Rescinded [2017-04-01] - Policy on Accounting for Inventories

1. This appendix describes alternative accounting methods to effect financial control over inventories of materiel and equipment when circumstances indicate the need for such control.
2. The choice of method used to exercise financial control over inventories will depend upon the benefits to be attained relative to the cost.
3. The actual form of the inventory records can vary from handwritten working papers or ledgers to sophisticated mechanical or electronic inventory control systems.

• use of subsidiary and control accounting records;
• use of control accounting records only; and
• inventory accounting in the absence of formal records by periodic stocktaking.

In this method all entries in the departmental subsidiary system are recorded individually or in total in a control account in the principal departmental accounting system. These entries include the costs of all receipts and issues; quantity shortages or overages identified through physical stock counts; and deletions of obsolete, damaged, or excess stock. The subsidiary system should be regularly reconciled with the control account.

For economy and simplicity, a subsidiary system may record quantities of inventory only, but in these circumstances each receipt or issue transaction should be assigned a value for entry in a control account in the principal accounting system. Periodically, the quantity balances shown on the subsidiary system should be priced and reconciled in total with the control account.

A system for accounting for inventories based on physical stock counts may be suitable only when it is uneconomic or very difficult to record each receipt and issue in the accounting system. In these circumstances, the amount of inventory used in a month or fiscal year may be determined by physical stock count on the basis that the opening inventories, plus purchases during the period, less closing physical inventories valued at unit cost prices, represent the net cost of inventories consumed in the period. The purchases in the period should be determined directly from the departmental accounting system, using line objects to obtain the necessary detail. The computed net cost of inventories consumed in the period is allocated in the accounting records on an appropriate and equitable basis, depending upon requirements for financial reporting. A degree of financial control over such inventories can be obtained through analysis of variances between actual and budgeted costs to ensure that the rate of consumption of inventories and total stock levels are in line with the level of operating activity.

1. Whatever the accounting system, there is a need to perform physical counts to prove that there have been no serious lapses in either physical custody or accounting controls over inventories.
2. Physical counts should be performed, summarized, and verified with inventory records by persons who are independent of the inventory custodians. Financial officers should participate directly in the planning, performance, and review of physical counts to ensure independence in the determination of quantities, physical condition, and values of inventories.

1. Inventories of materiel may be accounted for at cost by the following methods:
   • Establishing what direct and indirect expenses are to be included in or excluded from cost. For example, the cost of goods in a warehouse may be recorded at the price paid to the supplier or may include shipping, handling, and warehousing costs.
   • Establishing how costs are to be allocated to individual items in inventory. For example, costs may be recorded on a specific, average, or standard basis.
2. A standard costing system is recommended for most applications because it provides a good basis for financial control; serves the needs of those responsible for the materiel management function; and does not require complex accounting methods.
3. In this system, materiel acquisitions are recorded in the control account and subsidiary system at standard cost, with any resulting differences in the purchase price and shipping costs being recorded in a separate account. The balance in this separate account will represent accumulated price variances for each category of item, an analysis of which may disclose unrealistic standards, or favourable or unfavourable purchasing arrangements in the period. Issues from inventory to operations are also recorded at standard cost. At any point in time the total standard cost of all physical inventories on hand should be equal to the balances in the subsidiary accounting system and to the total in the control account. When standard costing is used, the standards should be realistically determined. Established standards should be reassessed on a systematic basis once each year or, if appropriate, on an exception basis during the year. When a new standard is introduced, existing inventories should be revalued and the applicable adjustment should be recorded in the accounts.

A work-in-process system should be used to determine the costs of manufacturing or processing operations. In such a system labour and raw-material costs are identified in relation to individual operations or projects, and other costs are allocated on an appropriate basis. Separate control accounts are operated for each cost component. These act as clearing accounts for inventories of work in process; they are charged with raw materials, labour, and other costs as they are entered into the productive process and are relieved of these costs as products are completed and transferred to finished-product inventories. Separate control accounts are also maintained for raw materials and finished products. This enables accurate costs to be determined on a period-by-period basis and permits the investment in raw materials, work in process, and finished goods to be controlled.

The following sets out certain accounting principles with respect to equipment that should be adhered to by all departments:

1. "While in inventory, equipment should be accounted for in the same manner as other items. Once issued for use, central records should be maintained to reflect distribution either geographically or by individual operating units.
2. "To preserve the continuity of responsibility for equipment in use, operating units should maintain records of the internal distribution of equipment."
3. There should be adequate accounting controls over the equipment records to ensure that they are complete and accurate. This includes maintaining a direct link with the principal departmental accounting system to ensure that all assets acquired and processed through the cash records are also included in the equipment records. For example, the total-dollar values of purchases as recorded in the equipment records should be reconciled with appropriate line-object totals created for that purpose in the classification of accounts and shown in financial reports. This would require a minimum of extra work, since computer reports that summarize the data in a useful way could be developed easily. As a minimum standard, when it is not practical to maintain dollar values in the detailed equipment records, no cheque requisition with respect to equipment should be processed unless it bears evidence that the item has been entered into the equipment records.
4. It should not always be necessary to integrate equipment records fully into the departmental accounting system, but information with respect to the total cost of equipment on hand at a responsibility centre should be available on request. There are circumstances, however, when it would be useful to report information on equipment by memorandum in departmental financial reporting systems. This may include a monthly or annual depreciation charge to allocate the cost of each item of equipment over its useful life and to provide an estimate of the current depreciated value of each item or of the total equipment on hand. Such depreciation charges should be equitably computed and consistently applied for each individual item or for each class of item, based on usage statistics or on a straight time consideration.
5. When it is desired to integrate equipment records with the principal accounting system, this can be done through the use of contra accounts.