FORMULA’S OF MATERIALS

1 ] MINIMUM LEVEL :-

It indicates the lowest figure of inventory balance,which must be maintained in hand

at all times,so that there is no stoppage of production due to non availability of inventory.

MIN. LEVEL OF INVENTORY =

RE-ORDER LEVEL – ( AVG.RATE OF CONSUMPTION * AVG.TIME

OF INVENTORY )

2 ] MAXIMUM LEVEL :-

It indicates the maximum figure of inventory quantity held in stock at any time.

MAX.LEVEL OF INVENTORY =

RE-ORDER LEVEL + RE-ORDER QTY.- (MIN.CONSUMPTION *

MIN.RE-ORDER PERIOD)

3 ] RE-ORDER LEVEL :-

This level lies between minimum and the maximum levels in such a way that
before the material order is received into the stores, there is sufficient quantity on hand to
cover both normal and abnormal consumption situations. in other words, it is the level at
which fresh order should be placed for replenishment of stock.

RE-ORDER LEVEL =

MAX.CONSUMPTION * MAX.TIME

4 ] AVERAGE INVENTORY LEVEL :-

This level of stock may be determined by using the following formula.

AVG.INVENTORY LEVEL =

MIN. LEVEL + ½ RE-ORDER QUANTITY.

OR
 MAX. LEVEL + MIN.LEVEL
2

5 ] DANGER LEVEL :-

It is the level at which normal issues of the raw material inventory are stopped
and emergency issues are only made.

DANGER LEVEL =

AVG.CONSUMPTION * LEAD TIME FOR EMERGENCY PURCHASE

1/2
EQUIVALENT ORDERING QUANTITY [ E.O.Q ]= [2A*O]
C

WHERE , A = ANNUAL DEMAND

C = CARRYING COST PER UNIT

O = ORDERING COST PER UNIT

EXM:-1

Two components, A and B are used as follows :

Normal Usage : 50 per week each

Maximum usage : 75

Minimum usage : 25 per week each

Re-order quantity : A :300 ; B : 500

Re-order period : A 4 to 6 weeks

B 2 to 4 weeks
 Calculate for each component ( a ) Re-ordering level ; ( b ) Minimum Level ; ( c )
Maximum Level ; ( d ) Average stock Level.

Solution :-

R.O.L = MAX. CONSUMPTION * MAX.TIME

75 * 6

= 450 UNITS

MIN. LEVEL = R.O.L – ( AVG.CONS. * AVG.TIME )

= 450 – ( 50 * 5 )

= 200 UNITS.

MAX.LEVEL = R.O.L + R.O.Q – ( MIN.CONSUMPTION * MIN.TIME )

= 450 + 300 – ( 25 * 4 )

= 650 UNITS

AVG.LEVEL = MAX.LEVEL + MIN.LEVEL

2

= 650 + 200
2

= 425 UNITS.

SELF – 1

Material X and Y are used as follows :

Minimum usage : 50 units each per week

Maximum usage : 150 units each per week

Normal usage : 100 units each per week

Ordering quantities : X = 600 units
Y = 1000 units

Delivery period : X = 4-6 weeks

Y = 2-4 weeks

Calculate for each material ( 1 ) Maximum Level ( 2 ) Minimum Level ( 3 ) Ordering

Level.

BUDGETARY CONTROL

SUM :- 1

Draw a material procurement budget from the following information:

Estimated opening balances at the commencement of the next year :

Finished product 5000 units

Material A