How do you classify and report inventory variances by category and subcategory?

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Inventory variances are the differences between the actual and expected quantities or values of your inventory items. They can affect your profitability, cash flow, and compliance with accounting standards. In this article, you will learn how to classify and report inventory variances by category and subcategory, and why it is important to do so.

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1 Why classify inventory variances?

Inventory variances can have different causes, impacts, and solutions. By classifying them into categories and subcategories, you can identify the sources of errors, measure their magnitude, and take corrective actions. For example, you can track and reduce shrinkage, spoilage, theft, or damage of your inventory items. You can also improve your inventory accuracy, forecasting, and planning.

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Rob Braman

Waste Approvals Specialist - Environmental Consultant
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This is sometimes called "cycle counting" and an organization wants to conduct these counts on a regular, Periodic basis to find these inventory discrepancies.

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2 What are the main categories of inventory variances?

There are two main categories of inventory variances: quantity variances and value variances. Quantity variances are the differences between the actual and expected physical counts of your inventory items. Value variances are the differences between the actual and expected costs or prices of your inventory items. Both types of variances can occur at any stage of the inventory cycle, from purchasing to selling.

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Caleb Ihejiofor

Bsc, FCA, CFAN, FIIM
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In my view, I consider variance to either positive (Overage) variance or negative (shortage) variance. Where the actual count is equal to the expected, there is no variance. Variance in inventory items calls for investigate. however, the management should pay more attention to shortage as it could be resultant from theft.

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3 How to subdivide quantity variances?

Quantity variances can be further subdivided into purchase quantity variances and sales quantity variances. Purchase quantity variances are the differences between the actual and expected quantities of inventory items received from your suppliers. They can result from over-delivery, under-delivery, or incorrect delivery of your orders. Sales quantity variances are the differences between the actual and expected quantities of inventory items sold to your customers. They can result from over-selling, under-selling, or incorrect selling of your products.

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4 How to subdivide value variances?

Value variances can be further subdivided into purchase price variances and sales price variances. Purchase price variances are the differences between the actual and expected costs of inventory items purchased from your suppliers. They can result from changes in market prices, discounts, exchange rates, or taxes. Sales price variances are the differences between the actual and expected prices of inventory items sold to your customers. They can result from changes in demand, competition, promotions, or discounts.

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5 How to report inventory variances?

Inventory variances should be reported in your financial statements and in your inventory management system. You should record the actual quantities and values of your inventory items, as well as the expected quantities and values based on your standards or budgets. You should also calculate the variance amounts and percentages for each category and subcategory of inventory variance. You should analyze the reasons and implications of your inventory variances, and take appropriate actions to minimize them.

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Rob Braman

Waste Approvals Specialist - Environmental Consultant
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For example, is the reason for the variance: incorrect received goods posting, theft, or forgetting to take items out of stock when used for company purposes.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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R. LeBlanc

Open
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You can do a cycle count, a physical inventory, or both. Variances can lead to adjustments in the inventory records which can affect P&L and balance sheet accounts. Careful attention should be brought to items of inventory which differ in nature as to what party has title and possession (you can categorize here). If you think you need to break down variances for budgeting and planning, you can categorize (price and qty) here too! However, this is if you implement Management by Exception and/or for truing up allocations that were based on planned numbers. At the end of the day, business comes down to relationships; variances are just a reflection of some of those. Variance reporting creates extra business records. Maybe too many!

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How do you classify and report inventory variances by category and subcategory?

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1 Why classify inventory variances?

2 What are the main categories of inventory variances?

3 How to subdivide quantity variances?

4 How to subdivide value variances?

5 How to report inventory variances?

6 Here’s what else to consider

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