We recommend that dealers engage a reputable outside service company to perform a parts physical on an annual basis. Approximately half of our dealer clients perform physicals on an annual basis. The others perform them every two years or even less frequently. The cost is generally 1.5% to 2% of the reported inventory. Considering the recent surge in profits at dealerships this cost is minimal.
As we all know, parts inventories are highly susceptible to theft. Physical inventories are an important step in identifying the possibility of theft. Random cycle counts conducted throughout the year are also recommended. These counts should be unannounced and be taken by personnel unaffiliated with the parts department. Counts of tires and other high dollar items should be performed monthly.
During the year, the office manager should be reconciling the parts pad to the general ledger while documenting and researching any differences. The results of the reconciliation should be shared with the general manager and/or owner each month. If the general ledger and pad are reconciled monthly, there should be no surprises when the physical is performed. The open parts statement must be reconciled each month and someone outside of accounting should be verifying that it is in balance.
It is imperative that the parts physical inventory be reconciled to the general ledger. We have encountered situations where the physical was taken, and the parts pad adjusted without reconciling to the general ledger. There is no benefit to perform the physical and neglect to reconcile to the general ledger. It is critical that the parts department and the accounting office be communicating several days in advance of the physical. All parts invoices must be entered before the inventory is taken and any part returns should be accounted for. The work in process must be verified as well before the physical is taken.
Performing a parts physical is a burdensome task for the parts and accounting staff, but is a necessary step in enhancing internal controls in the parts department.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
