Supermarket Physical Count Procedures

Supermarket Physical Count Procedures

The IRS requires taxpayers using the IPIC LIFO method to break their inventories down by the various Consumer/Producer Price Index (CPI or PPI) categories applicable to their inventories.

Most small supermarkets use the retail inventory method of inventory accounting (rather than item cost methods used by large supermarkets and other businesses) for their non-perishable departments and therefore they must rely on their inventory services to provide physical counts reflecting the required CPI category breakdowns.

LIFO CPI Count Codes

LIFO-PRO created a standard list of 33 LIFO CPI count codes for supermarkets to provide inventory breakdowns. This list of LIFO CPI count codes was revised on 10/15/2011. Shown below is LIFO-PRO’s CPI LIFO Count Codes & Procedures Guide:

Pages 5 & 6 of this guide lists the 33 different CPI LIFO count codes and pages 7-13 shows a detailed description of the types of items that should be included in each of the 33 different count codes.

Inventory Service Physical LIFO & Non-LIFO Counts

When a physical inventory service makes a regular (non-LIFO) count for a supermarket store, the end result will typically be a summary report showing the sum of the marked selling prices counted for each of about 20 different merchandise departments. The inventory service may also provide supplemental reports showing inventory dollars counted by area in addition to department.

When an inventory service makes a LIFO count for a store, the end result will be a summary report showing the sum of the marked selling prices for each of the 33 different LIFO CPI count codes.

Non-scanned Physical Counts

These values are entered in the data collector machine for each item:

1. Department number or LIFO CPI count code number
2. Manual count of item quantity
3. Marked selling price per item for this item

There is no item-by-item identity recorded for non-scanned counts. The end product for non-scanned counts that allows the count service to prepare the summary reports is the recording the cumulative retail dollars counts. Some inventory services have their data collector machines programmed to automatically enter the prior item LIFO CPI count code so that the only time this entry is required is when the next item is for a different LIFO CPI count code.

Scanned Counts

The data collector machines have barcode readers built into them. These values are entered in the data collector machine for each item:

1.  Dept. number or LIFO CPI count code number
2. Manual count of item quantity
3. Either the UPC or barcode item number

The marked selling prices are not entered, so the result at the end of the store counts is a physical count for each item. The data collected during the physical counts is provided to the store which will use this data to match with either an item cost or item retail price file to calculate the counts at either retail or cost dollars.

The ability to produce a summary report showing inventory balances by LIFO CPI counts codes whether from non-scanned or scanned counts is provided by the entry of the LIFO CPI count code into the data collector machine for all items.

An inventory service could make simultaneous non-LIFO and LIFO counts if their data collector machines were programmed to be able to record both merchandise department codes and LIFO CPI count codes for each item.

The way in which some of the large nationwide supermarket chains get the inventory count breakdowns by LIFO CPI count code allows them speed up the physical counts because manual entry of the LIFO CPI count codes is not required. The alternative method these companies use is to map all item UPCs they carry to the inventory merchandise group applicable to it (there are approximately 3,000 different subclasses used) and each subclass is mapped to the proper LIFO CPI count code.

The other way to produce count summaries by the LIFO CPI count codes would be to use the procedures used prior to the modern data collector machines. When I worked for RGIS during my college days in the early 1970s, we used electric (not electronic) calculators. These calculators did not have any electronic memory, so all they could do besides multiply the item counts and retail prices entered was to maintain the mechanically calculated cumulative total. We recorded the calculator cumulative total on tally sheets either at the end of each shelf or sooner depending on where there were markings to record the cumulative total. The way in which these steps allowed for creating reports showing the retail dollars counted by merchandise department was that a map of all shelf space footage was prepared showing the applicable merchandise department for each area of shelf space with items of the same type, however large or small this was. The cumulative totals we recorded on the tally sheets were subtracted from the prior total and these dollars for X amount of shelf space were then allocated to the applicable merchandise department based on the pre-mapping of the store by department and shelf area. We did not make LIFO counts at that time because the IRS did not make the IPIC LIFO method available to taxpayers until 1983. We could have made counts by the LIFO CPI count codes if a mapping of the store was made using those codes applicable to each area of shelf space.

Common Inventory Count Errors

There have been a lot of problems with the accuracy of the LIFO counts made by inventory services the past several years. The most consistent problem has been that the medical CPI categories (21-Nonprescription drugs (SEMF02) & 22-Medical equipment & supplies (SEMG)) appear to be understated and the personal care CPI categories (31-Hair, dental, shaving & misc. personal care products (SEGB01) & 32-Cosmetics, perfume, bath, nail preparations & implements (SEGB02)) are overstated. The first thing I look at to determine whether there is a problem with the physical counts is the balance for LIFO count code 21. This code includes all OTC drugs (such as Tylenol) and vitamins. These items do not belong in LIFO count code 22 which includes medical equipment, bandages, etc. None of the medical goods should be included in either of the personal care CPI categories (31 & 32). In recent years, I think most of the dollars for the OTC drugs & vitamins were included in the LIFO count code 31 and possibly some in LIFO count code 22. It also appears that some of the goods that should be included in LIFO count code 32 were included in LIFO count code 31. LIFO count code 32 includes all bathroom soaps and bath gels cleaners. Kitchen type soaps and cleaners are to be included in LIFO count code 15-Household cleaning products (SEHN01).

LIFO PPI Count Codes

Many larger supermarkets chains, as well as some smaller ones, use Producer Price Indexes (PPI) rather than CPI indexes because of the historically higher Tax LIFO deferral benefits that are achieved from using PPI when compared to CPI. More-detailed breakdowns are required by the IRS Regulations when PPI indexes are used. LIFO-PRO developed a list of 55 PPI LIFO count categories LIFO-PRO has helped a number of our clients change methods to switch from using CPI to PPI indexes. Shown below is LIFO-PRO’s Guide for Planning & Implementation of the IPIC LIFO Method for Supermarket Chains which addresses the steps necessary to make this change:
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