How do I identify obsolete inventory?

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How do I identify obsoleteinventory?

However, be sure to gain the commitment of upper management to this search first;
multiple rounds of questions regarding how the company could have found itself saddled

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discovered. Conducting a search for obsolete inventory may meet with a particular level of
resistance if the management team is being awarded significant profit-based
bonuses. If
so, consider addressing the prevention of incoming obsolete inventory instead, which may
reduce inventory levels over the long term, though it will not address the existing obsolete
inventory.

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The Materials Review Board

Though it is certainly encouraging to see a manager eliminate obsolete inventory, a common
problem is to see some items disposed of that were actually needed, possibly for short-term
production requirements, but also for long-term service parts or substitutes for other
items. In these cases, the person eliminating inventory will
likely be castigated for causing
problems that the logistics staff must
fix. A good solution is to form a Materials Review
Board (MRB). The MRB is composed of representatives from every department having any
interaction with inventory issues accounting, engineering, logistics, and production. For
example, the engineering staff may need to retain some items that they are planning to
incorporate into a new design, while the logistics staff may
know that it is impossible to
obtain a rare part, and so prefer to hold
onto the few items left in stock for service parts
use.
It can be difficult to bring this disparate group together for obsolete inventory reviews, so

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you normally have to put a senior member of management in charge to force meetings to

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occur, while also scheduling a series of regular inventory review meetings well in advance.

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Meeting minutes should be written and disseminated to all

members of the group,
identifying which inventory items have been mutually declared obsolete. If this approach

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still results in accusations that items have been improperly disposed of, then the group can

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also resort to a sign-off form that must be completed by each MRB member before any

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disposition can occur. However, obtaining a series of sign-offs can easily cause lengthy

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with so much obsolete inventory,

all of which must be written off as soon as it is

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There are a number of techniques for identifying obsolete inventory,

as discussed below.
otherwise, the scope of the resulting expense
(which can be substantial) may lead to

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delays or the loss of the sign-off form, and is therefore not recommended. A simpler

approach is to use a negative approval process whereby items will be dispositioned as of a

certain date unless an MRB member objects. The MRB is not recommended in very lowinventory situations, as can arise in a just-in-time (JIT) environment, since an MRB tends to
act too
slowly for employees used to a fast-moving JIT system.
How to Find Obsolete Inventory
The simplest long-term way to find obsolete inventory without the assistance of a computer

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How do I identify obsolete inventory? - Questions & Answers - AccountingTools

system is to leave the physical inventory count
tags on all inventory items following
completion of the annual physical
count. The tags taped to any items used during the
subsequent year will be thrown away at the time of use, leaving only the oldest unused
items still tagged by the end of the year. You can then tour the warehouse and discuss with
the MRB each of these items to see if an obsolescence reserve should be created for them.
However, tags can fall off or be ripped off inventory items, especially if there is a high level
of traffic in nearby bins. Though extra taping will reduce this issue, it is likely that some tag
loss will occur over time.

Even a rudimentary computerized inventory tracking system is likely to record the last date
on which a specific part number was removed from
the warehouse for production or sale. If
so, it is an easy matter
to use a report writer to extract and sort this information, resulting

in a report listing all inventory, starting with those products with the
oldest last used
date. By sorting the report with the oldest last usage date listed first, you can readily arrive
at a sort list of items requiring further investigation for potential obsolescence. However,
this approach does not yield sufficient proof that an item will never be used again, since it
may be an essential component of an item that has not been scheduled for production in
some time, or a service part for which demand is low.
An advanced version of the last used report compares total inventory withdrawals to the
amount on hand, which by itself may be sufficient information to conduct an obsolescence
review. It also lists planned usage, which calls for information from a material requirements
planning system, and which informs you of any upcoming requirements that might keep the
MRB from otherwise disposing of an inventory item. An extended cost for each item is also
listed, in order to give report users some idea of the write-off that might occur if an item is
declared obsolete.
If a computer system includes a bill of materials,
there is a strong likelihood that it also
generates a where used report, listing all the bills of material for which an inventory item
is used. If there is no where used listed on the report for an item, it is likely that a part is
no longer needed. This report is most effective if bills of material are removed from the
computer system or deactivated as soon as products are withdrawn from the market; this
more clearly reveals those inventory items that are no longer needed.
An additional approach for determining whether a part is obsolete is reviewing engineering
change orders. These documents show those parts being replaced by different ones, as well
as when the changeover is scheduled to take place. You can then search the inventory

database to see how many of the parts being replaced are still in stock,
which can then be
totaled, yielding another variation on the amount of obsolete inventory on hand.
A final source of information is the preceding periods obsolete inventory report. Even the
best MRB will sometimes fail to dispose of acknowledged obsolete items. The accounting
staff should keep track of these items and continue to notify management of those for
which there is no disposition activity.
In order to make any of these review systems work, it is necessary to
create policies and
procedures as well as ongoing scheduled review dates. By doing so, there is a strong
likelihood that obsolescence
reviews will become a regular part of a companys activities. In
particular, consider a Board-mandated policy to conduct at least quarterly obsolescence
reviews, which gives management an opportunity to locate items before they become too
old to be disposed
of at a reasonable price. Another Board policy should state that

management will actively seek out and dispose of work-in-process or finished goods
with an
unacceptable quality level. By doing so, goods are kept from being stored in the warehouse
in the first place, so the MRB never has to deal with it at a later date.
Podcast: A discussion of obsolete inventory is available on Episode 66 of the Accounting
Best Practices podcast. Listen Now.
Related Topics
How do I report an inventory write down?
How do I write down inventory?
What is an inventory reserve?

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What is inventory shrinkage?
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Reader Comments (3)

If in financial statements inventory is adjusted already for obsolete stock, to arrive at
stock turnover ratio do you add back obsolete stock to inventory and also cost of
sales?

January 9, 2011 |

Bansari

No, you do not add back the obsolete stock. It has already been
charged to expense, so
it is considered to be gone, even if the obsolete inventory is still on the premises.

January 9, 2011 |

Steven Bragg

Hi,
What are the post inventory procedures I should perform as an auditor to determine
inventory obsolescence allowance of the client to ensure that the inventory is correctly
valued? confused!!!!

September 27, 2012 |

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