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Home Materials and Inventory Cost Control Maximum Level or Maximum Limit
 
 

Maximum Level or Maximum Limit of Stock:

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

Relevant Articles:

Need for Materials Cost Control
Requirements for a System of Materials Control
Stock Control
Reorder Level
Minimum Level or Minimum Limit
Maximum Level or Maximum Limit
Danger Level of Materials or Inventory
Economic Order Quantity (EOQ)

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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