query about costing

Well, accounting is not a pure science.... So here you'll not always find cause and effect relationship.....

thats why formulae and principles on accounting are based on general principles and logic...... although these principles sometimes do seems to be illogical due to the reason mentioned above.....

Consider the following points -

- A firm will order only at reorder level.

- A firm will order the same quantity which has been determined using EOQ.

- Order placed at reorder level will take some time to arrive (lead time). When the order arrives, the stock would be reorder level + the order quantity if there is no consumption in lead time. However during this time, stock out of the reorder level would be consumed.  That is why we reduce consumption from the sum of reorder level and reorder quantity. We are not sure whether the consumption would be minimum or maximum, but we want to quantify the maximum stock which would ever be. Hence we take the possibility of minimum consumption.

agree with deepesh

question yourself 

how much quantity  you can hold at maximum

the apply the logic of deepesh

My Costing teacher used to give an example for this., (illustrated using filling up the petrol for bike)

Re-order level = Level at which the order is made by the firm ( i.e.Petrol level @ which you want  to refill the tank)

Re-order Qty  = Qty of petrol you refill to full the tank in the Petrol Bunk
 

Minimum Qty = Minimum amt of petrol consumed while travelling to petrol bunk

Maximum Stock Level = Maximum Qty of Petrol that can be filled in the tank.

Now the eqn is,

Maximum Oty of Petrol = Re-order Level of Petrol + Qty of Petrol filled - Min petrol consumed while travelling to bunk.

which is Maximum stock level=  Reorder level+ Reorder quantity- minimum consumption.

thanks a lot, Deepesh for answering my question...........

FOR BALA

 Superb yar, something like this only I was expecting, I understood... THANKS A TON...............tc