Cost accounting-material cost

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Mansi srivastava (Querist)

07 May 2013 Basic formula of caculating re-order level is

re-order level=maximum consumption*maximum
re-order period

but i ve come across one more formula i.e.

re-order level=minimum stock+(normal usage*
normal delivery time)

wht is the difference between these two formulae? and why are we suppose to add min stock in the 2nd formula ????

Pradeep Agarwal

Pradeep Agarwal (Expert)

07 May 2013 Reorder Level is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.

The following two formulas are used for the calculation of reorder level or point.

Ordering point/Re-order level = Maximum daily or weekly or monthly usage × Lead time

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided.

When safety stock is provided then the following formula will be applicable:

Ordering point or re-order level = Avg daily or weekly or monthly usage × Lead time + Safety/Minimum stock

In first formula you know with certainity your max. demand and lead time so no need to keep safety stock.

In second formulae since your demand or lead time is not certain, so you are keeping safety stock to meet situation of unexpected high demand or non receipt of material in time.

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Mansi srivastava

Mansi srivastava (Querist)

08 May 2013 thanks a lot sir for clearing my concept....
with kind regards
Mansi