Explain the terms maximum level minimum level and reorder level of inventories ignou
Answers
This represents the quantity which must be maintained in hand at all times. If stocks are less than the minimum level, then the work will stop due to shortage of materials.
(i) Lead Time:
A purchasing firm requires some time to process the order and time is also required by the supplier/vendor to execute the order. The time taken in processing the order and then executing it is known as lead time. It is essential to maintain some inventory during this period to meet production requirements.
(ii) Rate of Consumption:
It is the average consumption of materials items in the industry. The rate of consumption will be decided on the basis of past experience and production plans.
(iii) Nature of Material:
The nature of material also affects the minimum level. If a material is required only against special orders of the customer then minimum stock will not be required for such materials. Wheldon has given the following formula for calculating minimum stock level: Minimum stock Level = Re-ordering Level – (Normal Consumption x Normal Reorder Period)
(iv) Re-ordering Level:
When the quantity of materials reaches a certain level then fresh order is sent to procure materials again. The order is sent before the materials reach minimum stock level.
Reordering level is fixed between minimum level and maximum level. The rate of consumption, number of days required to replenish the stocks, and maximum quantity of materials required on any day are taken into consideration while fixing reordering level.
Re-ordering level is fixed with following formula:
Reordering Level = Maximum Consumption Rate x Maximum Reorder period.
Stock Level: Type # 2. Maximum Level:
It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit then it will be termed as overstocking. A firm avoids overstocking because it will result in high material costs. Overstocking will lead to the requirement of more capital, more space for storing the materials, and more charges of losses from obsolescence.
Maximum stock level will depend upon the following factors:
1. The availability of capital for the purchase of materials in the firm.
2. The maximum requirements of materials at any point of time.
3. The availability of space for storing the materials as inventory.
4. The rate of consumption of materials during lead time.
5. The cost of maintaining the stores.
6. The possibility of fluctuations in prices of various materials.
7. The nature of materials. If the materials are perishable in nature, then they cannot be stored for long periods.
8. Availability of materials. If the materials are available only during seasons then they will have to be stored for the future period.
9. Restrictions imposed by the government. Sometimes, government fixes the maximum quantity of materials which a concern can store. The limit fixed by the government will become the deciding factor and maximum level cannot be fixed more than that limit.
10. The possibility of changes in fashions will also affect the maximum level.
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Explanation:
The maximum stock limit is Highest level of the inventory and the quantity that must not be exceeded without specific authority from management. In other words, the maximum stock level is that quantity of material above which the stock of any item should not normally be allowed to go. this qty. is fixed by space , capital & some other factors.
Formula:
Maximum Level = Reorder Level + Reorder Qty. -(minimum Consumption x minimum Reorder period)
Minimum level: minimum stock level is the level of an item of material, below which the actual stock should not normally available go down
minimum quantity of a particular item of material that must be kept in the stores at all times.it is also depend on Re-order level it is set by observing average level of consumption.
Formula:
Minimum Level = Reorder Level - (Average Consumption x Average Reorder Period )
Reorder level = it is that stock level when company would place a new order. it depend on company order & demand. if company gives new order then it increase the company godown rent warehouse charges, Opportunity cost it order is so late then company born loss of sales.
formula
Reorder level = maximum consumption x maximum reorder period
or Average consumption x lead time + Safety stock/buffer stock
Note: consumption is also called Usage
Average is also called normal
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