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Home /  Cost and Management Accounting
  • 3768 Views
  • Estimated reading time : 84 Minutes
  • Stock Level | Reorder Level | Minimum Stock Level | Maximum Stock Level

  • Arjun EP
  • Published on: September 8, 2021

  •  

     

    Stock Level

    The basic meaning of inventory is unsold goods, unused raw materials or semi processed raw materials (work in progress).

    To ensure regular production or regular sales, inventory is essential component. 

     

    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:

    Re-order level

    Minimum stock level (safety level)

    Maximum stock level

    Average stock level

    Danger level

     

     

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    Reorder Quantity

    Reorder quantity is also known as economic quantity in inventory management. 

    Reorder quantity is the required units of materials that should be included in new order.

    By maintaining reorder quantity, production will not disturb. 

    Reorder quantity or economic quantity minimises the ordering cost and carrying cost.

     

    Reorder Level

    Reorder level is also known as reorder point. 

    Reorder level is the material stock level; from this level, the inventory management should initiate (begin) purchase requisition for fresh supply.

    Whenever the inventory comes down to reorder level, it is an indication that an action should be taken for the purchase of material.

    ROL depends upon the lead time, rate of consumption and economic order quantity.

     

    The formula of reorder level

    Reorder level (ROL)

    = Maximum consumption x Maximum re-order period

    = Minimum stock level + Lead time consumption

    = Safety stock + (Lead time x Daily consumption)

    = Normal lead time x Daily consumption

     

    Where:  Procurement = lead time

     

     

     

     

     

    Keep in Mind (KIM)

    Some important synonyms or abbreviations used in stock level

    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

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1A

    The following information is extracted from ABC Manufacturing Company:

    Annual requirement of raw materials

    6,120 tons

    Days in a year

    360 days

    Safety stock

    30 days consumption

    Normal lead time

    12 days

    Required: (1) Safety stock; (2) Reorder level

    [Answer: SS = 510 units; ROL = 714 units]

    Solution:

    Given and working note:

    Daily consumption      = 6,120 tons ÷ 360 days       = 17 units

     

    Safety stock       

    = 30 day’s consumption

    = 30 days x 17 units

    = 510 units

     

    Explain: safety stock is buffer or safeguard. Under safety stock, organization goes to danger level.

     

    Re-order level   

    = Safety stock + (Lead time x Daily consumption)

    = 510 + (12 x 17)

    = 510 + 204

    = 714 units

     

    Explain: reorder level is the level to reorder or purchase fresh supplies or goods.

     

    Keep in Mind (KIM)

    Lead-time is difference of ordering time and receiving time of good.

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1B

     ABC Manufacturing Company has following information:

    Re-order period

    6 – 8 days

    Consumption

    300 – 400 kg

    Required: Reorder level

    [Answer: ROL = 3,200 kg]

    Solution:

    Given and working note:

    Maximum ROP   = 8 days

    Maximum consumption       = 400 kg

     

    Re-order level   

    = Maximum consumption x Maximum ROP

    = 400 kg x 8 days

    = 3,200 kg

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1C

     Apex Chemical Company has following information:

    Annual requirement

    = 188,800 kg

    Lead time

    = 4–8 days

    Days in year

    = 360 days

    Required: Reorder level

    [Answer: ROL = 2,160 kg]

    Solution:

    Given and working note:

    Daily require       = 188,800 kg ÷ 360 days      = 360 kg

    Normal lead time = (4+8) ÷ 2                            = 6 days

    Now,

    Re-order level   

    = Normal lead time x Daily consumption

    = 6 days x 360 kg

    = 2,160 kg

     

     

    Minimum stock level (MSLMIN)

    Minimum stock level is also known safety stock or stock of buffer.

    MSLMIN represents the minimum quantity of materials, which must be maintained at all the time.

    In normal working condition, the stock of materials should not be fall below the minimum stock level.

    This helps to stop production.

    It can be used only under abnormal or emergency condition.

