A, B, C

Inventory Control Procedure

A collaborative effort of:

Choctawhatchee Electric Coop., Inc. Valley Electric Association

Clark County REMC
Eastern Illini Electric Co-op
Four County Electric Power Assn.
Iowa Lakes Electric Cooperative
Licking Rural Electrification, Inc.
New Hampshire Electric Cooperative
Nishnabotna Valley REC
Pierce-Pepin Electric Co-op
S.E. Iowa Cooperative Electric Assn.
South Plains Electric Coop.
Wake Electric Membership Corp.
Whitewater Valley REMC
Yazoo Valley Electric Power Assn
National Rural Electric Cooperative Assoc.
Central Area Data Processing
Daffron & Assoc.
North Central Data Co-op
Southeastern Data Co-op

Sponsored by:

Cooperative Finance Corporation

Management Consulting Services

Washington, DC
 Table of Contents

INTRODUCTION.........................................................................................................................................................................1

CONVERSION PROCEDURE .................................................................................................................................................3

STEP I: SEPARATE INVENTORY INTO DISTINCT SEGMENTS.................................................................................................. 3
STEP II: A CCOUNTING SOFTWARE CHANGES ......................................................................................................................... 7
STEP III: LAYOUT STOCK ROOM .............................................................................................................................................. 9
STEP IV: UPDATE INTERNAL DOCUMENTATION .................................................................................................................... 9
STEP V: EMPLOYEE TRAINING................................................................................................................................................ 10
GLOSSARY OF TERMS ..........................................................................................................................................................14

APPENDIX (A) ALLOCATING -C- ITEMS ......................................................................................................................17

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Performance Benchmark Project Group A, B, C Inventory Control

INTRODUCTION

RUS borrowers are required to follow various RUS procedures including Bulletin 1767B-2,
“Work Order procedure – Electric”. The purpose of this bulletin is “to provide a uniform system
for accumulating and distributing work order construction costs.” 1 The work order procedure
has many advantages including providing detailed descriptions on how to:2
• Control costs
• Collect construction cost data
• Retire and record units that complies with part 1767
• Post the quantity and cost of record units to the continuing property records
• Record blanket work orders like projects of small cost and short duration.

Cooperatives throughout the United States have been following the work order procedure for
many years that result in a consistent set of guidelines that all organizations implement in an
identical fashion.

Although beneficial in many respects, bulletin 1767B-2 work order procedure has several
limitations. For instance, it requires that all parts, regardless of their unit cost or other
characteristics, be managed using identical inventory control procedures. Bulletin 1767B-2,
requires that seven different records be used to manage material cost for every individual part,3
thus ignoring that miscellaneous hardware (which comprises up to 70% of cooperatives
inventory) can be managed in a more economical fashion. This results in a large amounts of
employee time being spent on miscellaneous hardware as shown in the following three
examples:

Plant Construction:
Line crews are responsible to record any part substitutions on work or maintenance orders.
Furthermore, they are required to record any parts salvaged from assemblies retired from service.
Material charge, credit and salvage tickets must be filled-out for these parts, including
miscellaneous hardware. Line crews can be much more productive if they could focus their time
on critical assemblies and not as much on miscellaneous hardware.

Quality Control:
Employees responsible for checking work orders must verify that all parts identified on the
material parts list match the parts installed out in the field. This task is especially time
consuming with part substitutions and retirements of miscellaneous hardware. Time would be
better spent checking the parts of higher value or those critical to the structural integrity of the
system.

Inventory Control:
In addition to record keeping for every part held in inventory, bulletin 1767B-2 requires that all
parts, including miscellaneous hardware, be physically counted on an annual basis. The
procedure states:

1
RUS Bulletin 1767B-2, Title Page
2
RUS Bulletin 1767B-2, Section 1.1
3
RUS Bulletin 1767B-2, Section 5.3

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Performance Benchmark Project Group A, B, C Inventory Control

“Proper accounting for materials requires the taking of a periodic, physical

inventory (at least once each year) in order to reconcile the items shown on the
stock record cards with the material items actually in stock. When differences
between the two records are found, the items involved should be re- inventoried.

If a difference still remains, the accuracy of the computations and postings to all
of the material records involved should be rechecked.

If a difference still cannot be located, the stock record cards should be adjusted to
the quantities and amounts determined by the physical inventory.”4

Although maintaining an accurate inventory is important, Bulletin 1767B-2 does not provide
alternate methods to reconc ile miscellaneous hardware versus high cost parts. The cost for an
employee to reconcile miscellaneous hardware may actually exceed the cost of the hardware.

RUS borrowers have no choice but to follow RUS guidelines, including Bulletin 1767B-2. Non-
RUS borrowers, however, have the option to follow alternate procedures. The purpose of this
procedure is to provide Non-RUS borrowers alternate inventory control mechanisms based on
unit cost, physical characteristics, and handling requirements, that will reduce the time required
to manage miscellaneous hardware. The procedure describes how to convert the existing system,
as followed under Bulletin 1767B-2, into an -A-, -B-, -C- materials inventory system and
describes how to operate the -A-, -B-, -C- material system on a day-to-day basis.

