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

 

Minimum Limit or Minimum Level of Stock:

Learning Objective: 

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

Definition and Explanation:

The minimum level or minimum stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.

Formula:

Minimum level or minimum limit can be calculated by the following formula or equation:

Minimum limit or level = Re-order level or ordering point Average or normal usage Normal re-order period

Or the formula can be written as:

Minimum limit or level = Re-order level or ordering point Average usage for Normal period

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

Calculate: minimum limit or level

To calculate minimum limit of materials we must calculate re-order point or re-order level first.

Calculation:

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

= 130 30

= 3,900 units

Minimum limit or level = Re-order level or ordering point Average or normal usage Normal re-order period

= 3900 (100 27.5*)

1150 units

*(25 + 30 ) / 2

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
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials & Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Cost-Volume-Profit-Relationship
Variable Costing System
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Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
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Financial Accounting

 
Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Journal
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Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
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