Actual/Budget Shrink Overview

Today my post will describe an important and not so
explored RMS functionality named Shrink. There is not a complete documentation
about it, but will compile most of the essential information and give some
examples using Actual and Budget Shrink.

Shrink is a generic term that refers to a loss in
inventory value and it is an important metric for accounting accuracy that
would be ideal to administer a physical inventory and account for shrink at the
end of each stock ledger period. Shrink is an unrealistic metric in most cases,
retailers could apply various methods do account for inventory shrinkage. For
example, shrink consideration in the stock ledger could simply be deferred
until the time of a physical inventory by comparing the actual and book inventories. Another approach would be to include in the
stock ledger an estimate of probable shrinkage based on past experience and
routinely reconcile the actual and book inventories.

Generally retailers prefer the simplicity that could be
an advantage of deferring shrink considerations until taking a physical
inventory. However, if physical
inventories are infrequent, this method may result in potentially misleading
inventory figures for the inventory reconciliation period.

The inclusion of a shrink estimate can prevent
instances where a disproportionate shrinkage amount is assigned to the stock
ledger for the period inventory is taken. If reasonably accurate, the estimate distributes shrink and leads to
smoother inventory figures. Irrespective
of the approach, actual and physical inventories need to be reconciled in the
stock ledger.

Oracle Retail provides two approaches for accounting
for shrinkage in the stock ledger:

Actual Shrink

Shrink is not considered in the stock ledger until an
inventory adjustment is applied to reflect any differences in a physical
inventory and stock count results.

• Actual
Shrinkage = Inventory adjustments and stock count adjustments

If any stock counts occurred during the month, the
Daily Stock Ledger batch processing would have updated the stock count’s book
stock and actual stock. Therefore,
Monthly Stock Ledger batch processing will either pass the ending stock levels
to next month (if no stock counts occurred) and report no shrinkage, or
calculate shrinkage using the stock adjustment value from the month data
table. The Actual approach requires the Use
Budget Shrink for Ending Inventory to be set to unchecked on the System Variables
screen (Control -> System -> System Variables)

• A
net sum of inventory adjustments within RMS will be posted to the stock ledger
whenever they occur.

• Additionally
the results of Unit & Dollar Stock Counts is used to calculate the
shrinkage

• Applies
to both Store & Warehouses.

Budgeted Shrink

The stock ledger’s budgeted shrinkage is calculated
using the budgeted shrinkage percent multiplied by sales at retail or at cost,
depending on whether the retail or cost accounting method is used.

• Budgeted
Shrink = % of Sales

• Sales
at retail if department on retail method of accounting

• Sales
at cost if department on cost method of accounting

The Shrinkage % is defined in the follow RMS screen (Finance
-> Half Budget Information):

If any stock counts occurred during the month, the
Daily Stock Ledger batch processing would have already updated the stock
count’s book stock and actual stock. The
Monthly Stock Ledger batch processing will perform this budgeted shrink
calculation as of the last stock count. The Budgeted approach requires the Use Budget Shrink for Ending Inventory
to be set to checked on the System Variables screen (Control -> System -> System
Variables)

• Only
stores (not warehouses) have sales to which the shrinkage % can be applied.
Actual shrinkage is posted only when a unit & dollar stock count occurs.

• Warehouse
locations do not have budgeted shrink calculated.

• Can
indicate special inventory adjustments to reduce ending inventory along with
budgeted shrinkage (by indicating “COGS” on the inventory adjustment reason
code)

Month End Process

Closing
of the month in the stock ledger is done by summing up the monthly transaction
totals and calculating the closing stock, gross margin and shrink for the
current month. The procedure for calculating shrink varies depending on whether
a Unit & Value stock count has occurred during the month and whether or not
budgeted shrink is used.

If
no Unit & Value count in period and budgeted shrink not used:

Shrink = (-1) *
Stock Adjustments (tran code 22)

If
no Unit & Value count in period and budgeted shrink used:

Shrink
= Net Sales * Budgeted Shrink rate

If
Unit & Value count in period and budged shrink not used:

Shrink
= (-1) * Stock Adjustments + (Stock take Book Stock – Stock take Actual Stock)

If
Unit and Value count in period and budget shrink used:

Shrink
= MTD Shrink

+
(Stock take Book Stock – Stock take Actual Stock)

+
((Net Sales for Month – MTD sales) * Budgeted Shrink Rate)

Generally,
most if not all stock counts will be completed prior to the beginning of the
month. However, in some cases, because of issues with the count or because the
count occurs close to the end of the month, it may be necessary for the count
to remain open until the following month. When this occurs, the adjustments and
shrink for the count are posted in the month following the count – there is no
back-posting of financial data.

Also in this situation, when the count is processed,
the calculations for Book Stock are identical to those that occur when the
count closes in the month that it occurred – calculating the “pseudo close” of
inventory based on the date of the count in order to compare to the value
calculated by the count itself. See the Appendix for an example of the
calculations for this process.

We hope that this post could show you more details
about the shrink functionality. Please let us know your comments and thoughts!

Cheers,

José Dutra