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Home Materials and Inventory Cost Control Maximum Level or Maximum Limit of Stock

 

Maximum Level or Maximum Limit of Stock:

Learning Objective: 

  1. Definite and explain maximum limit or maximum level of stock.
  2. How is maximum limit or maximum level calculated?

Definition and Explanation:

The maximum stock limit is upper level of the inventory and the quantity that must not be exceeded without specific authority from management. In other words, the maximum stock level is that quantity of material above which the stock of any item should not normally be allowed to go. This level is fixed after taking into account such factors as: capital, rate of consumption of materials, storage space available, insurance cost, risk of deterioration and obsolescence and economic order quantity.

Formula:

Maximum level or maximum limit can be calculated by the help of following formula:

Maximum limit or level = Re-order level or ordering point Minimum usage Minimum re-order period + Economic order quantity

Example:

Normal usage 100 units per day
Maximum usage 130 units per day
Minimum usage 70 units per day
Re-order period 25 to 30 days
Economic order quantity 5,000 units

Calculate maximum limit or level.

In order to calculate maximum limit of stock we must calculate re-order point or re-order level first.

Ordering point or re-order level = Maximum daily or weekly or monthly usage   Maximum re-order

= 130 30

= 39,000 units

Calculation:

Maximum limit or level = Re-order level or ordering point Minimum quantity used in re-order period usage + Economic order quantity

= 3900 (70 25) + 5,000

= 7150 units

You may also be interested in other articles from "materials and inventory cost control" chapter.

  1. Need for Materials Control
  2. Requirements of a System of Materials control
  3. Stock Control
  4. Ordering Level or Ordering Point or Re-order Level
  5. Minimum Level or Minimum Limit
  6. Maximum Level or Maximum Limit
  7. Danger Level
  8. Economic Order Quantity EOQ

 

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Introduction to Managerial Accounting
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Controlling and Costing Materials
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