     

    The formula of minimum stock level

    Minimum stock level

    = Reorder level − (Average consumption x Average Reorder period)

    = ROL – (Average consumption x Average ROP)

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1D

    A unit of Jagadamba Steel Industry has provided following information:

    Re-order period

    8 – 10 days

    Daily consumption

    4,000 – 6,000 tons

    Required: (1) Re-order level; (2) Minimum stock level

    [Answer: ROL = 60,000 tons; MSL = 15,000 tons]

     

    Solution:

    Given and working note:

    Maximum ROP   = 10 days

    Maximum consumption       = 6,000 tons

    Average ROP = (8 + 10) ÷ 2   = 9 days

    Average consumption = (4,000 + 6,000) ÷ 2   = 5,000 tons

     

    Re-order level (ROL)

    = Maximum consumption x Maximum ROP

    = 6,000 tons x 10 days

    = 60,000 tons

     

    Minimum stock level (MSLMIN) 

    = ROL – (Average consumption x Average ROP)

    = 60,000 – (5,000 tons x 9 days)

    = 60,000 – 45,000

    = 15,000 tons

     

    Explain:

    Minimum stock level is equal to safety stock. Under this level, organization goes to a danger level

     

    Keep in Mind (KIM)

    The formula of minimum and maximum stock level is given by Harold J. Wheldon

    ROQ = EOQ in this chapter.

    If daily consumption is given in question, minimum = maximum = average

     

     

     

    Maximum stock level (MSLMAX)

    Maximum stock level represents the maximum quantity of materials, which can be held in stock at any time.

    Stock should not be exceeding from this level.

    Beyond this level, capital will be blocked on stock.

    If manufacturing company keeps more stock than maximum stock level, carrying and holding cost increases.

     

    The formula of maximum stock level

    Maximum stock level

    = Re-order level + Re-order quantity – (Minimum consumption x Minimum ROP)

    = ROL + ROQ − (Minimum consumption x Minimum ROP)

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1E

    XYZ Rice Mill has following information:

    Consumption per day

    2,500 – 3,000 tons

    Lead time

    4 – 8 days

    Re-order quantity

    25,000 tons

    Required: (1) Re-order level; (2) Maximum stock level

     [Answer: ROL = 24,000 tons; MSL = 35,000 tons]

    SOLUTION:

    Given and working note:

    Minimum consumption

    = 2,500 tons

    Maximum consumption

    = 3,000 tons

    Minimum ROP

    = 4 days

    Maximum ROP

    = 8 days

    ROQ

    = 25,000 tons

     

    Re-order level (ROL)

    = Maximum consumption x Maximum ROP

    = 3,000 tons x 8 days

    = 24,000 tons

     

    Maximum stock level (MSLMAX) 

    = ROL + ROQ – (Minimum consumption x Minimum ROP)

    = 24,000 + 25,000 – (2,500 tons x 4 days)

    = 45,000 – 10,000

    = 35,000 tons

     

    Explain:

    Organization should not be kept stock more than maximum stock level. Because, it blocks unnecessary capital on stock.

     

     

    Average Stock Level

    Average stock level (ASL) shows the average stock of materials held by manufacturing company.

    It is maintained on the basis of average consumption.

     

    The formula of average stock level

    Average stock level

    = Minimum stock level + (ROQ ÷ 2)

    = Minimum stock level + (EOQ ÷ 2)

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

     

    PROBLEM: 1F

    Extracted information is taken from Pokhara Grill Industries:

    Minimum stock level                      2,000 units

    Economic order quantity               5,000 units

    Required: Average stock level

    [Answer: ASL = 4,500 units]

    SOLUTION:

    Average stock level (ASL)

    = Minimum stock level + (EOQ ÷ 2)

    = 2,000 + (5,000 ÷ 2)

    = 2,000 + 2,500

    = 4,500 units

     

    Explain:

    Average stock level is the average of minimum stock level and maximum stock level.

     

     

    Danger Level

    Danger level means below the minimum stock level.

    When the stock reaches this level, the inventory management must make special arrangement to purchase fresh or new materials, so that the production may not be interrupted due to the shortage of materials.

     

    The formula of danger level

    Danger level

    = Average consumption x Maximum ROP

    = Normal consumption x Maximum emergency period

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1G

    Following information is given:

    Normal consumption

    1,500 units

    Normal lead time

    10 days

    Maximum emergency period

    4 days

    Required: Danger level

    [Answer: DL = 6,000 units]

    SOLUTION:

    Danger Level (DL)

    = Normal consumption x Maximum emergency period

    = 1,500 units x 4 days

    = 6,000 units

     

    Explain: danger level is below safety stock or minimum stock level. This level can stop production.