4
RUS Bulletin 1767B-2, Section 5.6.6

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Performance Benchmark Project Group A, B, C Inventory Control

CONVERSION PROCEDURE

Converting an existing inventory control system into an -A-, -B-, -C- system requires a team of
dedicated employees from various departments throughout the organization. Representatives
from purchasing, inventory, line crews, engineering, accounting, and computer services are
needed for their diverse experience in order to implement the change successfully. Support from
upper management is critical to the ultimate success of the team. The following steps describe
how to convert and operate an inventory system defined under RUS bulletin 1767B-2 into an
-A-, -B-, -C- system.

Step I: Separate inventory into Distinct Segments

The main reason for separating inventory into segments is to establish different standards of
service that will result in lower operating costs. The first step is to create an appropriate list of
criteria and then classify inventory into distinct groupings with respect to these criteria.

Below is a suggested grouping of inventory into three segments: -A- items, -B- items, and -C-
items. The criteria used to segment inventory are described below. Cooperatives may use these
three inventory segments or they may revise the segments to fit their unique needs. However,
while grouping the inventory into segments, cooperatives must take utmost care to group
common items under the same category. For instance, all types of bolts should be classified as
item -C-.

Note: Once an agreement has been made regarding the separation of inve ntory into distinct
segments, a list showing these segments and parts should be produced. The team leader should
date and sign the list as the official copy for all project members. Although ongoing changes to
the list will be necessary, it is important to freeze this list on a temporary basis until the
conversion process is complete.

-A- Items

-A- items are high cost, low volume parts and comprise the top 10% – 15% of inventory by value
(approximately $100 or higher). -A- items require a moderate to high degree of order
coordination due to their unique design and intent for specific construction projects. Most -A-
items are physically large and require more shelving space than other parts.

Due to the relative high unit value and/or unique design characteristics, -A- items should remain
in stores until required for construction through the work order system. Inventory levels will
increase/decrease through the use of material charge, credit and salvage tickets.

Some of the following assemblies can be classified as -A- items:

• Catwalk platforms
• Poles, transmission and distribution

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Performance Benchmark Project Group A, B, C Inventory Control

• Pedestals
• Pads
• Vaults
• Disconnect switches
• High pressure sodium heads (250+ watt)
• High pressure sodium floodlights
• Metal halide floodlights
• Retail appliances
• Miscellaneous parts & assemblies (high cost/low volume)

-B- Items

-B- items are moderate cost, low to moderate volume parts. They comprise the next 20% - 25%
of inventory by value (approximately $15 - $99 per part) and are major components of retirement
units. These items do not require a high degree of order coordination due to their standard
design characteristics and interchangeability between construction projects. Product preparation
is low to none since most of these items can be stored in the box they were shipped in until
needed. Most -B- items are small to moderate in size (with the exception of poles and large
conductor spools), and do not require special storage considerations.

-B- Items are moderate cost and thus require control through inventory procedures. Inventory
levels will change through the use of material charge, credit and salvage tickets. The major
difference between -B- and -A- items is that -B- items can physically be removed from stores
and placed onto company owned vehicles as an extension of inventory (called “Rolling Stock”).

Some of the following parts can be classified as -B- items:

• Anchors • Splices
• Cutouts • Links, ext fiberglass
• Arrestors • High pressure sodium heads (under
• Crossarms 250 watt)
• Timbers, overhead • High pressure sodium lamps)
• Surge protectors • Underground conduit elbows
• Cable, underground • Connectors, transformer
• Conductor, overhead
• Brackets
• Terminators

-C- Items

-C- items are low cost, moderate to high volume parts. They comprise the lowest 60% – 70% of
inventory by value (under $15) and include miscellaneous hardware. These items do not require
a high degree of order coordination due to their low cost. Most -C- items are small in size and

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Performance Benchma rk Project Group A, B, C Inventory Control

do not require special storage considerations. As a result, product preparation is not required
since most of these items can be stored in the box they were shipped in or dumped into storage
bins until needed.

Because -C- items are low cost, high volume parts, they do not need to be accounted for on a
part-by-part basis. As a result, they can be expensed and/or capitalized as plant in a manner
similar to allocating overhead. Line crews can keep these items on company owned vehicles as
needed for any type of work order or maintenance order. Since these items have already been
expensed/capitalized upon receipt, material charge, credit, and salvage tickets will not have to be
filled-out, thus saving large amounts of time.

