Significance and Use
The calculated cost of property loss and destruction in combination with the cost of overages presents a logical foundation for the development of alternative models which can be used to evaluate the effectiveness of property management systems and provide relevant information to management useful for the distribution of resources to the task of property utilization and control.
The understanding of an organization’loss, destruction and overage cost of inventory is a necessary prerequisite to the development of cost effective systems for the management of movable, durable assets.
The costing model used in this standard assumes that individual categories of property represent a range of realized costs to an organization and that these loss or destruction costs can range from significant to minimal.
The use of overage is a necessary corollary to the model since there can be significant costs associated with the inventory and control of unneeded assets.
Scope
1.1 This practice covers the assignment of a value to categories and complete populations of lost or destroyed property assets for the purpose of determining the composite cost of all such losses on a periodic basis. This practice does not address the valuation of individual property assets.
1.2 The reason for assigning a loss or destruction value is to establish an economic basis for the allocation of resources to manage property efficiently and in a cost effective manner.
1.3 The direct cost of lost, damaged or destroyed (LDD) property has little to do with the acquisition, book or market value of such assets. While in many organizations, the value of LDD property is reflected at acquisition cost in the General Ledger accounts this approach is only appropriate for the financial reporting of property assets.
1.4 The calculation of the cost of loss or destruction of property for the purposes of computing a necessary factor to be used in the equation applied under Practice E 2219 is to be based upon the consideration of both the risk of an inventory shortage as well as the benefits of inventory control and overage management.
1.5 The valuation of property for the purposes of management and control is to be based upon the consideration of both the risk of an inventory shortage and benefits of inventory management as contained in this standard.