     

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1H

    Buddha Power Inverter Company has following information:

    Minimum consumption

    6,000 units per week

    Average consumption

    9,000 units per week

    Re-order period

    2 – 4 week

    Economic order quantity

    7,000 units

    Required:   (a) Re-order level; (b) Maximum consumption; (c) Minimum stock level; (d) Maximum stock level;

    (e) Average stock level; (f) Danger level

    [Answer: ROL = 48,000 units; MC = 12,000 units; Min SL = 21,000 units;

    Max SL = 43,000 units; ASL = 24,500 units; DL = 36,000]

    SOLUTION

    Given and working note:

    Average ROP = (minimum + maximum) ÷ 2 = (2+4) ÷ 2 = 3 week

     

    Re-order level (ROL)

    = Maximum consumption x Maximum ROP

    = 12,000 units x 4 weeks

    = 48,000 units

     

    Maximum consumption

    Average consumption

    =

    (Minimum consumption + Maximum consumption) ÷ 2

    9,000

    =

    (6,000 + Maximum consumption) ÷ 2

    9,000 x 2

    =

    6,000 + Maximum consumption

    18,000 – 6,000

    =

    Maximum consumption

    Maximum consumption

    =

    12,000 units

     

    Minimum stock level (MSLMIN)

    = ROL – (Average consumption x Average ROP)

    = 48,000 – (9,000 units x 3 weeks)

    = 48,000 – 27,000

    = 21,000 units

     

    Maximum stock level (MSLMAX)

    = ROL + ROQ – (Minimum consumption x Minimum ROP)

    = 48,000 + 7,000   – (6,000 units x 2 weeks)

    = 55,000 – 12,000

    = 43,000 units

     

    Average stock level (ASL)

    = Minimum Stock Level + (EOQ ÷ 2)

    = 21,000 + (7,000 ÷ 2)

    = 21,000 + 3,500

    = 24,500 units

     

    Danger Level (DL)       

    = Average consumption x Maximum ROP

    = 9,000 units x 4 weeks

    = 36,000 units

     

     

    #####

    PROBLEMS  AND  ANSWERS  OF  STOCK  LEVEL

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1A

    The extracted data are taken from ABC Manufacturing Company:

    Maximum consumption in one day

    1,200 kg

     

    Maximum re-order period for materials receive

    5 days

     

    Required: Re-order level

    [Answer: ROL = 6,000 kg]

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1B 

    The extracted data are taken from ABC Rice Mill:

    Maximum stock level

    14,400 ton (360 days)

    Safety stock

    2,400 ton

    Lead time consumption

    24 days

    Required: (1) Daily consumption; (2) Re-order level

    [Answer: Daily consumption = 40 ton; ROL = 3,360 ton]

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1C 

    ABC Manufacturing Company has following information in respect of a material:

    Re-order quantity

    4,000 kg

    Re-order period

    4 – 8 days

    Consumption per day:

    Minimum 600 kg

     

    Maximum 1,000 kg

    Calculate: (a) Re-order level; (b) Average consumption; (c) Minimum stock level; (d) Maximum stock level

    [Answer: ROL = 8,000 kg; Average consumption = 800 kg;

    MSL (MIN)     = 3,200 kg; MSL (MAX) = 9,600 kg]

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1D  

    The extracted data are taken from ABC Steel Industry:

    Re-order period

    16 – 20 days

    Consumption

    4,000 – 6,000 tons

    Required: (1) Re-order level; (2) Minimum stock level

    [Answer: ROL = 120,000 tons; MSL = 30,000 tons]

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1E 

    Bhudev Process (P) Ltd has following information related to pulse:

    Materials need per day

    2,000 – 3,000 tons

    Lead time

    6 – 8 days

    Economic order quantity

    25,000 tons

    Required: (1) Re-order level; (2) Maximum stock level

    [Answer: (1) 24,000 tons; (2) 37 tons; *EOQ = ROQ]

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1F       

    The following information has given by Hi-life Polymers (P) Ltd:

    Minimum consumption

    6,000 kg per week

    Maximum consumption

    12,000 kg per week

    Re-order period

    6 – 8 week

    Economic order quantity

    7,200 kg

    You are required to find out:        

    (a) Re-order level; (b) Minimum stock level; (c) Maximum stock level; (d) Average stock level

    [Answer: (a) 96,000 kg; (b) 33,000 kg; (c) 67,200 kg;

    (d) 36,600 or 50,100 kg]

     

    Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

    PROBLEM: 1G

    APD Inverter Company has following information related to home UPS 600 VA:

    Minimum consumption

    600 units per day

    Average consumption

    900 units per day

    Re-order period

    5 – 7 day

    Economic order quantity

    700 units

    Required:   (1) Maximum consumption; (2) Re-order level; (3) Minimum stock level

    (4) Maximum stock level; (5) Average stock level; (6) Danger level

    [Answer: (1) 1,200 units; (2) 8,400 units; (3) 3,000 units;

    (4) 6,100 units; (5) 3,350 units; (6) 6,300 units]

     

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