Submitted By: Muntaha Nafis

Inventory
Management
Auditing
INCLUDEPICTURE "http://www.classymommy.com/blog/uploaded_images/Pizza-Hut-Logo-780541.jpg" \* MERGEFORMATINET

Submitted to:
Darrel Pereira

Institute Of Business Management

 INTRODUCTION
Pizza Hut first started operations in Pakistan by opening its first restaurant near Bank's Square on
Mall Road in Lahore. It then expanded to Karachi and Peshawar. The maximum number of Pizza
Hut outlets is in the thickly populated city Karachi. Now it also has restaurants in Faisalabad,
Rawalpindi, Islamabad, Hyderabad, Quetta, Sialkot and Multan. The topping Chicken Tikka
which is now used in franchises in India was first used in restaurants in Pakistan. The pizza
served in Pakistan is Halal according to the Islamic law. Pizza Hut offers annually an "All you
can eat" in the month of Ramadan, which is very popular in the country.

PRODUCTS
The following products are manufactured by Pizza Hut

• Chicken Wings

• Flaming Wings

• Garlic Bread

• Spicy Wedges

• Garlic Bread Supreme

• BBQ Chicken chunks

• Cheese Stuffers

• Bruschetta

• Pizza Hut Platter 2

• Kebab Stuffers

• Pizza Hut Platter 1

• Behari Chicken Spin Rolls

• Potato Skins

• Garlic Mushrooms

• Soft Drink Fresh Lime

• Mineral Water
• orange Juice
• Cappuccino

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 DEPARTMENTS
Following departments are engaged doing different tasks including the cooking staff and servers

• Cooking

Cooking department plays a very important role, as all machines are imported and have to be
used accordingly as per the instructions given. The staff operating the machines is highly skilled
and trained.

• Management

The major aim is to make sure everything is working right.

• Human resources

We provide intensive training for our franchisees, which encompasses practical on the job
training as well as theoretical training. This training will incorporate many elements, most
of which relate to the following areas as outlined in the Operations Manual that will form
the basis of your day-to-day management tasks. New franchisees should prepare themselves
for an uncompromising 3 to 4 months training and make adequate provision, both social and
financial, for this period. This is especially important when taking cognizance of the fact
that the training will be conducted at the closest pizza hut . This training is usually
structured on a "6-days-a-week" basis and will cover the following:

• General Restaurant Management;

• restaurant Administration;
• Personnel Management and Training;
• Customer Care;
• Safety and Security;
• Marketing;
• Restaurant Maintenance;
• Cleaning and Hygiene;
• Industrial Relations;
• Product Preparation and Presentation;
• Raw Material Management, and;
• General Business and Financial Management;

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 Industry Operating Procedures
Restaurant Industry

As a general rule full service restaurants are for the most part company owned with very little
franchising. Fast food restaurants are heavily involved in franchising activities. Franchisees will
pay a fixed per-cent of receipts to a franchiser for advertising and royalties. Some fast food
franchisers will lease the structure to the franchisee for a monthly rate or a percentage of sales.

Suppliers will help restaurant chains with marketing and advertising funds. It is not unusual for
major suppliers to offer rebates or provide upfront payments to obtain exclusive supplier status.

The internal controls of these chain restaurants are extensive; conversely individual independent
restaurants do not always enjoy these controls over operations.

Normally restaurants purchase from foodservice companies or they may purchase their inventory
from a national chain commissary. Perishable goods are usually purchased from a local vendor.

Four tip reporting programs are available for these taxpayers to enter into with the Service. Two
of these pro forma documents are titled Tip Reporting Alternative Commitment (TRAC) and Tip
Rate Determination Agreements (TRDA). The IRS developed the Employer Designed Tip
Reporting Alternative Commitment (EmTRAC) Agreement program in response to employers in
the food and beverage industry who expressed an interest in designing their own TRAC
programs. Attributed Tip Income Program (ATIP) is a new three-year pilot program for food
and beverage employers. The first annual basis begins January 1, 2007. Details and
requirements for participation for employers and employees are available in Revenue Procedure
2006-30.

GENERAL RAW MATERIAL ACCOUNTS

The raw material received from different sources to put to production, are recorded under the
following basic account headers.

Raw Materials purchased of credit

Raw Material xxx
Accounts Payable xxx
(To record: Raw Material purchased on account.)

Raw Material returns to the supplier on credit

Accounts Payable xxx
Raw Material - Returns xxx
(To record: defective material return to the supplier.)

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Raw Material discount availed from the supplier on credit
Accounts Payable xxx
Raw Material – Discount xxx
To record: the discount availed from supplier)

Direct Material used in Production

Work in process xxx
Raw Material xxx
(To record: the Direct Material used in production.)

