Fixation of maximum level for various inventories on cost accounting

Maximum level:

It indicates the maximum figure of inventory quantity held in stock at any time.

The important considerations which should govern the fixation of maximum level for various inventory items are as follows:

1. The fixation of maximum level of an inventory item requires information about its-re-order level. The re-order level itself depends upon its maximum rate of consumption and maximum delivery period. It in fact is the product of maximum consumption of inventory item and its maximum delivery period.

2. Knowledge about minimum consumption and minimum delivery period for each inventory item should also be known.

3. The determination of maximum level also requires the figure of economic order quantity.

4. Availability of funds, storage space, nature of items and their price per unit are also important for the fixation of maximum level.

5. In the case of imported materials due to their irregular supply, the maximum level should be high.

The formula used for its calculation is as follows:

Maximum level of inventory = Re-order-level + Re-order quantity –

(Minimum consumption x Minimum re-order period)

Re-order level – This level lies between minimum and the maximum levels in such a way that before the material ordered is received into the stores, there is sufficient quantity on hand to cover both normal and abnormal consumption situations. In other words, it is the level at which fresh order should be placed for replenishment of stock.

The formula used for its calculation is as follows:

Re-order level = Maximum re-order period x Maximum Usage (or) = Minimum level + (Average rate of consumption x Average time to obtain fresh supplies).

Average Inventory Level – This level of stock may be determined by using the following equal
formula:

Average inventory level = Minimum level +1/2 Re-order quantity

(or) Maximum level + Minimum level/2