared to an experienced business computer consultant.

Those businesses that need the customized solution have usually already sold themselves on the emotional aspect of spending more than they would like to. This is akin to buying a new car. You know when you need one and you bite the bullet as best as possible.

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