Direct Labor Cost

Pizza Hut is one of the most famous international franchise in Pakistan. The costing system at
Pizza hut is designed in a way that the cost of labor is recorded on a daily basis and the salaries
are paid at the end of each month, as the labors are permanent. The branch manager is
responsible to keep a check on cost recording.

Let us take the example of the administrative dept., which is the most important dept of the
restaurant. The average salary of the server is 3000 a month.

Direct Labor applied to production

Work in process xxx
Accrued Factory Payroll xxx
(To record: the direct labor applied to production)

Salaries paid to labor

Accrued Payroll xxx
Cash xxx
(To record: the salaries paid to labor)

Factory overhead cost

Factory Overhead is an integral part of overall cost computation.

Factory Overhead Cost = Total Direct Material Cost + Total Direct Labor Cost

Different costs covered under Factory Overhead account are;

• Electricity charges

• Pizza hut cooking Machine’s repair & maintenance

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 • Carriage cost

• Indirect Material

• Indirect Labor

• Catering expenses

• cooking Based Machine’s and furniture fitting Depreciation

• Raw Materials safety and security cost

• Tea/Water for labors

• Stationary material etc.

• Uniform for staff

JIT (Just-In-Time)

Pizza hut follows, the JIT (JUST IN TIME) method as well as they believe in keeping stock in
store. It depends on the nature of the good.

JOB ORDER COSTING PROCEDURE

At Pizza hut, each job is assigned a specific code and the job number. The code is usually the
same code as that of a product listed in menu card. The product codes are also available in the
menu provided by the pizza hut, however different jobs are involved in the completion of a
product, and the complete code helps to identify which product is at what stage of completion.

In the same manner, different codes are assigned to different jobs and different products. The
status of the product is acquired on the basis of Job Codes. The` sample Job Cost sheets for the
above mentioned specific job is;

Job Order Sheet

cooking Department (Code XXX)

Description Quantity Rs. Total (Rs.)

Actual Required

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Chicken Wings Spice levels hot 400

Side lines 4 options Rice 120

Beverages 150
Total 670

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 Job Order Sheet
Machining (Code XXX)

Description
Frying (work according to Your order places)

steaming
baking

At Pizza Hut job order costing takes place and all orders are placed according to the requirement
of the customer.

Factory Overhead Cost

ITEM XXX

Department Average cost

Sui gas charges 10000

Electricity charges 250000
Labor 250000
Total 600000

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 JOB ORDER COST SHEET

Job Order Cost Sheet

For the year–2009

Job # Direct Material Direct Labor Overhead Total Cost (Rs.)

Chicken 90 40 45 175
shuffle
21 chicken 110 40 45 195
steak

The above job order cost sheet is a sample cost sheet prepared for each order of most running
item. The cost is broken according to the jobs involved in the completion of each item. From the
above statement, the cost of completion of each job and the total cost of all the completed jobs
for a order can be seen above.

AUDITING OF ACCOUNTS
Raw Material Inventory
The Raw Material received from different suppliers and places, is kept into the store houses. The
raw material in the form of different woods, received from suppliers is weighted and properly
noted by the store keeper. At the end of the month, an individual from the manufacturing factory
visits the store house and compare the amount and weight received by the factory from the store
house and the total ending raw material amount and weight in the store house. The amounts are
verified by the comparison of books maintained by the factory and store houses.

• Finished Goods

A special warehouse is designed, where the make to order furniture is kept. The customers are
informed when the product is transferred to the warehouse. Other products are designed for
visitors at the display center; such products are not made to order. The verification of finished

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goods is based on the job order sheets prepared for the month. The job order cost sheets of
completed jobs are compared with the physical counts of the finished goods present at the
display centers, in the warehouse and the cost of goods transferred to the customers. The cost of
completed jobs must be equal to the cost of the finished goods at different places.

Balance Sheet Accounts

Cash and Bank Balances
The liabilities are reduced by issuing the cheques to different suppliers and other related parties.
The salaries the factory workers are paid in cash and a salary register is maintained by the
factory supervisor. The cash and cheques received by the customers are also recorded. The
amounts are balanced and verified by comparing the salary journals with the job order cost
sheet’s direct labor accounts. The comparison of bank balance and the voucher received by the
suppliers are used to verify the payments made through bank.

Accounts Receivables
Many corporate Customers do not pay on delivery; their accounts are maintained by the
Redwood furniture as account receivable. The cheques received during the month by different
customers are deposited into the bank and the amounts received are verified through bank
reconciliation.

