Reconcile materials sent to an outsourced manufacturer

Agree on quantities that can be added

Link dispatch notes, carrier and processor receipts, issue-to-production and work-in-progress records, finished-goods acceptance, scrap and loss records by batch. Finished goods may be measured in units and raw materials in tonnes; they cannot be added directly. Verify the bill of materials, actual product composition and conversion units, retaining both physical quantities and raw-material equivalents where useful.

The example uses equivalents for one material. If there are other ingredients, moisture changes, by-products, non-reusable waste or uncertain inputs, separate and review them. A standard recipe is not automatically the actual consumption record.

Trace a 700-tonne material pool

Assume the company starts with 100 tonnes of its material equivalent at the processor, including unused material and the portion already in work in progress. It dispatches another 600 tonnes during the period. These figures track one material equivalent, not the physical weight of all finished goods.

• In accepted finished goods: 450 tonnes.
• In work in progress at the processor: 120 tonnes.
• Unused at the processor: 30 tonnes.
• Confirmed scrap and actual loss, without overlap: 30 tonnes.
• Dispatched but not yet delivered: 40 tonnes.
• Difference awaiting investigation: 30 tonnes.

Opening 100 tonnes plus 600 tonnes dispatched equals 700 tonnes. Identified positions total 450 + 120 + 30 + 30 + 40 = 670 tonnes, leaving 30 tonnes unexplained. Assume 225,000 accepted units have been verified to contain 2 kg of this material each, giving 450 tonnes. The 120-tonne work-in-progress equivalent needs production records or another measurement basis agreed and checked by both parties; a standard recipe alone does not prove actual work in progress.

The remaining 30 tonnes is an unresolved difference, not automatically process loss or theft. Timing of receipts, measurement, omitted returns, batch matching or other facts may explain it. Do not fill the gap with an estimated loss before investigation and the company's authorised decision. Material already included in accepted finished goods must not also be counted as work in progress.

Use four sets of records to locate the gap

1. Dispatch and transit: compare the company's release note, carrier record and processor receipt by batch, quantity, date and damage. Separate dispatches not yet received at cutoff; check transport responsibilities and update once received.
2. Stock at the processor: obtain unused, work-in-progress, completed-but-unshipped, scrap and write-off detail. Check which items belong to the company, whether batches are shared and whether physical count and cutoff dates match.
3. Returns and acceptance: connect the processor's dispatch, carrier record, the company's receiving and quality records. Track shipped-not-received, received-not-accepted and rework separately so one batch is not counted both externally and in the company's warehouse.
4. Loss and exceptions: distinguish a contractual allowance, identifiable physical scrap, actual loss and an unexplained difference. Record the measurement, both parties' evidence, responsibility and next action; a contract rate alone does not prove the actual loss on every batch.

Where third-party-held inventory is material to the financial statements, the Ministry of Finance's published audit guidance discusses confirmations of quantity and condition and inspection or other procedures. An operational reconciliation can use clear location, quantity and status evidence, while the responsible auditor determines audit procedures under applicable standards.

Then assess costs and responsibilities

Review supporting records and periods for material cost, processing charges, freight, taxes and abnormal loss. An entity applying China Accounting Standards for Business Enterprises should assess recognition and measurement under ASBE No. 1 on inventories and the actual contract; other entities apply their governing framework. Charges, rights and risk can vary by agreement. A quantity reconciliation alone does not establish that accounting or tax work is complete.

CaiGeek is an AI financial assistant for small and medium-sized businesses. Start with one material batch and have finance and supply-chain staff check the records and open differences. See the profit analysis example or contact CaiGeek.