 |
| Corporate Accounting Treatment |
Inventory-Stock levels -EOQ, safety stock, reorder level, maximum stock level, and minimum stock level:
In inventory management, identifying various stock levels is crucial for ensuring efficient and cost-effective operations. These stock levels help in maintaining the right balance between having enough stock to meet demand and minimizing holding costs. The most commonly identified stock levels are:
1.Economic Ordering Quantity(EOQ):
Where:
D = Demand for the product (units per period)
S = Ordering cost per order
H = Holding or carrying cost per unit per period
2.Minimum Level:
Re order level - (Normal consumption x Normal re-order period)
3.Maximum Level :
Re-order level + Re-ordering quantity – (Minimum consumption x Minimum re-order period).
4.Danger Level:
Average Consumption × Emergency Lead Time
5.Re-Ordering Level:
Maximum consumption x Lead time + Safety Stock
6.Safety stock level:
(Maximum rate of consumption - Average rate of consumption) × Lead time
7.Lead Time :
Difference the period between placing re-order & receiving period of the inventory.
8.Average Stock Level:
(Minimum Stock Level +Maximum Stock Level) /2
9.Buffer Stock:
Extra stock kept on hand as a precautionary measure against variability in demand or supply chain delays.
Lets Start with in details for better understanding:
1.Economic Order Quantity (EOQ)
Definition: The ideal order quantity that minimizes the total cost of inventory, including both ordering and holding costs.
Formula:
Economic Ordering Quantity(EOQ)=
Where:
D = Demand for the product (units per period)
S = Ordering cost per order
H = Holding or carrying cost per unit per period
Purpose: Ensures efficient purchasing practices to avoid frequent orders or excessive holding costs.
2.Minimum Level (Safety Stock Level):
Definition: The minimum quantity of stock that must always be available to avoid stock outs. It acts as a buffer in case of unexpected delays in replenishment or sudden demand surges.
Formula:
Minimum Level:
Re-order level - (Normal consumption x Normal re-order period)
Purpose:
Ensures that the business can continue operations even if replenishment is delayed.
3.Maximum Stock Level:
Definition: The maximum quantity of stock that should be held at any given time to avoid excess inventory and unnecessary holding costs.
Formula:
Maximum Stock Level= Re-order level + Re-ordering quantity –(Minimum consumption x Minimum re-order period).
Purpose: Helps in avoiding overstocking, reducing storage costs, and preventing spoilage or obsolescence.
4.Danger Level:
Definition: The critical point below the minimum level, which indicates a potential stock out situation and requires urgent replenishment.
Formula:
Danger Level= Average Consumption × Emergency Lead Time
Purpose:
Triggers immediate action to avoid production stoppages or failure to meet customer demand.
5.Reorder Level:
Maximum consumption x Lead time + Safety Stock
Definition:
The level of stock at which a new order should be placed to replenish inventory before it reaches the minimum level.
Purpose:
Ensures that stock is replenished before it runs out, accounting for the lead time needed to receive new supplies.
6.Safety stock level:
(Maximum rate of consumption - Average rate of consumption) × Lead time
7.Lead Time:
Definition:
The time taken between placing an order and receiving the inventory. It is a key factor in determining when to reorder stock.
Formula:
Lead Time = Difference the period between placing re-order & receiving period of the inventory.
Purpose:
Helps in calculating reorder levels to avoid stock outs.
8.Average Stock Level:
Definition:
The average quantity of stock held over a certain period, calculated to balance ordering and holding costs.
Formula:
Average Stock Level=(Minimum Stock Level+Maximum Stock Level) /2
Purpose:
Provides insight into the average inventory that the company is likely to have on hand, helping to optimize storage and cost management.
9.Buffer Stock:
Definition:
Extra stock kept on hand as a precautionary measure against variability in demand or supply chain delays.
Purpose:
Protects against uncertainties and ensures smooth operation even in the face of unexpected disruptions.
In Finally:
By monitoring these various stock levels, businesses can effectively manage their inventory, avoid stock outs, reduce holding costs, and optimize the overall inventory turnover.