We operate in a standard cost environment, and historically have carried what we call a FIFO reserve allowance to ensure at year end our inventory is evaluated at the lower of cost or market.
Steps we have taken historically to determine our reserve.
- Determine the WAAC for our purchased goods, which are commodities & package materials.
- Require procurement department to determine current market price for our commodities.
- Evaluate our demonstrated performance speeds, rates of which we produce our finished goods or WIP products
- Evaluate all our overhead burdens and direct labor rates.
Then we would input all this information into a cost category on our ERP system, which then would produce a report showing our year end on hand inventory balances extended at standard cost, and at actual cost.
The variance would dictate the reserve we would carry. So if standard exceeded our actual we would book a JE credit to the FIFO reserve and debit to cogs. If standard was less than actuals, we then would make a JE debit to the FIFO reserve and credit cogs.
Secondly at the beginning of each Fiscal Year, we would roll in our new FY standards. At the time of updating our standards a system entry would create a debit to FIFO and credit to inventory if our standards were decreasing and a credit to FIFO and debit to inventory if our standards were increasing.
So our current dilemma is we are now attempting to evaluate this quarterly and would like to get to monthly. It is creating a questions about our reserve.
The confusion is with the reserve we set at year end, and then it is changed when we roll in our new standards on day one of our new FY.
Also we do not roll standards during the year anymore, unless there is an approved ECN (engineering change notice).
Any suggestions on how we can streamline this or thoughts on how we can improve our evaluation and review?
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Todd Shores
Controller