Fixed Assets
The Fixed Assets includes heads like Property, Equipment, etc. The books are checked for any
changes made in the Fixed Asset account which might arise from the buying or selling of a/some
fixed asset(s). As for the German based sawing machines, the company uses straight line
depreciation method for taking out the book value of the machines. The polishing and spray
channels are also depreciated at a specific rate, and the book values are calculated on the basis of
pre determined rate.

Accounts Payable
Accounts payable are generated when cost is incurred in acquiring any asset specifically raw
materials. There are only few suppliers and contractors, which provide the raw materials and the
transactions, are usually on credit. The settlements are made at the end of each month by issuing
cheques to each supplier. Comparison of vouchers or bills received from the suppliers with the
bank accounts verifies the accounts payable balances and other related accounts.

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Equity Capital

As such, there is no specific debt financing, the business is almost financed by the owner himself
(Equity Financed) but proper books are maintained to identify the amount drawn for
personal or business use. The amount put into business by the owner is also recorded and
verified. This step is very important for the authenticity of real income generated from
the business operations.

Income Statement Accounts

Sales
The sales account is verified by comparing it with the cash registered maintained by the Pizza
hut to record the cash sales. The cheques received by the customers and deposited to the bank are
also taken into account to compute the credit sales for a specific time period. Account receivable
balances are also checked to compute the sales on credit and amount not yet received. The
amount received in cash and in the form of amount transferred to bank is only considered as the
sales for the specific period of time.

Cost of Goods Sold

The cost of sales is verified from the job order cost sheets. The total cost, including the direct
material, direct labor and factory overhead cost from the job order cost sheet is compared
with the cost of finished goods transferred to warehouse, display center and customers.
This way the cost of goods sold and the ending balances are compared and verified.

Selling and Distribution expenses

There are number of sub accounts under this header, including salaries expense, transportation
expenses, sales and promotion expenses, repairs and maintenance and miscellaneous expenses.
All such cost are properly recorded and taken into account at the end of each period to arrive at
actual net income. The verification is based on the bills and vouchers received from different
parties and the journals maintained for few other accounts.

As such no formal balance sheets and income statements are formed by the Pizza Hut; just the
proper recording is maintained for internal use and proper costing of the items and business.

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 INTERNAL CONTROL PROCEDURES
FNANCIAL ACCOUNTING

i. Evolution of auditing — major influences of auditing ; nature and scope of auditing ;

basic concepts of auditing ; role of evidence in auditing ; auditing techniques and
practices – generally accepted auditing standards ; the concept of materiality in auditing.

ii. Verification of assets and liabilities — fixed assets, investments, inventories, debtors,
loans and advances, cash and bank balances, debentures and creditors, provisions for
taxation, proposed dividend and gratuity – other items in the balance sheet ; verification
of items in the profit and loss account ; contingent liabilities; disclosure of accounting
policies, practice ; expenditure during the period of construction ; adjustments for
previous year – provisions of the Companies Act, 1956 regarding accounts.
Nature of internal control, evaluation and audit of internal control – internal control
questionnaires; flow chart ; systems audit, internal control.
Audit-in-depth — statistical sampling in auditing. Use of ratios and percentages for
comparison and analysis trends – inter – firm and intra – firm comparison.

iii. Appointment of statutory auditors — auditors’ remuneration, removal, rights of

statutory auditors, duties of statutory auditors, joint auditors, branch audits. Audit report –
report versus certificate, contents of the reports, qualifications in the report. Divisible
profits – relevant provisions of the Companies Act, 1956 and the Income – Tax Act,
1961. Interface between statutory auditor and internal auditor.

iv. Nature and Scope of Internal Auditing — financial versus operational audit; concepts
of efficiency audit, propriety audit, voucher audit, compliance audit, pre and post audits.
Impact of the Manufacturing and Other Companies (Auditors’ Report) Order, 1988 on
the internal auditing functions. Organisation of the internal auditing function selection
and training of staff – assignment of audit projects, organizational status of the internal
auditing functions; scope for audit committees.
Planning the internal audit project: familiarization; preparing checklist, internal control
questionnaires, audit programs.

v. Verification of evidence — detailed checking versus sampling plans, statistical sampling

as used in internal auditing ; flow chart techniques
Internal control — nature and scope, internal auditor and internal controls
Field work — collecting evidences, interviews ; memoranda. Audit notes and working
papers.
Audit reports — techniques of effective reporting; follow up of audit report. Summary

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 reports of top management. communications in internal auditing – improving auditor –
auditee relationship

