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How to account for construction materials between inventory and construction in process accounts?

I'm struggling with how to properly record periodic adjustments for a materials (pipe) inventory account. Pipe is purchased in bulk for line repairs and maintenance and in stored in various field locations, until needed. Pipe is also ordered for specific capital projects, accounted for in a CIP account until completed, and then capitalized. We record periodic (quarterly) inventory adjustments, expensing any losses. Problem is project specific pipe, coded to CIP, may be delivered to storage yard and mixed in with inventory pipe until delivered to construction site. Therefor, it's not uncommon to have substantial inventory count gains. My initial thought is that for any volumetric gains, increase the volume but leave historic cost, resulting in a lower average cost per unit. This at least ensures all pipe, whether in inventory or CIP, is recorded at historic cost. The problem I see with this is if you do have CIP pipe included in the counts, lowering the average cost of inventory, when pipe is moved out for project you will take a hit to to OPEX and understate remaining inventory. At least this method is conservative. Please note we do not have the resources available for a perpetual inventory system, and the number of locations and daily pulls/ deliveries are very high. Overall amounts are immaterial on corporate level, but would like to get as close as possible. Appreciate in advance any suggestions.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I don't think your problem lies in the recording but inventory control and process/practices.

The cost (purchases and recording) is in your control. "Project specific" items is also questionable as I presume that specifications are different for it to be used as "ordinary" items?

Try looking at it from the inventory control and process perspective and all your other concerns (misclassification or whatever costing issues) will go away.

Maybe your warehousing and project site (inventory) practices should be looked at. Ex. Just mere segregation practices and a talk with your project managers and or site warehouse personnel will do wonders. Different color tagging maybe?

Maybe an oversimplification but I think that is where your problem lies.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Emerson, you are highlighting an example of what often can happen. The accounting (or financial tracking) cannot happen without an associated business process, or in the case of a bad business process, the process prevents the accounting from being sound.
Anon, try to find a sound business reason to discuss with your ops colleagues so that they buy into solving the problem.

Anonymous
(Controller) |

I appreciate the responses and agree 100% with your recommendations, but I’m handcuffed on changing operations. We have a real “control” issue as most of the locations are unsecure. Employees and third party contractors have unfettered access. I’ve been unable to obtain consistent quarterly counts, much less monthly or daily activity. Note Ive got ~15 locations in very remote areas with unreliable cell service and no internet. Daily activity in and out for repair and maintenance, and like I said temporary storage for large project needs. To further complicate it I’ve got ~15 different reporting entities operating in overlapping areas, and I assume pulls are made cross company with no notice. All are related and eliminated, but creates a real nightmare when reconciling periodically. It will likely take a big hit to earnings to grab enough attention to get some meaningful change.

Thanks again.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

I understand your conundrum:)
As far as project specific purchases are made, maybe stop tracking as inventory. Charge the full purchase cost direct to the project as a direct expense. If they overpurchase pipe, they won't like the project loss it creates when the project closes.

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