The following miscellaneous hardware identified as exempt items by RUS can be classified as -
C- items:5

Part Name RUS Item #

• Bolt, machine c
• Washer d
• Brace, crossarm h
• Bolt, carriage i
• Bolt, double arming n
• Bolt, eye, oval o
• Bolts, upset, double q
• Nut, eye aa
• Clamp, ground aj
• Bolt, eye, straight, thimble type ao
• Bolt, eye, angle, thimble type ba
• Bolt, single upset bs
• Clamp, guy bond ck
• Clip dz
• Bolt, clevis ef
• Locknuts ek

The following hardware identified in Construction Assembly Units not large enough to form a
retirement unit can be listed as -C- items:6

Part Name RUS Item #

• Insulator, pin a
• Pin, Pole top b
• Brace h
• Screw, lag j

5
Paragraph 5.6.1, RUS bulletin 1767B-2
6
Table 1, 7.2/12.5 kV Distribution Lines, RUS Bulletin 1767B-2

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Performance Benchma rk Project Group A, B, C Inventory Control

Part Name RUS Item #

• Connector p
• Clevis, secondary, swinging, insul s
• Deadend for guy strand u
• Guy attachment (rating) v
• Guy wire y
• Wire holder ar
• Clevis, insulated, swinging as
• Guy marker at
• Jumper, No.4 av
• Guy hook bj
• Guy Plate bk
• Clamp loop, deadend bn
• Shackle, anchor bo
• Nail bp
• Bolt, single upset bs
• Insulator, spool cm
• Sleeve, offset, splicing cq
• Brace, wood, 60” span cu
• Bracket, insulated da
• Pipe spacer dl
• Clevis, conduit insulated dr
• Service deadend dt
• Bracket, pole top eb
• Bracket, offset ec
• Connector, hot line fi
• Bracket, secondary transformer fo

Determine % to be expensed and capitalized for each -C- item

Under the guidelines of Bulletin 1767B-2, all parts, including miscellaneous hardware, are either
expensed or capitalized as plant when physically installed. This procedure treats -C- items
differently by expensing a percentage of the parts and capitalizing the balance in advance instead
of when installed. By allocating -C- items in advance, cooperatives can save a considerable
amount of time by eliminating the need to maintain inventory records for miscellaneous
hardware and not require material charge, credit and salvage tickets.

Since the cost of all -C- items will be allocated in advance, management must predetermine the
percentage to be expensed and capitalized. Material cost can be allocated using one set of
percentages for all -C- items or by grouping parts into similar categories (bolts, for example, are
grouped into a category) and allocate based upon each group.

Example : After some research, management has determined that 70% of all -C- items have been
capitalized as plant and 30% have been expensed as shown in the following table:

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Performance Benchma rk Project Group A, B, C Inventory Control

Percentage Percentage
Name Expensed Capitalized as plant
Bolt 25% 75%
Nut 26% 74%
. . .
. . .
. . .
. . .
Washer 30% 70%
Bracket 37% 63%
Average 30% 70%

The above example shows that management could use the average and expense 30% of the cost
of all -C- items and capitalize the remaining 70% as plant upon receipt or allocate the cost by
each part category.

Note: Allocate each item based on the average of all -C- items. However, exceptions should be
made for parts that don’t follow the norm and result in a material difference.

Step II: Accounting Software Changes

Accounting software changes are necessary for all -C- items since their quantities are no longer
managed as inventory but are expensed and capitalized in advance. Each software vendor must
provide specific steps to convert -C- items from parts that are “inventoried,” to “non-stock” parts
and to identify all parts as -A-, -B-, or -C- items on material pick lists and other print-outs.
Several vendors have provided the following conversion steps:

Daffron & Assoc System Changes

A) Identify parts as -A-, -B-, or -C- items

When locating a part in the warehouse, or a pick list, or on the computers system, employees
must be able to identify parts as -A-, -B-, and -C- items. Employees must know the distinction in
order for them to easily locate parts in stores and process material charge, credit, and salvage
tickets properly. As a result, the ABC designation must be added to the part name for each part.

B) Change the control group number

In addition to adding the -A-, -B-, -C- designations, the control group number of each part must
also be changed. This change will permit the material pick list to print parts sorted into -A-, -B-,
and -C- categories. Currently, the pick list only prints parts sorted by part number. Since the
stock room will have the material inventory separated into -A-, -B-, and -C- categories, the pick
list should show the same itemization.

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Performance Benchma rk Project Group A, B, C Inventory Control

The easiest way to change the identity of these items and the control group number, is accessing
the Item description field of the item master record:
Master Menu #8
Inventory master Menu #3
Inventory Menu #1 (Enter/Update Item Master).

Note: The Daffron system will have to be modified to sort parts into ABC categories.

C) Change “inventory” items to “non-stock” items

All parts, except special equipment, are identified as “inventory” items in the Daffron system.
The system will not permit users to manually change parts from “inventory” items to “non-
stock” items. Users can either manually create new -C- items as “non-stock” items or run a
conversion program that changes existing part numbers from “inventory” items to “non-stock”
items. The conversion program is strongly recommended due to the labor hour savings and
elimination of potential data entry errors.

Note: Daffron has access to conversion programs that have worked successfully for other
cooperatives.

