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INTRODUCTION1. There are various methods used to value inventory. Which method is used depends on several factors including degree of control desired, rate of turnover of inventory, frequency of stocktakings, and whether the inventory is counted at cost or retail. Methods may vary depending on the type of outlet, and may also vary within an outlet depending on the type of merchandise. In the case of CANEX outlets, methods may vary depending on the department. When Base Fund operates an activity which is normally a CANEX operation (eg. Retail Store), CANEX inventory procedures will apply unless indicated otherwise. INVENTORY VALUATION METHODS 2. The following is a list of the methods of inventory valuation used within NPF and a brief description of each type. Included at the end of the description is a list of outlets and departments to which the method applies. RETAIL ACCOUNTABILITY 3. This method permits determination of the approximate value of the closing inventory without a physical count and without researching source documents for the costs of the items. Inventory is maintained at retail. Stocktakings occur at different frequencies depending on the outlet or department and the inventory is counted at retail. A cost multiplier is used to determine the closing inventory at cost. 4. Retail accountability is used for the following outlets and departments: a. Bar Operations in messes, Base Fund subsidiaries, restaurants, and Food Services D/51; b. Retail Stores; c. ExpressMarts; d. The following Combination Stores: ExpressMart with Gas Bar: all departments other than D/40 and D/46; Retail Store and ExpressMart: all departments; and Retail Store and Supermarket: D/2 to D/16 inclusive, D/20 and D/21 and D/22; e. Gas Bars: all departments except D/40 and D46; f. Vending; and g. Special Services depending on the type of inventory. 5. The retail accountability method is used widely throughout NPF. Because the inventory is maintained at retail, the use of the Retail Accountability Report ( RAR) is an intregal part of this method. For further information on this method and the RAR, see paras 13 to 26 below. COST ACCOUNTABILITY (CURRENT COST) 6. Inventory is not maintained at retail for this method and thus, there is no RAR. Instead, stocktakings occur every month and the inventory is counted by units and multiplied by the most current cost price. The closing inventory at cost figures are therefore actual rather than determined through the use of a cost multiplier.
7. Cost Accountability (current cost) is used for the following
outlets and departments:
a. Supermarkets: D/19, D/21, D/31, D/33, D/34 and D/35;
b. Gas Bars: D/40, and D/46;
c. Food Services: D/50; and
d. Special Services depending on the type of inventory.
8. For departments D/31, D/33, D/34, and D/35, the stock that has
been priced at retail (ie. processed and located on the display shelves)
should be counted at retail and costed using the following average
national cost multipliers: D/31-0.75, D/31-0.80, D/34-0.65, and D/35-
0. 60.
COST ACCOUNTABILITY (COST MULTIPLIER)
9. Inventory is not maintained at retail for this method and thus,
there is no RAR. Stocktakings occur at different frequencies depending
on the outlet but are not conducted every month. The inventory is
counted at retail rather than at cost, and the closing inventory is
valued at cost using a cost multiplier that is determined by calculation
after the inventory is taken. During those months when there is no
stocktaking, the closing inventory at cost is determined by using an
estimated cost multiplier.
10. Cost Accountability (cost multiplier) is used for the following
outlets and departments:
a. Supermarkets: all departments other than those listed at para
7(a) above; and
b. Combination Stores: (combined Retail Store and Supermarket
only) D/1, D/30, D/32, and D/36.
COST ACCOUNTABILITY (WAREHOUSES)
11. Inventory is not maintained at retail for this method and thus,
there is no RAR. Stocktakings occur at different frequencies depending
on the outlet but are not conducted every month. The inventory is
counted by units and multiplied by the original cost price. A cost
multiplier is determined by using accumulated Cost of Goods Sold (COGS)
and Sales figures, and is for use during those months when no
stocktaking occurs.
12. This method is applicable to warehouses only.
RETAIL ACCOUNTABILITY AND THE RETAIL ACCOUNTABILITY REPORT (RAR)
13. The Retail Accountability System requires that
transactions moving products into or out of inventory be
recorded at the retail value. Note that the retail value
excludes any GST and PST which may be included in the
selling price.
