Best Practices

Excess and Obsolete Inventory Policy Guide

This Excess and Obsolete Inventory Policy provides guidance for shrinkage, obsolescence and excess inventory in the inventory allowance accounts on their ledgers.

In general allowance, reserves are recorded by the company to provide for inventory losses due to shrink, obsolescence and excess inventory. Whether the decrease in value is due to damage, deterioration, obsolescence, changes in price levels, future demand, or any other cause, the difference should be recognized by a charge to income in the period the decrease occurred.

This guide help you proactively identifying, accounting for and resolving the disposition of excess and obsolete inventory. Also to assign the proper accountability for continuous improvement activities focused on reducing the occurrence of excess and obsolete inventory by identifying and addressing the related root causes.

Excess and Obsolete Inventory (E&O) Policy when implemented should offer:

  • Inventory reserves evaluation to identify and review all inventory to proper estimations on a quarterly basis.
  • Proper planning to ensure accuracy on all levels.

The scope of this guide spread over all company inventory items. Such inventory items include

  • Finished Goods
  • Inventory at Subcontractors
  • Raw Stock
  • Work-In-Process (WIP)

The policy 12 pages with the 2696 word count. Included as Microsoft Word and PDF format, so you can customize it for your own business

It is the responsibility of each financial controller and supply chain manager to establish reserves for shrinkage, obsolescence and excess inventory guidelines based on the recommended steps above mentioned in this guide.

This guide is also useful for Sector/Segment CFO/Controller, or their appointed designee, for their business units, divisions, and manufacturing leaders to oversee their locations ensuring that standard policies and procedures are available to guide the supply chain and financial controlling start for alignment.

From a materials management perspective, the current practices for identifying and reserving for excess and obsolete inventory are reactive with respect to identifying the true inventory activity profile, this policy helps you to be more proactive and can become instrumental in reducing E&O for your business.

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Files Included

1 Excess and Obsolete Inventory Policy Guide 621.66 KB
621.66 KB