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Materials and Inventory Cost Control

# Materials and Inventory Cost Control

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Materials and Inventory Cost Control,minimum level, maximum level,EOQ level
Materials and Inventory Cost Control,minimum level, maximum level,EOQ level

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06/26/2013

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Materials and Inventory CostControl
Maximum Level or Maximum Limit of Stock:
Learning Objective:
1.

Definite and explain maximum limit or maximum level of stock.
2.

How is maximum limit or maximum level calculated?

Definition and Explanation:
The maximum stock limit is upper level of the inventory and thequantity that must not be exceeded without specific authority frommanagement. In other words, the maximum stock level is that quantityof material above which the stock of any item should not normally beallowed to go. This level is fixed after taking into account such factorsas: capital, rate of consumption of materials, storage space available,insurance cost, risk of deterioration and obsolescence and economicorder quantity.

Formula:
MAXIMUM LEVEL OR MAXIMUM LIMIT

can be calculated by thehelp of following formula:
[Maximum limit or level = Re-order level or ordering point – Minimum usage ×Minimum re-order period + Economic order quantity]

Example:
Normal usage

100 units perday

Maximum usage

130 units perday

Minimum usage

70 units perday

Re-order period

25 to 30 days

Economic order quantity

5,000 units

Calculate maximum limit or level.

In order to calculate maximum limit of stock we must calculate re-order pointor re-order level first.

Ordering point or re-order level = Maximum daily or weekly or monthly usage× Maximum re-order= 130 × 30

= 39,000 units

Calculation:

Maximum limit or level = Re-order level or ordering point – Minimum quantityused in re-order period usage + Economic order quantity

= 3900 – (70 × 25) + 5,000

= 7150 units

Minimum Limit or Minimum Level of Stock:
Learning Objective:
1.

Definite and explain minimum limit or minimum level of stock.
2.

How is minimum limit or minimum level calculated?
Definition and Explanation:
The minimum level or minimum stock is that level of stock below which stockshould not be allowed to fall. In case of any item falling below this level, thereis danger of stopping of production and, therefore, the management shouldgive top priority to the acquisition of new supplies.

Formula:
Minimum level or minimum limit can be calculated by the following formula:

[ MINIMUM LIMIT OR LEVEL = RE-ORDER LEVEL OR ORDERING POINT –AVERAGE OR NORMAL USAGE × NORMAL RE-ORDER PERIOD ]

OR THE FORMULA CAN BE WRITTEN AS:

[ MINIMUM LIMIT OR LEVEL = RE-ORDER LEVEL OR ORDERING POINT –AVERAGE USAGE FOR NORMAL PERIOD ]

Example:
Normal usage

100 units per day

Maximum usage

130 units per day

Minimum usage

70 units per day

Re-order period

25 to 30 days

Calculate: minimum limit or level

To calculate minimum limit of materials we must calculate re-order point or re-order level first.

Calculation:

Ordering point or re-order level = Maximum daily or weekly or monthly usage× Maximum re-order= 130 × 30

= 3,900 units

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