It is important to institute controls to ensure that your parts inventory balance as reflected on your general ledger is accurate. Dealers should strongly consider hiring an outside service company to perform an annual parts inventory, especially if an inventory has not been done in several years. The cost is generally 1.5% to 2% of the dollar value of the inventory. With dealer’s profits soaring in recent years, this should not be considered an unreasonable expense.
We have seen cases in which a dealer has incurred the cost of having the inventory done, but the office does not perform a reconciliation to the general ledger. Dealers must insist that the office perform a detail reconciliation which considers work in process, returns, and unrecorded purchases. Before the inventory is performed, the office and parts department must meet to ensure that all parts inventory purchases have be entered and that the work in process is accurate. The variance between the pad and the general ledger should be under 5% of the inventory. A common reason for the variance is the part’s price appreciation that is recorded on the pad. The accounting department should be posting the price appreciation/depreciation on a monthly basis.
One way of avoiding large discrepancies discovered during an inventory is to perform monthly reconciliations and track monthly differences. This is done by reconciling the month end parts pad balance to the general ledger. We recommend that the reconciliation be provided to the dealer/general manager each month. If the differences are significant in a month, the accounting staff will research the monthly activity to identity the problem. This will prevent the discrepancy from growing, resulting in a large difference at the time of the inventory.
Dealers that perform monthly reconciliations and an annual parts inventory are less likely to incur parts theft. The parts department is one of the areas of your store most susceptible to theft. Performing an annual parts inventory will ensure that the amounts recorded on the pad are accurate and will alert your staff that you are closely monitoring the quantities in your parts department. Internal controls will also be improved by performing “surprise” bin count checks by personnel other than parts employees. Items most susceptible to theft should be the focus of your bin counts. For example, dealers have been stocking larger quantities of tires in recent years; therefore, inventories of tires should be performed at least monthly.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or 800-849-6022.