14. Retail accountability permits determination of the
approximate value of the closing inventory without a
physical count and without research into source documents
for the items' cost. Under this system, different methods
such as the Average Cost Method or the Lower of Average Cost
and Market Method can be used with different results. The
Lower of Average Cost and Market method is the one advocated
by the Retail Council of Canada and is now in use for all
NPF operations. Under this method, markdowns are fully
accounted for in the month in which they have been taken. It
assumes most of the markdowns apply to goods sold and
therefore that few of those goods are part of the ending
inventory.
15. It is important to note that no matter what method
(Average Cost method or Lower of Average Cost and Market
method) is used the total gross profit in the long term will
be the same. However, the Lower of Average Cost and Market
method applies more closely to the CANEX marketing situation
as well as to the other NPF operations. The main advantages
are, firstly, that the impact of markdowns on the gross
profit is known in the month they occur and are not carried
forward and, secondly, the simplicity of application and
ease of understanding for managers.
16. The system has a disadvantage in that valuations are
estimates based on the average relationship between the cost
and selling price of purchases moving into inventory. The
system assumes that the markup on actual sales is the same
as the average markup on purchases. In most cases this
assumption is valid; however, when large variances occur in
either the markup percentages or the departmental sales mix,
the cost as calculated under this method will often be
substantially different than the actual cost. By
departmentalizing inventories and sales into categories
which carry similar markups, the discrepancies between
calculated cost and "real" cost are minimized. Therefore,
those operations which have not been departmentalized should
be examined and, where economically feasible,
departmentalization introduced.
NOTES
1. Markdowns represent downward changes in retail
value of merchandise and may consist of
promotional, regular or special markdowns.
2. Markups represent upward changes in the regular
retail value of merchandise. Markups shall only
apply on items ticketed at the regular selling
price and shall not be used to raise prices on
items which have been the subject of previous
markdowns.
17. The RAR is initiated, completed, and maintained by the
operating outlet.
18. The report is prepared and submitted to the NPFAO
weekly for all outlets controlled at retail except for the
retail stores set out in Chapter 42 which shall submit them
at least twice weekly. Reports will also be completed and
submitted to the NPFAO at the close of business each month
and when stocktakings are conducted.
19. Although there are several different forms used by the
operating outlets (mainly due to number of departments
required), to calculate and maintain the RARs the same basic
format as shown at Annex A applies to all of them. The
procedure to prepare this report is as follows:
a. Column 1. Enter the opening inventory figure at
retail brought forward from the previous report;
b. Column 2. Enter the purchases at retail for the
period from the Invoice Register;
c. Column 3. Enter the transfers at retail for the
period from the Transfer Register;
d. Column 4. Enter the total retail value of all
markups attached to the report for the period;
e. Column 5. Enter the total retail value of NPFAO
Correction Notices (Annex B) processed since the
last RAR in accordance with paragraph 23;
f. Column 6. Enter the amount at retail calculated as
a stocktaking shortage or overage as a result of a
supervised stocktaking. This entry is made to bring
the report into balance with the actual physical
stocktaking;
g. Column 7. Enter the sales at retail for the period
from the DSRs;
h. Column 8. Enter the total retail value of all
markdowns attached to the report for the period;
and
j. Column 10. Add or subtract (as applicable) the
totals of columns 2 to 8 from the opening inventory
in column 1 which will give the closing inventory
value at retail which is entered in column 10.
NOTE
All items to be deducted from Column 1 shall be circled
to avoid confusion in the totalling of columns.
20. For all items except sales entered on the RAR, the
supporting documents such as Invoice Registers, RPCs, etc,
must be attached to the report when submitted to the NPFAO.
The DSRs are submitted to the NPFAO for all outlets on a
daily basis separate from the RAR.