Manual change: Must be performed for each -C- item

1) Create new “non-stock” part number
Master Menu #8
Inventory master Menu #3
Inventory Menu #2 (Enter/Update Non-stock Items)

2) Update each construction Assembly Unit with the new “non-stock” part number.
Master Menu #4
Materials Master Menu #1
Setup Menu Item #6 (Enter/Update Assembly Units)

Conversion program: Conversion programs change -C- items from “inventory” to “non-stock”
while keeping part numbers the same. This conversion eliminates the time consuming task of
updating each construction assembly unit with new part numbers and eliminates data entry
errors. In order for the conversion to work as a mass change, the “control group” field will have
to be updated to let the program know which parts are -C- items.

Prior to running the conversion program, an adjustment must be made to all -C- items whereby
all the current inventory value is transferred to a clearing account. The remaining balance must
be zero prior to the conversion as shown in the following example:

Example: Inventory records show part # 6362508 (3/4*8” eyebolt) has143 parts in stores at a
total price of $385.23. The following transaction will credit the amount in stores and debit the
amount in a clearing account

(DR) general ledger account #163 $385.23

(CR) Inventory stores $385.23

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Performance Benchma rk Project Group A, B, C Inventory Control

The above transaction should be repeated for all -C- items.

Note: Changing “inventory” items to “non-stock” items, whether manual or through the
conversion program, is the last step to be performed with this procedure. Once this step is
accomplished, all -C- items will no longer appear as inventory. The team leader must be certain
that all other steps have been completed prior to this change.

CADP System Changes

A) Identify parts as -A-, -B-, or -C- items

The CADP software permits users to update part descriptions with the -A-, -B-, -C- designation.

B) Change “inventory” items to “non-stock” items

CADP’s newest level software permits users to manually change -C- items from inventory items
to non-stock items without creating new part numbers or running conversion programs. This
change will flow through the system and automatically update construction assembly units. Any
open work orders with parts already charged-out (including -C- parts) will not be updated. These
work orders will be permitted to close-out under the previous system.

Step III: Layout Stock Room

Inventory must be physically relocated by the three inventory segments in order for employees to
distinguish between -A-, -B-, and -C- items. As a result, all employees will be able to identify
the areas that are open for them to select their own parts (-B- and -C- items) and the areas that
require stores employees to issue parts (-A- items). Within each inventory segment, arrange the
material by part number. When people are picking material for their jobs (people other than
inventory employees will be picking parts), it will be easy finding parts if they are arranged in
numerical order. Do not arrange by part name since people ma y have different names for the
same part. High volume parts may have to be put out of numerical order in order for them to be
within easy reach.

In addition to separating inventory into -A-, -B-, and -C- segments, add color coded tags to the
racks and/or bins of each part. Red tags can be used to designate -A- items, blue for -B- items,
and white tags for -C- items. If parts are stored in boxes, add color coded labels to the boxes
identify the parts as -A-, -B-, and -C- items.

Step IV: Update Internal Documentation

Under the current RUS system, bulletin 1767B-2 requires material charge, credit and salvage
tickets to be filled-out for all parts, including miscellaneous hardware. Most cooperatives have
preprinted forms that list commonly used parts in order to minimize the time spent filling out
material tickets. Since miscellaneous hardware comprises a majority of these forms, it can
typically be two or more pages long.

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Performance Benchma rk Project Group A, B, C Inventory Control

The -A-, -B-, -C- inventory control procedure only requires -A- and -B- parts to be listed on
these forms. -C- parts no longer need to be listed since they will not be charged, credited or
salvaged through the inventory system. By modifying the form, and only listing -A- and -B-
items, a reduction to one page is realistic.

Step V: Employee Training

The purpose of this section is to describe the logistics changes needed in order to support the
newly created -A-, -B-, and -C- inventory segments. These changes involve customized
processes to match the needs and constraints of each segment.

Engineering
Employees responsible for reviewing work orders will no longer be required to verify whether
quantities and part numbers for -C- items match the parts installed out in the field. They will
better spend their time checking -A- and -B- items.

Inventory & Line Crews

The main goal of this procedure is to minimize the administrative burden of operations. -C-
items, which account for as much as 70% of all parts used, will no longer need to be controlled
through inventory. This change will greatly reduce the amount of paperwork that is normally
required for these parts under RUS procedures.

Pick Lists: Material pick lists will continue to identify all material required for work orders. Part
numbers and part names will be sorted on the pick list according to -A-, -B-, or -C- items and
then in part number order.

-A- items will continue to be issued from and returned to stores as in the past. The same records
such as material charge, credit, and salvage tickets will continue to be filled-out.

• Regular work order: Line crew personnel will be issued -A- items from stores as required by
specific work orders. Stores personnel are responsible for charging -A- items out of
inventory according to material pick lists.

• Part substitution: Should an -A- item called-out on a pick list need to be substituted with
another -A- item, a material charge ticket should be filled out for the new part, and a material
credit ticket for the part returned to stores.

