In order to keep the ordering cost and carrying cost under control, a maximum level of stock is determined. It ensures that the cost saved as a result of minimizing the ordering cost and carrying cost can be utilized in any other way to maximize the net income of the entity.
Maximum level ensures that store does not keep goods in excess of the requirement and the goods in the stores do not get damaged due to over storage. As you know that, due to limited area in the store, an extra ordinary quantity of goods can cause poor management of stock. Stock can get damaged and even can be stolen. To counter all these negative aspects, entity has to find out its maximum stock level to be stored in the store department.
Due to the availability of the modern ERP, it has new become easy to tackle the situation very well. If the records are kept properly and entries of stock movements are entered on the spot, then the issues of stock management can be controlled with better performance.
Factors Affecting Maximum Stock Level
- space availavle to store the goods,
- amount of funds available,
- chances of loss by evaporation and deterioration,
- frequency of usage of the goods with respect to the lead time,
- maximum requirement of the store department for production process,
- effect of fashion and trends,
- imposition of law,
- fluctuation trends in the prices of the goods,
- seasonal impact.
Maximum Stock Level Formula
Maximum level = Re-ordering level + EOQ – (Minimum consumption x Minimum re-order period)
Example
Aero is engaged in the manufacturing of bed sheets and towels. It is unsure what level of minimum thread stock it should kept in its store department. Following data is available from its costing records:
Minimum consumption per week = 3,000 units
Maximum consumption per week = 4,500 units
Economic order quantity (EOQ) = 14,000 units
Normally, 3,500 units of threads are consumed on a weekly basis and it takes around 20 – 25 days of ordering period to get the new supply of threads from the supplier.
Required
Calculate Maximum stock level from the information given above.
Solution
Re-order level = Maximum weekly consumption x Maximum re-order period = 4,500 x 25 = 112,500
Maximum level = Re-ordering level + EOQ – (Minimum consumption x Minimum re-order period) = 112,500 + 14,000 – (3,000 x 20) = 126,500 – 60,000 = 66,500 Units
From the calculation done above, it is clear that the maximum level of stock that can be kept in the store department is 66,500 units.
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