CHAPTER 27 INVENTORY SHRINKAGE, SPOILAGE/BREAKAGE AND SHORTAGE/OVERAGE

SHRINKAGE


1.   It is recognized that a certain amount of discrepancy between the
     physical count of the inventory and its book value is a common
     occurrence in any retail enterprise. This discrepancy or business cost
     is termed inventory shrinkage and may result from actual loss of
     merchandise, theft, errors in the completion of documents, etc.


2.   Shrinkage is recorded for management use and does not constitute
     an unquestioningly acceptable measure of loss. Managers must continue to
     investigate losses to the extent deemed necessary considering all
     circumstances without regard for the relationship of actual to estimated
     losses.


3.   The authorized shrinkage shall be as follows:

     a.  Retail Stores

         - 1% of consumer sales;

     b.  Gas Bars

         - 1% of TBA department consumer sales,

         - Nil for gasoline or labour;

     c.  Expressmarts

         - 0.5% of consumer sales; and

     d.  Combination Stores

         - 1% or 0.5% of consumer sales depending on the department.


4.   When Base Fund operates an activity which is normally a CANEX
     operation (eg. a Retail Store), the shrinkage level that would apply to
     the CANEX outlet will also apply to the Base Fund outlet.


5.   Shrinkage is not authorized for other CANEX outlets, messes, or
     Base Fund operations (except as indicated in para 4). Therefore, any
     discrepancies occurring at these operations are considered as shortages
     or overages. Shrinkage is also not authorized on the following:

     a.  Departments 18, 20, 23, 24, 82 and 87; and

     b.  Wholesale sales.


6.   Shrinkage is entered on line 12 of the Closing Inventory Worksheet
     (CIW) and on the RAR and is, therefore, included in the calculation of
     the Inventory Adjustment and Cost of Goods Sold.


SPOILAGE AND BREAKAGE


7.   In accordance with Chapter 36, spoilage and breakage is authorized
     to be expensed, using a form CF 603, in bars only. Breakage and spoilage
     for all other outlets will not be expensed and, therefore, will
     automatically be included in any overage/shortage determined by a
     stocktaking.


8.   In these other outlets, a Breakage/Spoilage Register may be
     maintained but is strictly for management and control purposes and is
     not to be actioned to the books of account.


SHORTAGES AND OVERAGES


9.   Any loss of merchandise exceeding the authorized shrinkage is
     defined as abnormal loss or shortage. Abnormal gains are overages.



10.   Upon completion of a stocktaking, the NPFAO shall:

     a.  Compute the actual shortage or overage by completing the
         stocktaking Reconciliation Report in accordance with Chapter
         26;

     b.  Enter the adjustment at retail on line 12 of the Closing
         Inventory Worksheet (CIW) and on the Retail Accountability
         Report (RAR) in the column/line "Stocktaking Adjustment"; and

     c.  Advise the B Admin O or the CANEX RM of the discrepancy,
         requesting review, investigation if required, and either
         write-off approval or, where applicable, presentation to
         higher authorities for approval.

                               NOTE

     A BComd must be very cautious in accepting stocktaking results
     indicating overages. Overages are as serious as shortages if not more
     so. Overages at retail in excess of 0.5% of sales are considered
     abnormal.


11.   Having determined the most appropriate course of action, the
      BComd/CANEX RM shall advise the appropriate outlet manager and the NPFAO
      of the decision.


12.   The NPFAO shall:

     a.  For shortages that are to be recovered at cost or retail
         value, process a journal voucher (JV) to debit "Accounts
         Receivable" for the cost or retail amount and credit
         "Inventory Adjustment" for the same amount. No adjustment to
         the CIW entry is required;

     b.  For shortages that are to be written off (absorbed) by the
         outlet, no further action is required since the shortage has
         already been included in the Cost of Goods Sold (CGS) through
         the original CIW entry; and

     c.  For overages, no further action is required since the overage
         has been credited to the outlet by the CIW entry which would
         have reduced the CGS.

                                     Note

     In all instances the NPFAO shall be provided with a copy of the approval
     for write-off or recovery.


DISPOSITION OF SHORTAGES PENDING WRITE-OFF


13.   Notwithstanding that approval must be obtained with regard to all
      losses, the accounting action outlined in paragraphs 10 to 12 is to be taken
      immediately. Losses shall not be transferred to "Suspense" accounts
      pending completion of administrative action.