• Part retirement: Material salvage tickets should continue to be filled out for all -A- items
salvaged from retirement that are either useable or have a resale value.

-B- items: Line crew personnel are responsible for making sure they have adequate number of -
B- items on-hand (in their possession on location during construction) for their work or
maintenance orders. Line crews have full access to these parts in stores and may keep additional

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Performance Benchma rk Project Group A, B, C Inventory Control

quantities in their possession as “rolling stock” until required. Stores personnel are responsible
for charging -B- items out of inventory according to work order pick lists. If -B- parts are either
substituted or retired, then material charge, credit, and salvage tickets will need to be filled-out.

• Regular work order: Line crew personnel are responsible for making sure they have an
adequate number of -B- items on-hand (in their possession on location during construction)
for their work orders. Material pick lists and charge tickets are required in order to show
reductions in the inventory control system.

• Part substitution: Should a -B- item that is called-out on a pick list need to be substituted
with another -B- item, a material charge ticket should be filled out for the new part, and a
material credit ticket for the part returned to stores. (Note: the -B- item does not actually
have to be returned to stores, it may remain with the work crew for another construction job.
The material credit ticket is required in order to update the inventory control system).

• Part retirement: Material salvage tickets should continue to be filled out for all -B- material
salvaged from retirement that are either useable or have a resale value. (Note : the -B- item
does not actually have to be returned to stores, it may remain with the work crew for another
construction job. The material salvage ticket is required in order to update the inventory
control system).

-C- items: Line crew personnel are responsible for making sure they have adequate number of -
C- items on-hand (in their possession on location during construction) for the ir work or
maintenance orders. Line crews have full access to these parts in stores and may keep quantities
of these parts in their possession as required for maintenance or work orders. Stockroom
employees are not responsible for issuing or returning these parts to stores and part substitutions
require no paperwork. Material charge, credit, and salvage tickets do not have to be filled-out
since these parts were already expensed/capitalized in advance.

• Regular work order: Line crew personnel are respons ible for making sure they have an
adequate number of -C- items on-hand (in their possession on location during construction)
for their work orders. Stores personnel do not charge -C- items out of inventory although
they continue to appear on material pick lists (for reference only).

• Part substitution: Should a -C- item that is called-out on a pick list need to be substituted
with another -C- item, the change can occur without filling-out material charge and credit
tickets. (Note: -C- items do not have to be returned to stores, they may remain with the work
crew for other construction jobs).

• Part retirement: Material salvage ticket should not be filled out for -C- items salvaged from
retirement that are either useable or have a resale value. (Note: Salvaged -C- items do not
have to be returned to stores, they may remain with the work crew for other construction
jobs).

Material Charge & Credit Ticket Example: A line crew installing a crossarm assembly
determines that a 10” machine bolt identified on the pick list should be replaced with a 12” bolt.

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Performance Benchma rk Project Group A, B, C Inventory Control

The crew is familiar with the new -A-, -B-, -C- inventory procedure but is not sure if the 10” bolt
requires a material credit ticket and the 12” bolt requires a material charge ticket. The material
credit ticket will indicate which items are -A- or -B- items. If the item is not listed on the
material ticket, the line crew should refer to the pick list and the comprehensive parts list
provided to them. Since the 10” bolt is listed on the pick list as a -C- item, the credit ticket does
not have to be filled-out.

In addition, since the 12” bolt is listed on the comprehensive parts list as a -C- item, the charge
ticket does not have to be filled-out.

Material Salvage Ticket Example: A line crew retiring a transformer assembly determines that a
10” machine bolt and a surge arrester are salvageable. The crew is familiar with the new -A-, -
B-, -C- inventory procedure but is not sure if the bolt or arrester require material salvage tickets.
The material salvage ticket will indicate which items are -A- or -B- items. . If the item is not
listed on the material salvage ticket, the line crew should refer to the pick list and the
comprehensive parts list provided to them. Since the 10” bolt is listed on the pick list as a -C-
item, the salvage ticket does not have to be filled-out.

In addition, since the arrester is listed on the material salvage ticket as a -B- item, the salvage
ticket does have to be filled-out for the arrester. The arrester, however, does not have to be
returned to stores since it is a - B- item and may remain with the crew for another construction
job.

Purchasing
-C- items do not appear in inventory since they are classified as “non-stock” items. They are
expensed/capitalized upon receipt and will show a zero balance in the inventory control system
although they will physically exist. When -C- items are received, the cost of the parts are
debited into an asset clearing account:

Example: The purchase department purchases part # 6362508 (3/4*8” eyebolt) worth $505.23.
The following transaction will credit accounts payable or cash and debit the amount in a clearing
account

(DR) general ledger account #163 $505.23

(CR) Accounts payable/Cash $505.23

-C- items can either be expensed/capitalized immediately upon receipt or spread-out over several
months in direct proportion to anticipated labor dollars. This is a management decision that
depends upon the volume level of parts ordered on a monthly basis.

Note: Refer to Appendix (A) for a further description of allocation timing of -C- items.

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Performance Benchma rk Project Group A, B, C Inventory Control

The inventory control system is not a good information tool to use when calculating reorder
points for -C- items, since inventory balances will not show on the accounting system. The
following 3 steps will help determine timing and quantities for -C- items:

• Review purchasing history to determine the amount and timing (monthly, quarterly,
annually) of part usage.
• Contact stores and line crews and estimate the amount of -C- items on hand
• Maintain a safety stock.

Daffron & Assoc: The purchase order programs are capable of handling both stock and non-
stock on the same P/O. Receive the non-stock items just like you would any stock item. Use
Inventory Menu Item #5 to receive material. After material is received use the Accounts Payable
Menu Item #1 to enter the invoice information.

Daffron & Assoc: Establish an existing open P/O by changing the inventory item number to the
new non-stock item number. Use Purchase Order Menu Item #1 to perform this step. If items
have already been received but no invoice posted yet, then continue under the old item number.
These quantities and amounts will be closed out of the system later.

Finance/Accounting
One potential accounting problem exists with -C- items that may result in distortion of plant
assets and operating expenses. Although the total impact is minor, Finance/Accounting should
monitor this potential problem in order to minimize its effect.

Problem 1: Plant assets and operating expenses can be over (under) reported if the actual usage
of -C- items is different than the amount capitalized/expensed. Continuing Property records
(CPR) will also over (under) report the average cost of a record unit.

Example: The proposed system calculates a predetermined ratio of percent

expensed and capitalized as plant. Management may determine, for instance, that
90% of the cost of -C- items be capitalized as plant and the remaining 10%
expensed. If only 95% of -C- items are actually capitalized, distribution plant will
be understated by 5% of the cost of -C- items and maintenance expense will be
overstated.

Finally, the cooperatives should refer to Appendix (A) and select any preferred method to
allocate -C- items.

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Performance Benchma rk Project Group A, B, C Inventory Control

GLOSSARY OF TERMS

Material Cost Forms

1) Stock Record Card: A separate Stock Record Card is used for each item or group of items
for which an average unit price is maintained. Each card shows the quantity and cost of material
received; the quantity and cost of material issued; and the quantity, amount, and average cost of
material at the end of the month. The total of the balances shown on all of the individual cards
should equal the balance in the general ledger control account at the end of the month.

2) Material Charge Ticket The Material Charge Ticket is used to record all withdrawals of
material from stock and should be prepared in duplicate, showing the work or job order number
(or purchaser, in the case of a sale of material).

3) Material Credit Ticket The Material Credit Ticket is used to record unused material
previously issued to a job that is returned to stock. Salvaged material should not be recorded on
a Material Credit Ticket.

The Material Credit Ticket shows the quantities and items of material returned and the job or
work order to be credited.

4) Summary of Material Charge and Credit Tickets: The Summary of Material Charge and
Credit Tickets is used to recap all Material Charge and Credit Tickets.

5) Material Salvage Ticket The Material Salvage Ticket is used to record all materials salvaged
from retirements that are either usable or that have a resale value.

The employee responsible for the physical removal of the material should complete the Material
Salvage Ticket, except for the pricing. The pricing of the reusable and salable items should be
performed by personnel in the office.

6) Summary of Material Salvage Tickets: The Summary of Material Salvage Tickets is used to
recap all reusable, or nonusable but salable, materials salvaged from retirements.

7) Materials Register: The Materials Register is used to recap all material tickets and to
distribute material costs to the general ledger and the various construction and retirement work
orders.

Construction Activities

New construction is construction in which no replacements are involved.

System Improvements: are changes or additions to existing electric plant facilities that, based
upon engineering studies, are necessary and either improve the quality of electric service or
increase the quantity of electric power available to existing consumers.

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Performance Benchma rk Project Group A, B, C Inventory Control

Ordinary Replacements: result from wear and tear, damage, or the relocation of plant facilities.
The replacement is normally in kind; however, it may involve an improvement or the installation
of a larger item than that being replaced.

Work Orders

Work Order Log: The Work Order Log is a control record in which work orders are assigned
numbers and listed in numerical order. If a blanket work order procedure is used, each job order
number is assigned to a specific blanket work order. As activities associated with a work order
are completed, the dates of completion are entered in the log.

Construction Work Order: The Construction Work Order is used to accumulate, in one record,
by month, all of the costs incurred for a specific work order.

Retirement Work Order: The Retirement Work Order is used to accumulate, in one record, by
month, all of the costs incurred for the retirement of plant when such plant is comprised of
retirement units.

Retirements - No Replacement represents plant removed from service with no new facilities
constructed.

Retirement - System Improvement represents plant removed from service in conjunction with
construction that is classified as a system improvement.

Retirement - Replacements represents plant removed from service accompanied by a

replacement made necessary by wear, tear, or damage.

