The term inventory represents the stock of consumable items like raw material, work in progress, finished goods, supplied etc held by the firm waiting either for sale or production or its utilization to achieve their respective goals.
Such as inventory purchasing economically, using appropriately and preserving carefully are the main objectives of inventory management.
In other words, optimum investment in inventory is the inventory management.
To avoid over and under stocking, the stock keeper or inventory management must fix the inventory level.
Inventory level also known as demand and supply methods of stocking.
For the inventory control, the following levels of material are fixed:
· Reorder level
· Minimum stock level (safety level)
· Maximum stock level
· Average stock level
· Danger level
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Keep in Mind (KIM)
Some important synonyms or abbreviations |
|
ROP |
= re-order period |
ROL |
= re-order level |
Re-order period |
= lead time or procurement time |
Minimum stock |
= safety stock |
Uses |
= consumption |
Inventory |
= stock |
Average |
= normal or nominal |
Minimum level |
= minimum stock level |
Maximum level |
= maximum stock level |
Formulas of stock level
Re-order level (ROL) |
= Maximum consumption × Maximum re-order period |
|
= Minimum stock level + Lead time consumption |
|
= Safety stock + (Lead or procurement time × Daily consumption) |
|
= Normal consumption × Normal lead time |
|
|
Minimum stock level |
= ROL – (Average consumption × Average ROP) |
|
|
Maximum stock level |
= ROL + ROQ – (Minimum consumption × Minimum ROP) |
|
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Average Stock Level (ASL) |
= (Maximum stock level + Minimum stock level) ÷ 2 (for working note) |
[EOQ = ROQ ] |
= Minimum stock level + (ROQ ÷ 2) (for value find) |
|
= Minimum stock level + (EOQ ÷ 2) (for value find) |
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Danger Level |
= Average consumption × Maximum ROP |
|
= Normal consumption × Maximum emergency period |
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Reorder quantity (ROQ) |
= Maximum stock level + (Minimum consumption × Minimum ROP) – ROL |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2073, Q: 6
Following extracted information are given below:
Reorder period 4 to 6 days
Consumption per day 400 to 600 units
Reorder point 3,600 units
Reorder quantity 4,000 units
Required: Maximum stock level
[Answer: MSL = 6,000 units]
SOLUTION:
Maximum stock level
= ROL + ROQ – (Minimum consumption × Minimum ROP)
= 3,600 + 4,000 – (400 units × 4 days)
= 3,600 + 4,000 – 1,600
= 6,000 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2074, Q: 6
Following extracted information are given below:
Normal lead time 9 days
Normal consumption 15 units per day
Minimum reorder period for emergency purchase 3 days
Required: Danger level
[Answer: DL = 45 days]
SOLUTION:
Danger level
= Normal consumption × Maximum ROP
= 15 units × 3 days
= 45 days
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2075, Q: 9
Following extracted information are given below:
Consumption per day 400 to 600 units
Delivery period 3 to 5 days
Reorder level 4,500 units
Required: Minimum stock level
[Answer: MSL = 2,500 units]
SOLUTION:
Given and working note:
Normal consumption = (400 + 600) ÷ 2 = 500 units
Normal delivery time = (3 + 5) ÷ 2 = 4 days
Minimum stock level
= Reorder level – (Normal consumption × Normal ROP)
= 4,500 units – (500 units × 4 days)
= 4,500 – 2,000
= 2,500 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2076, Q: 6
Following extracted information are given below:
Reorder level 1,800 units
Reorder period 4 to 6 days
Reorder quantity 4,000 units
Consumption per day 200 to 300 units
Required: Maximum stock level
[Answer: MSL = 5,000 units]
SOLUTION:
Maximum stock level
= ROL + ROQ – (Minimum consumption × Minimum ROP)
= 1,800 + 4,000 – (200 units × 4 days)
= 1,800 + 4,000 – 800
= 5,000 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2077, Q: 9
Following extracted information are given below:
Consumption per day 30,000 to 50,000 units
Reorder period 3 to 5 days
Maximum stock level 300,000 units
Required: Reorder quantity
[Answer: ROQ = 140,000 units]
SOLUTION:
Given and working note:
ROL = Max consumption × Max ROP = 50,000 units × 5 days = 250,000 units
Reorder quantity
= Maximum stock level + (Minimum consumption × Minimum ROP) – ROL
= 300,000 units + (30,000 units × 3 days) – 250,000
= 300,000 + 90,000 – 250,000
= 140,000 units
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Accounting Equation |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Analysis of Financial Statement |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2054, Q: 3
The following details have been provided by A Manufacturing Company:
(i) Weekly demand of raw materials 900 units for 6 working days.
(ii) Delivery of raw material requires 2 to 4 days.
(iii) Deviation of plus and minus 60 units during weekly consumption.
