USA Inventory in Accrual based accounting


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Hello, I am not an accountant. I am in management and operations. However, we are going round and round with other operations folks and accounting changes how they are answering the questions on a daily basis so I thought I would ask how the rest of the world deals with this situation.

Situation: We buy widgets, a bunch of different kinds of widgets and keep them on site and sell them to my client as needed. We restock these items every 28 days, we invoice the customer for number of widgets used monthly.

We are in accrual based accounting world, and just in time methodology will not function in this situation. (Keeping inventory minimum and order only what is needed when it is needed.) So our inventory fluctuates monthly Roughly +/- 20%. The problem is accruing the change inventory so that the cost of that (or loss of inventory) doesn't effect revenue reports in a roller coaster fashion. The revenue from each widget (and margin) is widely variable.

Methods purposed:

1)Accrue the entire inventory: at the end of any period (monthly) accrue the cost of the entire inventory as a revenue. This way next period the inventory accrual will cancel and the change in inventory will be actually realized every month. This is not liked by some in operations, because it artificially increases revenue reporting. Even though the previous inventory, number might cancel out the new one.

2)Accrue a complicated way: Every month calculate the change in inventory and only accrue revenue equal to what was bought in surplus as a negative revenue. (the actual method of how to do this in a meaningful way we run around and around on). But only accrue when there is a increase in inventory. I.e. Realize the cost, but not the revenue. And over the year this will just work itself out.

3)Don't worry about: Because the +/-20% inventory is possibly a small fluctuation don't worry about it. This won't cause roller coasting profits and losses. (it likely does but will be explainable.)

Conclusion:

Thanks some advice would be great. accounting rapidly changes from 1 to 3 depending on the person and the day. Operations is pushing for 2 or 3. Because it allows the final revenue statements to be used without considering previous months accruals. If your business or if there is another standard way it is done please let me know. Sorry if this didn't make sense I am not an accountant.
 
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p.s. It took me a long time to understand method 1. But, once I got it, that is what I want to do. Unfortunately this isn't my choice.
 
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Accrual basis accounting in summary is when the revenues are matched with related expenses. So, an accrual basis accounting system wouldn't be mutually exclusive with JIT. That is, there is nothing about JIT that makes it impractical for accruals.

You mention you're not an accountant. But I'm guessing you may have taken some accounting to earn a business management degree. So, you might remember COGS. Upon refamiliarizing with COGS, you want to determine which valuation method is being used / proposed.

If a sale has been made and the goods have transferred to the customer, then the revenue is to be recognized.
 

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