COST AUDIT

i. Provisions relating to maintenance of cost Accounting record under the Companies Act;
recording and audit compliance of cooperative societies Act, Customs & Excise Act,
WTO, Antidumping processing, export – import policy & special provisions of sick
industries Act (SICA) etc

ii. Nature, objects and scope of cost Audit — The concepts of efficiency audit, propriety
audit, management audit, social audit.

iii. Appointment of Cost Auditor — procedure for appointment , his rights, responsibilities,
status, relationship and liabilities – professional and legal under the Companies Act, 1956
(1 of 1956), the cost and works Accountants Act, 1959 (23 of 1959).

iv. Planning the audit — familiarization with the industry, the organisation, the production
process systems and procedures, list of records and reports, preparation of the audit
programme.

v. Verification of records and reports — utilization of statistical sampling methods –

verification of performance and statements maintained under the cost Accounting
(Records) Rules.

vi. Evaluation of Internal Control Systems — Budgetary Control, capacity utilization,

inventory control, management information system.

vii. Assessment of the adequacy of the internal audit function.

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viii. Audit notes and Working papers — audit reports to management.

ix. The cost Audit Reports — contents of the Reports, distinction between “Notes and
Qualifications” to the Report. Cost Auditor’s observations and conclusions.

x. Professional Ethics and Code of Conduct.

xi. Relationship between the Statutory Financial Auditors, the internal Auditor and the
Statutory Cost Auditor.

xii. Cost Accounting (Records) Rules under clause (d) of sub – section (1) of section 209
(issued one year before the examination) and Cost Audit (Reports) Rules issued under
section 233 – B of the Companies Act, 1956 (1 of 1956). Critical study of the rules
including the prescribed Annexure and proforma applicable to the industries covered.

xiii. Review of Cost Audit Report by the Government: objectives, methods, follow – up
actions and disposal of Cost Audit Reports by the Government company and other end –
users of the Cost Audit Reports.

xiv. Comparative Studies between cost audit and financial audit with special reference to
disclosure of information to members, parliament and the general public.

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 MANAGEMENT AUDIT

i. Meaning, nature and scope, organizational needs for Management Audit and its coverage
over and above other audit procedure.

ii. Audit of the Management processes and Functions, such as planning, organisation,
Staffing, Co – ordination, Communication, Direction and Control.

iii. Evaluation of Management Information and Control Systems with special emphasis on
Corporate Image and Behavioural Problems.

iv. Corporate Development and Management Audit, including operational and propriety
aspects.

v. Social Cost and Benefit of business enterprises with particular reference to developing
countries.

vi. Audit of social responsibility of management.

vii. Corporate governance and Audit Committees.

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 Perpetual System
Under a perpetual inventory system, a continuous record of changes in inventory is maintained in
the Inventory account. That is, all purchases and sales (issues) of goods are recorded directly in
the Inventory account as they occur. The accounting features of a perpetual inventory system are
as follows.

1. Purchases of merchandise for resale or raw materials for production are debited to
Inventory rather than to Purchases.
2. Freight-in, purchase returns and allowances, and purchase discounts are recorded in
Inventory rather than in separate accounts.
3. Cost of goods sold is recognized for each sale by debiting the account, Cost of Goods
Sold, and crediting Inventory.
4. Inventory is a control account that is supported by a subsidiary ledger of individual
inventory records. The subsidiary records show the quantity and cost of each type of
inventory on hand.
The perpetual inventory system provides a continuous record of the balances in both the
Inventory account and the Cost of Goods Sold account. Under a computerized recordkeeping
system, additions to and issuances from inventory can be recorded nearly instantaneously. The
popularity and affordability of computerized accounting software have made the perpetual
system cost-effective for many kinds of businesses. Recording sales with optical scanners at the
cash register has been incorporated into perpetual inventory systems at many retail stores.

Periodic System
Under a periodic inventory system, the quantity of inventory on hand is determined only
periodically, as its name implies. All acquisitions of inventory during the accounting period are
recorded by debits to a Purchases account. The total in the Purchases account at the end of the
accounting period is added to the cost of the inventory on hand at the beginning of the period, to
determine the total cost of the goods available for sale during the period. To compute the cost of
goods sold, ending inventory is subtracted from the cost of goods available for sale. Note that
under a periodic inventory system, the cost of goods sold is a residual amount that is dependent
upon a physically counted ending inventory. No matter what type of inventory records are in use
or how well organized the procedures for recording purchases and requisitions, the danger of loss
and error is always present. Waste, breakage, theft, improper entry, failure to prepare or record
requisitions, and any number of similar possibilities may cause the inventory records to differ
from the actual inventory on hand. This requires periodic verification of the inventory records by
actual count, weight, or measurement. These counts are compared with the detailed inventory
records. The records are corrected to agree with the quantities actually on hand.

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