(iv) Reorder quantity is 500 units
Required: (1) Reorder level; (2) Maximum inventory level
[Answer: (1) ROL = 640 units; (2) Max stock level = 860 units]
SOLUTION:
Given and working note:
Weekly demand |
= 900 ± 60 units |
|
Normal working days in a week |
= 6 days |
|
Maximum weekly demand of raw materials |
= 900 + 60 |
= 960 units |
Maximum daily consumption |
= 960 ÷ 6 days |
= 160 units |
Minimum weekly demand of raw materials |
= 900 – 60 |
= 840 units |
Minimum daily consumption |
= 840 ÷ 6 days |
= 140 units |
Minimum delivery time [ROP] |
= 2 days |
|
Maximum delivery time [ROP} |
= 4 days |
|
Re-order quantity [EOQ] |
= 500 units |
|
(a) Re-order level
= Maximum Demand × Maximum Delivery Time
= 160 units × 4 days
= 640 units
(b) Maximum stock level
= ROL + ROQ – [Min Demand × Min Delivery Time]
= 640 units + 500 units – [140 units × 2 days]
= 1,140 – 280
= 860 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2055, Q: 3
The following extracted information is available in respect of materials:
Reorder level 1,800 units
Reorder period 4 to 6 days
Reorder quantity 4,000 units
Normal consumption 250 units
Required: (a) Maximum consumption; (b) Minimum consumption; (c) Maximum level
[Answer: (a) 300 units; (b) 200 units; (c) 5,000 units]
SOLUTION:
Given and working note:
ROL = 1,800 units |
ROQ = 4,000 units |
|
Min ROP = 4 days |
Normal or average consumption = 250 units |
|
Max ROP = 6 days |
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(a) Maximum consumption |
||
Reorder level |
= Maximum consumption × Maximum ROP |
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1,800 units |
= Maximum consumption × 6 days |
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Maximum consumption |
= 1,600 units ÷ 6 days |
|
|
= 300 units |
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||
(b) Minimum consumption |
||
Average consumption |
= (Min consumption + Max consumption) ÷ 2 |
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250 units |
= (Min consumption + 300 units) ÷ 2 |
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250 × 2 |
= Min consumption + 300 units |
|
500 – 300 |
= Min consumption |
|
Min consumption |
= 200 units |
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||
(c) Maximum stock level |
||
= ROL + ROQ – (Min consumption × Min ROP) |
||
= 1,800 + 4,000 – (200 units × 4 days) |
||
= 5,800 – 800 |
||
= 5,000 units |
||
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||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2056, Q: 3
The following extracted information was provided to you:
Yearly demand for the materials 10,000 units
Procurement cost per procurement Rs 50
Cost per unit of materials Rs 2
Carrying cost per unit per year Re 0.16
Required: (a) EOQ units; (b) Daily consumption; (c) Optimum number of order;
(d) If yearly operating days are 250 days; procurement time is 10 days and safety stock is 300 units, find out reordering level
[Answer: (a) EOQ = 2,500 units; (b) Daily consumption = 40 units;
(c) EOQ order = 4 times; (d) ROL = 700 units]
SOLUTION:
Given and working note:
A= 10,000 |
Yearly operating days = 250 |
O = Rs 50 |
Procurement time = 10 days |
P = Rs 2 |
Safety stock = 300 units |
C = Re 0.16 |
|
(a) EOQ in units
Here, SQRT means square root
= SQRT 2AO ÷ C
= SQRT 2 × 10,000 × Rs 50 ÷ Re 0.16
= SQRT 62,50,000
= 2,500 units
(b) Daily consumption
= Yearly demand ÷ Days in year
= 10,000 units ÷ 250 days
= 40 units
(c) Optimum number of order
= A ÷ EOQ units
= 10,000 units ÷ 2,500 units
= 4 times
(d) Reorder level
= Safety stock + (Procurement time × Daily consumption)
= 300 units + (10 days × 40 units)
= 300 units + 400 units
= 700 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2057, Q: 3
The following information was extracted from the store ledger of A Factory:
Reorder level 3,000 units
Minimum stock level 1,500 units
Average stock level 4,000 units
Minimum consumption during minimum reorder level period is 700 units
Required: (a) Reorder quantity; (b) Maximum stock level
[Answer: (a) ROQ = 5,000 units; (b) MSL = 7,300 units]
SOLUTION:
