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Standards

Inventory Reporting for Recharge and Service Center Units Overview

Review the below standard for guidance on inventory reporting for recharge and service center units.

Students posing in the Simon Skjodt Assembly Hall.
Students posing in the Simon Skjodt Assembly Hall.

Understanding inventory reporting for recharge and service center units is pivotal for compliance with Uniform Guidance. Understanding this practice also helps ensure that recharge and service center units are operating efficiently. Proper inventory reporting enables the unit to make informed fiscal decisions and optimize procurement strategies. Understanding inventory reporting in recharge and service center units is crucial for maintaining smooth operations, controlling costs, and in supporting both day-to-day activities and long-term strategic decisions for the recharge and service center unit.

UCO-RSC-5.00: Inventory Reporting for Recharge and Service Center Units

Prerequisites

Prior to reading the standard on Inventory Reporting for Recharge and Service Center Units, it is beneficial to review the below standards to gain foundational information:

IU Indianapolis student on the way to class.
IU Indianapolis student on the way to class.
  1. UCO-RSC-1.00 Rate Submission Requirements for Recharge and Service Centers Standard
  2. UCO-RSC-3.00 Allocating Costs to Internal and External Activities Standard
  3. UCO-RSC-4.00 Unallowable Expenses for Recharge and Service Centers Standard

 


Preface

This standard establishes guidance and best practices regarding inventory associated with recharge and service center accounts (66* accounts). Information presented below outlines account setup considerations, proper inventory valuation, how to conduct a physical inventory count, and how to handle unusable inventory items for recharge or service center units. In addition, this standard is focused on the implications if inventory is not handled in accordance with Uniform Guidance.


Introduction

Prior to learning about proper inventory valuation and disposal procedures, it is essential to understand the inventory parameters in place for recharge and service center units to comply with Uniform Guidance and Generally Accepted Accounting Standards (GAAP). Federally donated or furnished materials cannot be added to the cost of inventory. It is crucial to fully understand the qualifications for inventory costs prior to billing or submitting a recharge rate template to Recharge Accounting.


Importance and Impact of Inventory Reporting for Recharge and Service Center Units

Uniform Guidance does not permit the recharge or service center unit to recover the cash outlay for inventory purchases in their annual rates. However, Uniform Guidance does allow the unit to include the (cost of goods sold) expense when the item is sold (and removed from inventory) in proposed rates. Only inventory that has been used/sold during the period should be recorded in a cost of goods sold object code.

Accurate inventory records help track the usage and allocation of resources, preventing misuse or misappropriation of funds. Additionally, meticulous accounting facilitates accurate reporting and auditing, which is essential for demonstrating that the funds are used appropriately and effectively for their intended purposes. Should fiscal officers and/or delegates fail to properly identify and document inventory, the university may be subject to the following:

  • An unfavorable audit finding which may result in additional audits and/or result in a decrease in future federal funding.
  • The university may be required to reimburse the unallowable expenses back to the grantor.
  • The university may be charged additional interest and penalties on the unallowable expenses.
  • Reputational harm could befall the department and/or university.

Inventory Reporting for Recharge and Service Center Units Discussed in Detail

Account Setup

Recharge and service center units that are selling inventory at cost while also charging for other expenses related to the recharge activity should consider setting up two accounts for their activities.

  • The first account would represent all labor and other expenses related to the recharge activity, excluding the inventory items. The activity would have a calculated cost-based rate and appropriate volume levels. In the event that the department does not want to actually charge the fully costed rate, they are allowed to charge a lower amount. This will provide the audit support for the administrative portion. These accounts will follow the rate setting procedures outlined in the Rate Setting Template Instructions.
  • The second account would represent the inventory (pass through) cost only. Inventory in this account will be billed at cost, with no mark-up. It is our understanding that the department is charging actual cost of their materials. By separating the materials into a separate account, the department and UCO would be able to easily monitor the account. This account, along with supporting the inventory system for the recharge or service center unit, should be able to provide adequate support in the event of an audit. Inventory purchases should be limited to amounts that will be consumed in a 12-month period.

The segregation of the inventory pass-through expenses will aid in monitoring the accounts and identifying the cause of a profit or loss.

Inventory Valuation

Inventory should be valued in a consistent manner and accurately reflected in the university’s financial statements. Consistent compliance with the provisions of this standard reduces cost and ensures that supplies are available when needed. The cash outlay for inventory purchases may not be recovered within the recharge or service center unit. Instead, units should recover the cost of goods sold incurred for materials, supplies, and fabricated parts that were used or sold during the period. It is the responsibility of the recharge or service center unit to ensure that only inventory that has been used or sold during the period is recorded in a cost of goods sold object code. Purchased materials and supplies must be charged at their actual prices, net applicable credits.

Below is an example of a journal entry for inventory that was purchased directly for resale from a vendor. This item is essential to the performance of a recharge or service center unit and the costs are allocable to the unit.

Object Code Debit Credit
{66* Account} Inventory for Resale 5301 $XXXX
Accounts Payable 9000 $XXXX

Withdrawals from inventory should be charged at their net cost inventory valuation. This valuation is based on the costs incurred by the entity to acquire the inventory, such as incoming transportation charges, and costs to convert it into a condition that makes it ready for sale. Administrative or selling costs cannot be added to the cost of inventory. Departments should maintain adequate records to substantiate the inventory cost with the appropriate vendor invoice, in case of audit.

