Reorder Level is a term related to refilling the inventory. It is the level where a business, company or firm should order for a new purchase or start manufacturing a new batch to replenish their inventory as it has reached a critical level. If the reorder level is calculated correctly it means that the inventory required to be replenished as it has reached at the zero point.
The formula of the reorder level of the inventory can be calculated by multiplying the average daily usage rate of the inventory with the lead time in days for a given inventory item. The formula of the reorder level can be shown as under:-
Inventory Reorder Level = Maximum Daily Usage Rate x Lead Time + Safety Stock
While calculating the inventory reorder level one thing must be kept in mind that reorder level consider the constant usage of the inventory at the constant rate. However this is not always the case as the usage level of the inventory may spike or decrease depending upon the circumstances, seasons or events. If the usage of the products spikes that means the reorder level is too low and there is no inventory in hand when required for the manufacturing. On the other hand if the usage of inventory declines that means there is too much inventory on hand.
Other Related Accounting Articles: