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Cost of Sales Narrative

The Cost of Sales process covers the following sub-processes: Inventory Purchase Inventory Physical Count Inventory Costing (Finished Product)

Inventory Purchase Items of Inventory are requested by the Production Department based on the Bill of Material (BOM). Inventory Clerk receives the inventory request electronically based on material requirement for production. The Inventory Clerk then verifies the stock availability in the ERP. If the requisitioned items mentioned in the BOM are available, the Inventory is issued to the Production Department and updates are made to the ERP. In case of unavailability of items requested in BOM, a purchase requisition is created by the Inventory Clerk. The purchase requisition is approved by the Inventory Manager before being sent to the Purchase Requisition Clerk (at the Purchasing Department), for procurement. The ERP system is configured to perform a 3-way match for goods purchased. The invoice, Purchase Order (PO) and GRN for the good received are matched within the ERP prior to payment (R_INV_3), (C_INV_3). Inventory Physical Count Inventory is stored in a secured Storage Facility (Both Raw Materials and Finished Goods) with access to the Storage Facility restricted to authorized personnel. The security measures are to reduce the risk of shrinkage caused by theft. Warehouse Clerk has access to inventory at the store and has access to view the inventory records but not modify inventory records. On the last day of the month, the Inventory Clerk downloads an On-Hand Inventory Report from the ERP for physical inventory counts. Using the Inventory Report for the month, Warehouse Clerk (at the Storage Facility Both Raw Material and Finished Goods) performs a Physical Inventory Count. The Physical Inventory Count Sheet is sent to Warehouse Manager (at the Storage Facility Both Raw Material and Finished Goods) for approval. Any differences, including timing differences, require explanation by the Warehouse Clerk in the Physical Inventory Count Sheet (R_INV_6), (C_INV_2). Adjustment entries, if required, are prepared by the Inventory Manager and approved by the Inventory Controller prior to sending it to the Financial Clerk for recording in the ERP. Inventory Costing (Finished Product) Standard costs are established during the budget process occurring at the end of the previous fiscal year. Standard costs are determined for material, labor, and overhead costs. Standard costs are

Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

reviewed and approved by the Finance Controller based on the approved budget. Upon approval, they are entered into ERP. On a quarterly basis, the Financial Clerk computes the valuation of inventory. The inventory value is reviewed by the Finance Manager (R_INV_8), (R_COS_2), (C_COS_2), (C_COS_3). Inventory is recorded at standard cost. On a quarterly basis, inventory variances (Standard Cost versus Actual Costs) are analyzed by the Financial Clerk to determine adjustments required to properly state inventory at actual cost. Variances if any are investigated. The inventory variances are reviewed by the Finance Manager and recorded in ERP (R_COS_1), (C_COS_1). The actual cost of production is compared to the market price. The Financial Clerk prepares a lower of cost or market (LOCM) analysis for the inventory whose cost price exceeds the net consideration for sale. The analysis is reviewed by the Financial Manager before the Financial Clerks records a provision in the ERP. IPE: 1. COS_IPE_1 On-Hand Inventory Report 2. COS_IPE_2 Inventory Variance Analysis

Notes: 1. The following risks have not been mapped in this narrative as they have been mapped in Inventory narrative: a. R_INV_2 b. R_INV_5 c. R_INV_7 d. R_INV_8 e. R_INV_9 f. R_INV_10

g. R_INV_11 h. R_INV_12 i. j. R_INV_13 R_INV_14


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Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

k. R_INV_15 l. R_INV_18

m. R_INV_19 n. R_INV_20 o. R_INV_24 p. R_INV_25 2. The following risks have not been mapped in this narrative as they have been mapped in Property Plant, and Equipment narrative: a. R_PPE_5 b. R_PPE_6
Formatted: Normal, Indent: Left: 0.75", No bullets or numbering

Note: This document is an illustrative example and is for information and education purposes only. It is not a substitute for professional advice, services, nor an entitys own internal control procedures and should not be used or relied on as such.

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