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 Excess and Obsolete Inventory Policy provides guide to manage this.

Excess and Obsolete Inventory 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 Excess and Obsolete Inventory Policy spread over all company inventory items. Such inventory items include

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

The policy 7 pages with the 1680 word count. Included as Microsoft Word and PDF format, so you can customize it for your own business

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Excess and Obsolete Inventory Management in a critical aspect of Inventory Reduction Strategies you can adopt. 

Excess and Obsolete Inventory Policy

The Guide also explains:

  • GUIDELINES – SHRINKAGE
  • GUIDELINES – OBSOLESCENCE
  • GUIDELINES – EXCESS INVENTORY
  • QUARTERLY MODIFICATIONS TO INVENTORY RESERVE
  • ANNUAL MAINTENANCE OF RESERVE
  • DEBIT BALANCES IN RESERVE ACCOUNTS
  • IMPORTANT DEFINITIONS

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.


Muddassir Ahmed