Given and working note:
ROL = 3,000 units
MSL = 1,500 units
ASL = 4,000 units
(a) Reorder quantity |
|
Average stock level |
= Minimum stock level + (ROQ ÷ 2) |
4,000 units |
= 1,500 + ROQ ÷ 2 |
4,000 – 1,500 |
= ROQ ÷ 2 |
2,500 |
= ROQ ÷ 2 |
ROQ |
= 2,500 × 2 |
|
= 5,000 units |
|
|
(b) Maximum stock level |
|
= ROL + ROQ – (Minimum consumption during Minimum reorder level) |
|
= 3,000 + 5,000 – 700 |
|
= 7,300 units |
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2063, Q: 5 Or
The normal consumption of material of an industry for 250 working days is 150,000 kg and minimum consumption per day is 400 kg
The purchase period normally ranges from 6 days to 10 days
The level of safety stock is 2,000 kg and maximum stock level is 10,000 kg
Required: (1) Re-order level; (2) EOQ in kg; (3) Minimum stock level; (4) Average stock level
[Answer: ROL = 8,000 kg; EOQ = 4,400 kg; MSL = 3,200 kg; ASL = 5,400 kg]
Or ROL = 6,800 kg; EOQ = 5,600 kg; MSL = 2,000 kg; ASL = 4,800 kg]
*ASL = SS + (EOQ ÷2)
SOLUTION:
Given and working note:
Annual consumption = 150,000 kg
Working days in year = 250 days
Normal/average consumption per day = 150,000 ÷ 250 = 600 kg
Minimum consumption = 400 kg per day
Minimum period [ROP] = 6 days
Maximum period [ROP] = 10 days
Average period [ROP] = [6+10] ÷ 2 = 8 days
Safety stock level = 2,000 kg
Maximum stock level = 10,000 kg
Reorder level (ROL)
ROL = Maximum consumption × Maximum ROP]
= 800 kg × 10 days
= 8,000 kg
Or
= Safety stock + [Average consumption × Average ROP]
= 2,000 kg + [600 kg × 8 days]
= 2,000 + 4,800
= 6,800 kg
EOQ [ROQ] in units
MSLMAX |
= ROL + ROQ – [Minimum consumption × Minimum ROP] |
10,000 |
= 8,000 + ROQ – [400 kg × 6 days] |
10,000 |
= 8,000 + ROQ – 2,400 kg |
ROQ |
= 4,400 kg |
Or
MSLMAX |
= ROL + ROQ – [Minimum consumption × Minimum ROP] |
10,000 |
= 6,800 + ROQ – [400 kg × 6 days] |
10,000 |
= 6,800 + ROQ – 2,400 kg |
ROQ |
= 5,600 kg |
Minimum stock level
= ROL − (Average consumption × Average ROP)
= 8,000 − (600 × 8)
= 8,000 – 4,800
= 3,200 kg
Or
= ROL − (Average consumption × Average ROP)
= 6,800 − (600 × 8)
= 6,800 – 4,800
= 2,000 kg
Average stock level
= Minimum stock level + (EOQ ÷ 2)
= 3,200 kg + (4,400 ÷ 2)
= 3,200 + 2,200
= 5,400 kg
Or
= Safety Stock + (EOQ ÷ 2)
= 2,000 kg + (5,600 ÷ 2)
= 2,000 + 2,800
= 4,800 kg
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2065, Q: 5 Or
The following information is provided:
Reorder level 80,000 units
Reorder period 8 – 10 days
Minimum consumption per day 4,000 units
Required: (a) Maximum consumption per day; (b) Average consumption; (c) Minimum stock level
[Answer: (1) 8,000 units; (2) 6,000 units; (3) 26,000 units]
Given and working note:
Reorder level = 80,000
Minimum ROP = 8 days
Maximum ROP = 10 days
Average ROP = (8 + 10) ÷ 2 = 9 days
Minimum consumption = 4,000 units per day
Maximum consumption
Reorder level |
= Maximum consumption × Maximum ROP |
80,000 |
= Maximum consumption × 10 days |
Maximum consumption |
= 80,000 ÷ 10 |
|
= 8,000 units |
Average consumption
= (Minimum consumption + Maximum consumption) ÷ 2
= (8,000 + 4,000) ÷ 2
= 6,000 units
Minimum stock level
= ROL – (Average consumption × Average ROP)
= 80,000 – (6,000 × 9 days)
= 80,000 – 54,000
= 26,000 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
2071, Q: 5 Or
The following extracted information is available:
Maximum stock level 8,000 units
Consumption per month 1,000 to 1,200 units
Estimated delivery period 2 to 4 months
Required: (a) Reorder level; (b) Reorder quantity
[Answer: (a) ROL = 4,800 units; (b) ROQ = 5,200 units]
SOLUTION:
Given and working note:
MSL = 8,000 units
Min consumption = 1,000 units
Max consumption = 1,200 units
Average consumption = (1,000 + 1,200) ÷ 2 = 1,100 units
Min ROP = 2 months
Max ROP = 4 month
Average ROP = (2+4) ÷ 2 = 3 months
(a) Reorder level (ROL)
= Maximum consumption × Maximum ROP
= 1,200 units × 4 months
= 4,800 units
(b) Reorder quantity
= Maximum stock level + (Minimum consumption × Minimum ROP) – ROL
= 8,000 + (1,000 × 2) – 4,800
= 8,000 + 2,000 – 4,800
= 5,200 units
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