Accounting Best Practices, Fifth Edition

9–1. Audit Bills of Material

When the accounting department issues financial statements, one of the largest expenses listed on it is the material cost (at least in a manufacturing environment). Unless they conduct a monthly physical inventory count, the accounting staff must rely on the word of the logistics department in assuming that the month-end inventory listed on the books is the correct amount. If it is not, the financial statements can be off by a significant amount. The core document used by the logistics department that drives the accuracy of the inventory is the bill of material. This is a listing of the components that go into a product. If it is incorrect, the parts assumed to be in a product will be incorrect, which means that product costs will be wrong, too. This problem has the greatest impact in a backflushing environment, where the bills of material determine how many materials are used to produce a product. Thus, the accuracy of the bills of material has a major impact on the accuracy of the financial statements.

The solution is to follow an ongoing program of auditing bills of material. By doing so, errors are flushed out of the bills, resulting in better inventory quantity data, which in turn results in more accurate financial statements. The best way to implement bill audits is to tie them to the production schedule, so that any products scheduled to be manufactured ...