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Note: This document is an illustrative example and is for
information and education purposes only. It is not a substitute
for
professional advice, services, nor an entitys own internal
control procedures and should not be used or relied on as such.
Cost of Sales Narrative
The Cost of Sales process covers the following
sub-processes:
Inventory Purchase Inventory Physical Count Inventory Costing
(Finished Product)
Inventory Purchase
Items of Inventory are requested by the Production Department
based on the Bill of Material (BOM).
Inventory Clerk receives the inventory request electronically
based on material requirement for
production. The Inventory Clerk then verifies the stock
availability in the ERP. If the requisitioned items
mentioned in the BOM are available, the Inventory is issued to
the Production Department and updates
are made to the ERP. In case of unavailability of items
requested in BOM, a purchase requisition is
created by the Inventory Clerk. The purchase requisition is
approved by the Inventory Manager before
being sent to the Purchase Requisition Clerk (at the Purchasing
Department), for procurement. The ERP
system is configured to perform a 3-way match for goods
purchased. The invoice, Purchase Order (PO)
and GRN for the good received are matched within the ERP prior
to payment (R_INV_3), (C_INV_3).
Inventory Physical Count
Inventory is stored in a secured Storage Facility (Both Raw
Materials and Finished Goods) with access to
the Storage Facility restricted to authorized personnel. The
security measures are to reduce the risk of
shrinkage caused by theft. Warehouse Clerk has access to
inventory at the store and has access to viewthe inventory records
but not modify inventory records.
On the last day of the month, the Inventory Clerk downloads an
On-Hand Inventory Report from the ERP
for physical inventory counts. Using the Inventory Report for
the month, Warehouse Clerk (at the
Storage Facility Both Raw Material and Finished Goods) performs
a Physical Inventory Count. The
Physical Inventory Count Sheet is sent to Warehouse Manager (at
the Storage Facility Both Raw
Material and Finished Goods) for approval. Any differences,
including timing differences, require
explanation by the Warehouse Clerk in the Physical Inventory
Count Sheet(R_INV_6), (C_INV_2).
Adjustment entries, if required, are prepared by the Inventory
Manager and approved by the Inventory
Controller prior to sending it to the Financial Clerk for
recording in the ERP.
Inventory Costing (Finished Product)
Standard costs are established during the budget process
occurring at the end of the previous fiscal
year. Standard costs are determined for material, labor, and
overhead costs. Standard costs are
7/27/2019 Cost of Sales Narrative
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Note: This document is an illustrative example and is for
information and education purposes only. It is not a substitute
for
professional advice, services, nor an entitys own internal
control procedures and should not be used or relied on as such.
reviewed and approved by the Finance Controller based on the
approved budget. Upon approval, they
are entered into ERP.
On a quarterly basis, the Financial Clerk computes the valuation
of inventory. The inventory value is
reviewed by the Finance Manager(R_INV_8), (R_COS_2), (C_COS_2),
(C_COS_3). Inventory is recorded
at standard cost. On a quarterly basis, inventory variances
(Standard Cost versus Actual Costs) are
analyzed by the Financial Clerk to determine adjustments
required to properly state inventory at actual
cost. Variances if any are investigated. The inventory variances
are reviewed by the Finance Manager
and recorded in ERP(R_COS_1), (C_COS_1).
The actual cost of production is compared to the market price.
The Financial Clerk prepares a lower of
cost or market (LOCM) analysis for the inventory whose cost
price exceeds the net consideration for
sale. The analysis is reviewed by the Financial Manager before
the Financial Clerks records a provision in
the ERP.
IPE:
1. COS_IPE_1 On-Hand Inventory Report2. COS_IPE_2 Inventory
Variance Analysis
Notes:
1. The following risks have not been mapped in this narrative as
they have been mapped inInventory narrative:
a. R_INV_2b. R_INV_5c. R_INV_7d. R_INV_8e. R_INV_9f. R_INV_10g.
R_INV_11h. R_INV_12i. R_INV_13j. R_INV_14 Formatted: Normal,
Indent: Left: 0bullets or numbering
