Page 65 - DCOM202_COST_ACCOUNTING_I

Unit 4: Material Control

Notes
Example: Two components, A and B, are used as follows:
Normal usage 100 units/week
Maximum usage 150 units/week

Minimum usage 50 units/week
Reorder quantity A 600, B 1000
Reorder period A 4 to 6 weeks
B 2 to 4 weeks
Calculate for cash component 1. Reorder level
2. Minimum level

3. Maximum level
4. Average Stock level
Solution:
1. Reorder level = Maximum usage/week × Maximum delivery period

Reorder level for A = 150 units × 6 = 900 units
Reorder level for B = 150 units × 4 = 600 units
2. Minimum level = Reorder level – (Normal usage × Avg. period)
Minimum level for A = 900 units – 50 units × 5
= 900 units – 250 units = 650 units

Minimum level for B = 600 units – 50 units × = 450 units
3. Maximum level = Reorder level + Reorder Qty – (Min. consumption × Min. reorder
period)
Maximum level for A = (900+600) – (50 units × 4 weeks)

= 1500 – 200 = 1300 units
Maximum level for B = (600+1000) – (50units × 2) = 1500 units
4. Average stock level = ½ (minimum + maximum stock level) Average stock for
component A = ½ (650 + 1300) = 975

Average stock for component
B = ½ (450 + 1500) = 975

Example: From the following particulars, calculate the various stock levels:

Normal consumption 300 units per day
Maximum consumption 420 units per day
Minimum consumption 240 units per day
Re-order period 10–15 days
Re-order quantity 3,600 units

Normal re-order period 12 days

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