The purpose of this post is to discuss some of the possible pitfalls that a lender could encounter when lending on inventory that is managed with a standard cost system. During this post we will discuss:
- The difference between management and financial accounting, as it applies to inventory and standard cost systems.
- The various components of inventory costs (materials, labor and overhead) and how they are impacted by manufacturing efficiencies (or more importantly inefficiencies).
- The calculation of price and manufacturing variances and how to calculate appropriate borrowing base ineligibles if they exist.
- The role of field exams and appraisals in mitigating the risks posed by inventory valued at standard costs. Continue reading