21. The RAR is prepared in duplicate with the original
being forwarded to the NPFAO and the duplicate copy
maintained by the outlet.
ACTION BY THE NPFAO
22. On receipt of the RAR, the NPFAO shall:
a. Verify the accuracy of the figures entered on the
RAR from the attached reports and ensure that all
the required documents are submitted with the
reports; and
b. Check additions and extensions of the RAR, attached
reports (Invoice Register, etc) and the individual
documents (suppliers' invoices, etc) listed and
attached to the reports.
NOTE
100 % verification of source documents is desirable,
however, depending upon the number of transactions and
the availability of accounting staff, the BCompt may
authorize random sampling techniques in lieu of a 100 %
check of all supporting documents.
23. After the verification detailed in paragraph 22, the
NPFAO shall:
a. Process the suppliers' invoices, PO and credit
notes attached to the Invoice Register in
accordance with Chapter 19;
b. Process the merchandise transfers attached to the
Transfer Register in accordance with Chapter 22;
c. Process the RPCs attached to the RAR in accordance
with Chapter 23; and
d. Process the NPFAO Correction Notices attached to
the RAR by checking off their numerical sequence
and taking hastening action on any correction
notice that is outstanding more than five working
days. At month end any significant ($) correction
notice shall be actioned by the outlet manager in
order not to distort the monthly calculation of
gross profits.
NPFAO CORRECTION NOTICES
24. In order that the RAR may be used as the operating
personnel's control over their accountability for the retail
inventory, whenever errors are found by the NPFAO, they
shall not change the report at that time but shall notify
the outlet manager through the use of the serially numbered
NPFAO Correction Notice (Annex B).
When applicable the NPFAO shall identify the Department(s)
concerned on the Correction Notice.
25. The NPFAO will serially number the NPFAO Correction
Notice (CF 1335) and control the issue and usage of the form
as detailed in paragraph 23d.
26. The entity manager, upon receipt of the NPFAO
Correction Notice, will review the errors noted and, if in
agreement with the changes required, take the following
action based on the source of the original document being
corrected:
a. Invoice Register. If the error is either in the
retail or cost value of a suppliers invoice or an
adding/extension error on the Invoice Register
submitted, then the NPFAO Correction Notice shall
be processed through the subsequent Invoice
Register as shown on Annex A to Chapter 21;
b. Transfer Register. If the error is either in the
retail or cost value of a requisition or an adding/
extension error on the Transfer Register submitted,
then the NPFAO Correction Notice shall be processed
through the subsequent Transfer Register in the
same manner as outlined for the Invoice Register in
paragraph 26a;
c. Sales. If the error is on the DSRs, then the NPFAO
Correction Notice shall be processed as a separate
item (separate from current DSR totals) in column 5
with an applicable adjustment to column 9 of the
subsequent RAR;
d. RPCs. If the error is on the RPC Summary or on
individual RPCs (where the base processes them
individually), the NPFAO Correction Notice shall be
processed as a separate item in column 4 or column
8 of the subsequent RAR; and
e. RAR. If the discrepancy originates from arithmetic
errors on the RAR itself, then the NPFAO Correction
Notice shall be processed in column 5 of the
subsequent RAR.
NOTE
It is important that all NPFAO Correction Notices are
processed as set out in paragraph 24 in order that the
manager can use the accumulated monthly figures from
the RAR to verify the accuracy of entries (invoice
purchases and transfers at cost) and calculations
(retail gross profit calculations) prepared by the
NPFAO.
CALCULATION OF CLOSING INVENTORY
27. The NPFAO calculates closing inventories by department.
Appendix 1 to Annex C provides details on how to complete
the Closing Inventory Worksheet (CIW) for each type of
inventory valuation method described above. The calculation
of the closing inventory is necessary to determine the cost
of goods sold and therefore, the gross profit.
28. CIWs are to be prepared, for each department where an
inventory exists, and attached to the Income Statement of
the outlet. Exceptions to this requirement must be approved
by DNPFS.