UCR Policies and Procedures

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Campus Policy Number: 750-52

Physical Inventories (Counts of Supplies)
Policy Owner: Internal Audit
Effective Date: 9/15/94

Supply inventories are to be controlled by the responsible University department. Currently all departments with cumulative supplies in excess of $50,000 are to conduct at least an annual physical inventory count.*

This count is of all department goods held for production and distribution within the University and should be performed at year-end if perpetual inventory records are not maintained. Affected departments should develop operating procedures consistent with Business and Finance Bulletin BUS-54 to regulate supply inventories.

Physical counts should be conducted by individuals who have no inventory responsibilities such as custody and recordkeeping. On a sampling basis, someone independent of the supply inventory operation should verify physical counts, prices, extensions, and totals. The results of the count are to be reported to the Materiel Manager and the Accounting Officer.

The following guidelines are suggested for departments required to perform physical inventory counts in compliance with B&F Bulletin BUS-54. Each department, however, must evaluate the applicability and relevance of these procedures before their adoption. Departments are encouraged to develop procedures tailored to their own specific conditions. Suggested guidelines are as follows:

    1. Planning:
    2. This step is the most important procedure in conducting a successful inventory count. Planning involves establishing priorities, assigning responsibilities, setting up a problem resolving mechanism (perhaps a chain of command), determining the inventory method and coordinating all activities. The inventory date and time is also determined and communicated to all involved.

    3. Instructions:
    4. Detailed inventory instructions should be prepared and distributed. These instructions should clearly delineate the roles and responsibilities of all involved in the count. A practice inventory counting session might be helpful to those who have not previously participated in a physical count. Encourage questions from participants.

    5. Observation Tools and Supplies:
    6. Obtain two or three part inventory tags (sequentially numbered for control purposes), measuring instruments, clipboards, pens, and other items necessary to conduct the count. This is also the time to determine how the inventory will be listed and extended in the inventory summary; i.e., by department using a standard spreadsheet software package, alphabetic by part name using a customized inventory summarization program on an in-house computer, numeric by part number using data base software, etc.

      * Policy also provides for cyclical physical inventories during the course of a year in lieu of a complete physical inventory at one time. (See BUS-54 for specific policy.)

    7. Operations:
    8. Arrange for operations to be preferable halted or at least conducted at a minimal level to reduce the movement of inventory. Prepare a log to document all movements of materials during the counting. Also, plan on minimizing receiving and shipping operations.

    9. Organize and Clean:
    10. Organizing materials in storerooms will assist in efficient counting. Like items should be grouped together and any excess storage locations noted.

    11. Preliminary Stock Estimates:
    12. Inventory levels in each area for comparison with the actual count in order to test the reasonableness of the count. This assists in exposing counting mistakes and avails counters the opportunity to take corrective action.

    13. Obsolete Stock:
    14. Identify obsolete stock and make arrangements to dispose of or exclude it from the physical count. Goods that are to be excluded should be clearly marked and preferable located away from other inventory.

    15. Administrative Office Supplies and Equipment:
    16. Office supplies not used in production or held for resale such as pencils, paper, boxes of tissue, floppy disks, etc. should be expenses when purchased and excluded from the physical count.

      Equipment inventory is recorded on a separate equipment inventory listing and is the subject of a separate physical count in accordance with Business & Finance Bulletin BUS-29.

    17. Tag Responsibility:
    18. If possible, assign responsibility for the control of tags and count sheets to an individual independent of inventory custody and recordkeeping duties.

    19. Identify Potential Problem Areas:
    20. Special stock might provide counting problems (an example might be work-in-process). Resolve these problems by planning ahead how to handle them and ensure that participants are familiar with the inventory to be counted.

    21. Unit Pricing:
    22. In advance, determine the source of and obtain as much unit cost information on items expected to be in inventory. This will minimize the amount of pricing work needed after the physical count is completed when time demands are usually greater.

    1. Shipping and Receiving:
    2. All shipping and receiving should cease. Any shipments arriving the day of the count should be physically separated and their appropriate inclusion in inventory individually determined.

    3. Assign Count Teams:
    4. Teams of two persons should be assigned to count inventory. Experienced individuals should be teamed with inexperienced individuals so that at least one team member is familiar with the inventory. Team members should double check each other's counts.

    5. Distribute Tags:
    6. The tags may be released for hanging prior to the day of the count. Part descriptions and units of measure may be listed on the tags at this point but quantities should not be entered until the day of the actual count. Document individual responsibility for all numeric sequences of the tags.

    7. Complete Tags:
    8. Only one part number or inventory item should be listed per tag. Participants must complete all tag information by writing clearly. Units, part number, location and amount are some of the required tag information. All information should be completed in non-erasable ink. Amounts less than the measurable unit should be ignored. Except for obsolete inventory, all departmental owned items (raw materials, work-in-process and finished goods) must be tagged. All copies of the tag should remain with the inventory counted at this point.

    9. Counting Mistakes:
    10. Incorrect balances on tags should not be erased but instead crossed out. The new quantity should then be entered and approved by a supervisor. Voided tags should be kept and turned in. Under no circumstances should a tag be thrown away.

    11. Adequate Supervision:
    12. All counting activities are to be adequately supervised. The supervisor should evaluate the progress of the count. Any adjustments made in the prearranged procedures should be documented.

    13. Audit Function:
    14. Sample comparisons are to be made of the completed tags with the stock on hand. Errors are to be corrected and evaluated as a basis for possible expanded sampling. If a master inventory listing is available, the tag information should be compared to this record. Any discrepancies should be investigated and resolved.

    15. Final Tour:
    16. A final tour should be made before the release of an area to ensure that all stock has been included in the count. Tag copies can now be pulled but one copy of the tag should remain with the inventory.

    17. Release Areas:
    18. Tag custodian releases storage areas to production after collecting tag copies from that particular area.

    19. Reconcile Tags:
    20. All tags distributed should be reconciled to those collected and lost. A list should be maintained of lost and voided tags.

    1. Update Inventory:
    2. Use the inventory tags to update any perpetual inventory records.

    3. Evaluate Variances:
    4. Evaluate variances between the tag quantities and perpetual inventory quantities.

    5. Operating Efficiency:
    6. Determine the operating efficiency of the unit. Compare operating results to the unit's goals/standards. Take appropriate action after careful analysis. Remember, one of the purposes of the physical inventory is to establish a basis for management decision-making.

    7. Final Tag Copies:
    8. Final copies of the tags can now be pulled from the physical inventory. The reason for leaving the tags on the inventory until this stage is that counting discrepancies can often be investigated by comparing the actual inventory to the original tag in the storage area.

    9. Evaluate Count Procedures:
    10. Evaluate the count procedures applied and determine how these procedures may be modified to improve the next count. The best time to make adjustments to the following year's inventory instructions is immediately after the current year's count is completed.

      These are some of the areas to consider when performing a physical inventory. It should be noted that inventory counts of significant volume can often require two or three days to complete. If you have any questions about these procedures or wish assistance in developing your department's specific procedures please contact Internal Audit.