Excess and Obsolete Inventory Policy Guide
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This Excess and Obsolete Inventory Policy offers comprehensive guidance on managing shrinkage, obsolescence, and excess inventory within the inventory allowance accounts on ledgers.
Generally, companies record allowance reserves to account for inventory losses arising from shrinkage, obsolescence, and excess inventory. Regardless of the reason for the decrease in value, be it due to damage, deterioration, obsolescence, price fluctuations, or future demand changes, the difference should be recognized through an income charge in the corresponding period.
This guide aids in proactively identifying, accounting for, and addressing the disposition of excess and obsolete inventory. It also assigns accountability for continuous improvement activities focused on mitigating excess and obsolete inventory occurrences by pinpointing and tackling their root causes.
When implemented, the Excess and Obsolete Inventory (E&O) Policy offers:
- Regular inventory reserves evaluation to ensure accurate estimations on a quarterly basis.
- Comprehensive planning to maintain accuracy across all levels.
The scope of this guide encompasses all company inventory items, including:
- Finished Goods
- Inventory at Subcontractors
- Raw Stock
- Work-In-Process (WIP)
Spanning 12 pages with a word count of 2696, the guide is available in both Microsoft Word and PDF formats, enabling customization for individual business needs.
The responsibility of establishing reserves for shrinkage, obsolescence, and excess inventory lies with each financial controller and supply chain manager, based on the recommended steps outlined in this guide.
Sector/Segment CFO/Controllers, or their designated representatives, can also utilize this guide for their business units, divisions, and manufacturing leaders to ensure alignment with standard policies and procedures guiding supply chain and financial controlling efforts.
From a materials management perspective, existing practices for identifying and reserving excess and obsolete inventory tend to be reactive. However, this policy shifts towards a proactive approach, potentially serving as a vital instrument in reducing excess and obsolete stock issues for your business.
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