Blanket Work Order: A blanket work order is a specialized work order designed to accumulate
the costs of repetitive types of construction and/or retirement activities, the types and costs of
which indicate that individual costs are not required. A blanket work order includes like projects
of small cost and of short duration.

Inventory of Work Orders, REA Form 219: The Inventory of Work Orders is designed to
accumulate construction and retirement costs, the net amount of which is the basis for requesting
advances of REA loan funds.

Rolling Stock: Material stored on company owned vehicles as an extension of inventory for
convenience purposes.

Staking Sheet: A staking sheet is an engineering drawing of a construction project that depicts
plant extensions and replacements by construction units.

Tabulation of Record Units : The Tabulation of Record Units is used to tabulate the record units
shown on the reverse side of the individual staking sheets. The record units used by most

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Performance Benchma rk Project Group A, B, C Inventory Control

borrowers are preprinted on the form, with space provided to include any other units. The
"Total" column includes all record units completed during a given month. The totals are posted
to Column 2 of the Unit ization and Distribution to Plant Accounts on which the distribution to
accounts is made.

Standard Record Unit Cost Sheet: The Standard Record Unit Cost Sheet is used to develop
standard costs for the individual record units. Borrowers should use a system of standard costs
applied to the various record units to unitize the material, labor, and overhead costs accumulated
in a work order.

Unitization and Distribution to Plant Accounts: The Unitization and Distribution to Plant
Accounts is used to allocate the cost of all construction work orders closed in a given month to
the appropriate record units and plant accounts.

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Performance Benchma rk Project Group A, B, C Inventory Control

Appendix (A) Allocating -C- Items

The ABC Inventory Control Procedure outlines how cooperatives can segment inventory into
several catego ries and streamline the paperwork associated with these parts. The greatest
savings pertains to -C- items, consisting primarily of miscellaneous hardware, in which their cost
is either expensed or allocated to work orders in a method very similar to allocating overhead.

A complication arises in selecting the best method to allocate -C- items. Just as with allocating
overhead, several methods exist that allocate -C- items in slightly different ways, and produce
different results. The objective of this paper is to identify several alternate methods to allocate -
C- items and list the differences associated with each.

Method #1 – Allocate -C- items immediately upon receipt

Under this method, -C- items will be either expensed or capitalized as plant when they are
received. Despite potential timing issues, this solution will work well for electric cooperatives
with relatively constant work order and purchasing activity through the year.

Observations
• Easy way to allocate -C- items
• Does not require historical data or subjective forecasting
• The receipt and immediate allocation of -C- items may not coincide with construction
activity. For example, if a large quantity of -C- items is received and immediately allocated
two months in advance of substantial construction activity, very few work orders will receive
a large capitalization cost of -C- items. This distortion will show in the continuing property
records (CPR) of plant assets.
• Assumes that the amount purchased is the exact amount needed for the future work activity.

Method #2– Allocate -C- items in direct proportion to direct material used.

Each month, -C- items will be allocated based on a ratio of direct materials used. Quarterly
adjustments to the ratio will be made based on the amount of -C- items used in the latest rolling
12-month period.

Step 1. Calculate the following allocation ratio:

Total -C- items dollars used, past 12 months

Total -A- and -B- items dollar used, past 12 months

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Performance Benchma rk Project Group A, B, C Inventory Control

If cooperatives do not have access to -C- item usage, purchases of -C- items is an acceptable
alternative (this assumes that all -C- items purchased are used). The ratio will be used to allocate
-C- items over the next several months.

Step 2. Multiply the ratio, calculated in step 1, by the actual cost of -A- and -B- items used in
each future month.

Note: The importance of this step is to identify a variable that will be a good predictor of -C-
item usage. Since most electric cooperatives purchase and maintain inventory of all material
used for constructio n (most supply the material for construction contracts), direct material cost
may be the best consistent predictor of -C- item usage.

Step 3. Update the allocation ratio by repeating step 1 on a quarterly basis.

Example:
If the most recent 12 months showed that $220,000 -C- items and $300,000 -A- and -B- items
were used, the ratio of -C- to -A- & -B- items calculates to 73.3% ($220,000 ÷ $300,000).
Multiply the ratio by the actual amount of -A- and - B- items used over the next several months as
shown below:

-A- and -B- -C- Item -C- Item

Actual Usage Allocation Allocation
(thousands) Ratio Usage (thousands)
Apr $25 x 73.3% = $18.3
May $20 x 73.3% = $14.7
Jun $23 x 73.3% = $16.9
Jul $25 x 73.3% = $18.3
Total $93 X 73.3% = $68.2

After allocating -C- items for a quarter, update the allocation ratio. If the next most recent 12
month period shows -C- items usage totaling $265 thousand and -A- & -B- item usage totaling
$321 thousand, a new ratio would calculate to 82.6% ($265 ÷ $321).

Observations
• Easy to understand computations
• Historical data is used to calculate the allocation ratio.
• Subjective forecasting is not required
• The amount of -C- items allocated will be greater or less than the amount purchased. The
other two methods allocate exactly the amount purchased.

