Describe how the separation of (1) authorization of production transactions, (2) recording of these transactions, and (3) physical custody of inventories can be specified among the production, inventory, and cost accounting departments
The separation of authorization of production transactions, recording of these transactions, and physical custody of inventories can be specified among the production, inventory, and cost accounting departments through a well-designed system of internal controls. Here's how it can be done:
1. Authorization of Production Transactions:
- The production department, responsible for initiating and executing production activities, should have authority to authorize the commencement of production.
- The production department should have appropriate documentation, such as production orders or work orders, to initiate production activities and provide details about the specific goods or services being produced.
- The authorization process should involve checks and balances to ensure production is justified, aligns with strategic goals, and complies with relevant policies and regulations.
2. Recording of Transactions:
- The inventory accounting department should be responsible for recording all production transactions in the accounting system. This includes updating inventory records, capturing costs associated with the production process, and creating appropriate journal entries.
- The inventory accounting department should establish clear guidelines for recording production transactions accurately and timely. This may involve reconciling physical counts of inventory with recorded quantities, verifying cost allocations, and ensuring proper classification of transactions.
3. Physical Custody of Inventories:
- The production department should have responsibility for the physical custody of inventories during the production process. This involves ensuring proper storage, handling, and security measures for raw materials, work-in-progress, and finished goods.
- Adequate controls should be in place to prevent unauthorized access or theft of inventories. This may include implementing restricted access areas, inventory tagging systems, surveillance cameras, and regular inventory audits.
- Periodic reconciliations between physical counts and recorded quantities should be conducted to identify any discrepancies and investigate the causes.
Overall, defining clear roles and responsibilities, implementing proper authorization procedures, establishing robust recording practices, and ensuring physical custody controls are in place can help separate these functions among the production, inventory, and cost accounting departments. Additionally, periodic internal and external audits can provide independent verification of the effectiveness of these internal control measures.