Inventory that is purchased for use in the production process or that was purchased for resale and has not been sold must be appraised. To align with Generally Accepted Accounting Standards (GAAP), all inventory should be recorded at the lower of cost or market value. Indiana University utilizes several inventory valuation systems. Valuation method options include the Specific Identification method, the Average Cost method, First In, First Out (FIFO) method, Last In, First Out (LIFO ) method, or the Retail Inventory method. The inventory value should be recorded as an asset in the university’s Kuali Financial System (KFS). Once a method is chosen, the recharge or service center unit must apply it consistently, diligently, and uniformly to comply with GAAP. All items that are purchased for resale should be coded with the title “purchases for resale.”

Below is an example of a journal entry for supplies that were purchased directly for resale from a vendor. This item is essential to the performance of a recharge or service center unit and the costs are allocable to the unit.

Object Code Debit Credit
{66* Account} Purchases for Resale 5300 $XXXX
Accounts Payable 9000 $XXXX

Any other items that are used in the final product or service should be identifiable in the university’s accounting records. All the inventory items that are purchased for resale or are used in making the product should be counted during the physical inventory. The physical inventory should be recorded in KFS in the fiscal period in which the inventory was counted.

Physical Inventory Count

It is important that the recharge or service center unit’s balance sheet accurately reflect the unit’s financial position at the end of the fiscal year. To ensure the balance sheet is accurate, a physical inventory of supplies and equipment should be taken at least once every fiscal year. It is recommended to conduct the inventory count during the fourth quarter to ensure a more accurate valuation of the inventory at year end. It is the responsibility of the recharge or service center unit to perform the required inventories and to maintain all inventory records.

Conduct a complete inventory count. Verify the inventory quantities, value, and the accuracy of the inventory record. Any net gain or loss resulting from the physical inventory count should be clearly recorded in the General Ledger.

Below is an example of an adjusting journal entry following an inventory count.

Object Code Debit Credit
{66* Account} Purchases for Resale 5300 $XXXX
Inventory Adjustments 1840 $XXXX

Unusable Inventory

If an inventory item has been permanently impaired, whether by damage, obsolescence, neglect, or a change in the economic landscape, such that future expected cash flows from the inventory is less than their net book value on the balance sheet, the asset must be written down to its estimated remaining value or, in some cases, written off entirely via a journal entry.

Below is an example of an adjusting journal entry following inventory being damaged.

Object Code Debit Credit
Inventory Adjustments 1840 $XXXX
{66* Account} Purchases for Resale 5300 $XXXX

All disposals, especially of chemicals or hazardous waste, must comply with Indiana University safety procedures. Contact Indiana University Environmental Health and Safety personnel for assistance if any questions regarding the safe disposal of equipment or supplies arise.

It is recommended that the recharge or service center unit account for disposals due to the sale, demolition, or transfer of assets in the month of the disposal or transfer. Retain a copy of the details of this transaction and any relevant backup information such as the approved request for disposal from the grantor. The amount to be written down should be the difference between the book value of the inventory and the amount of cash that the business can obtain by disposing of the inventory in the most optimal manner. This is known as the market value of the inventory item. If the disposal generates any proceeds (e.g. sale of scrap materials), these proceeds must be deposited in the recharge or service center unit account. Outside of depreciation, transfers of cash into a 66* account cannot be transferred out. The recharge or service center unit is responsible for reducing their rates to reduce the fund balance generated by the transfer in of cash. Any exceptions must be approved in advance by Recharge Accounting.


Requirements and Best Practices

This portion of the standard outlines general requirements and best practices related to recording inventory reporting for recharge and service center units. While not required, the best practices outlined below allow users to gain a better picture of the entity’s true financial health and help identify potential issues on a more frequent basis. This allows organizations to identify errors, mistakes, and pitfalls so that they can be remedied quickly and prevent larger issues in the future.

Requirements

  1. Record inventory that has been used or sold during the period in the cost of goods sold object code.
  2. Appraise all inventory that is purchased for use in the production process or that were purchased for resale and have not been sold. All items that are purchased for resale should be coded with the title “purchases for resale.”
  3. Complete a physical inventory of supplies and equipment once every fiscal year.
  4. Record the physical inventory in KFS in the fiscal period in which the inventory was counted. Adjust for any net gain or loss resulting from the physical inventory count in the General Ledger.
  5. Write down or off any impaired inventory items via a journal entry.
  6. Prior to disposing of inventory items, review the terms and conditions of the award as it may require the recharge or service center unit to request disposal instructions from the grantor or provide the grantor with a portion of the disposal proceeds.
    • If the disposal generates any proceeds, these proceeds must be deposited in the corresponding 66* account.
    • Resubmit the rate setting template to Recharge Accounting to reduce the fund balance generated by the transfer in of cash.

Best Practices

  1. Conduct the annual inventory count during the fourth quarter to ensure a more accurate valuation of the inventory at year end.
  2. Account for disposals of inventory in the month of the disposal or transfer.
  3. Frequently review the inventory on hand calculations and cost of goods sold object code to confirm accuracy and completeness.
  4. Limit inventory purchases to amounts that will be consumed in a 12-month period.
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Recharge and Service Center Units Copyright © by The Trustees of Indiana University. All Rights Reserved.

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