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Performance Benchma rk Project Group A, B, C Inventory Control

Method #3 – Allocate -C- items over turnover period.

Instead of immediately allocating -C- items upon receipt, an alternate solution is to spread the
cost over several months based upon inventory turnover and in direct proportion to direct
material used. A more detailed explanation follows:

Step 1. Determine the average inventory turnover for -C- items. Inventory turnover is defined
as:
Total -C- items dollars used, past 12 months
Turnover =
Average inventory balance of -C- items, past 12 months

An inventory turnover of three means that inventory turns over three times per year or every four
months. For purposes of this analysis, all examples will be based upon an inventory turnover of
three.

Note: Cooperatives may not be able to gather the information needed to calculate inventory
turnover of -C- items. Under the proposed A, B, C inventory procedure, inventory control
software will not keep track of inventory balances or amounts issued for -C- items. An
acceptable alternate is to estimate -C- item turnover based on the turnover of -B- items.

Step 2. Estimate the total cost of -A- & -B- items on a month-by- month basis in the turnover
period. Calculate the percent of -A- & -B- item cost in each month to the total -A- & -B- item
cost in the turnover period.

Step 3. Multiply the cost of the -C- items by the monthly percent in the turnover period.

Example:
Total material cost of -C- items used during the past 12 months is $669,000 and the average
inventory balance of -C- items during this period is $220,000. The turnover calculates to 3.04,
which translates to turnover every four months.

If $70,000 worth of -C- items were received in April, the cost would be spread over four months
in direct proportion to the estimated cost of -A- & -B- items in those four months:

Estimated Estimated
-A- & -B- Item -A- & -B- Item Actual
Dollars Dollars Cost of Allocated
(Thousands) (Percent) -C- Items Amount
Apr $400 17.8% x $70,000 = $12,460
May $500 22.2% x $70,000 = $15,540
Jun $650 28.9% x $70,000 = $20,230
Jul $700 31.1% x $70,000 = $21,770
Total $2,250 100% $70,000

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Performance Benchma rk Project Group A, B, C Inventory Control

The above example shows that although parts were received in April, the cost of the parts will be
spread over four months when the parts will be used. In order to simplify the cost allocation of -
C- items, avoid special situations that attempt to spread costs over fewer or greater months from
the average of all -C- items.

Observations
• Greatest flexibility to allocate -C- items.
• Assumes that all -C- item purchases are allocated over turnover period (no longer, no
shorter).
• Assumes that the amount purchased is the exact amount needed for the future work activity.
• Subjective assumptions regarding use of materials required.
• Turnover period is difficult to calculate since actual -C- item usage and inventory balances
may not be known.

Each of these three methods has been reviewed and endorsed by Arthur Andersen LLP. As there
is no best method to allocate C items, the non-RUS borrowers can adopt any preferred allocation
procedure.

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Performance Benchma rk Project Group A, B, C Inventory Control

Allocating Beginning Inventory

Preferred Approach – Do not allocate beginning inventory.

Cooperatives will always have a physical balance of -C- items located in stores even though the
material inventory system will not show a balance of each -C- item. Cooperatives may not want
to allocate the beginning inventory balance over future months and instead keep them in account
154 - plant materials and operating supplies.

Allocating beginning inventory

Should management decide to allocate beginning inventory, the cost cannot be
expensed/capitalized at one time since work orders will receive a greater amount of direct
material cost due to the one-time liquidation. Beginning inventory should be spread over 12
months in direct proportion to direct materials. A more detailed explanation follows.

Step 1. Estimate the total cost of -A- & -B- items to be used on a month-by-month basis for the
next 12 months. The previous 12 months may be a good estimate for this exercise. Calculate the
percent of -A- & -B- item cost in each month to the total cost in the 12-month period

Step 2. Multiply the cost of the beginning inventory by the monthly percent in each 12 month
period.

Example:
If the beginning balance cost of -C- items totaled $437,665, that cost would be spread over 12
months in direct proportion to estimated -A- & -B- item cost in these 12 months.

Estimated Estimated Actual

-A- & -B- items -A- & -B- items Cost of Allocated
(Thousands) (Percent) Beg Inv Amount
Apr $500 7.46% x $437,665 = $32,650
May $500 7.46% x $437,665 = $32,650
Jun $650 9.70% x $437,665 = $42,454
Jul $700 10.45% x $437,665 = $45,736
Aug $750 11.19% x $437,665 = $48,975
Sep $700 10.45% x $437,665 = $45,736
Oct $550 8.21% x $437,665 = $35,932
Nov $450 6.72% x $437,665 = $29,411
Dec $450 6.72% x $437,665 = $29,411
Jan $450 6.72% x $437,665 = $29,411
Feb $500 7.46% x $437,665 = $32,650
Mar $500 7.46% x $437,665 = $32,650
Total $6,700 100% $437,665

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