Home page               Download material                Accounting topics                Accounting dictionary                Financial calculators

Home Materials and Inventory Cost Control Reorder Level
 
 

Re-order Level or Ordering Point or Ordering Level:

  1. Definition and explanation of re-order point
  2. Formula of re-order level or ordering point
  3. Examples

Definition and explanation:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety  stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

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

The above formula is used when usage and lead time are known with certainty; therefore, no safety stock is provided. When safety stock is provided then the following formula will be applicable:

Ordering point or re-order level = Maximum daily or weekly or monthly usage Lead time + Safety stock

Examples:

Example 1:

Minimum daily requirement 800 units
Time required to receive emergency supplies 4 days
Average daily requirement 700 units
Minimum daily requirement 600 units
Time required for refresh supplies One month (30 days)

Calculate ordering point or re-order level

Calculation:

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

= 800 30

= 24,000 units

Example 2:

Tow types of materials are used as follows:

Minimum usage

 

20 units per week each

Maximum usage 40 units per week each
Normal usage 60 units per week each
Re-order period or Lead time
Material A:
Material B

3 to 5 weeks
2 to 4 weeks

Calculate reorder point for two types of materials.

Calculation:

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

A: 60 5 = 300 units
B: 60 4 = 240 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
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
----------------------------------------------------------------------------
  Journal, Ledger and Trial Balance
----------------------------------------------------------------------------
  Accounting for Bills of Exchange
----------------------------------------------------------------------------
  Special Journals
----------------------------------------------------------------------------
  Cash Book
----------------------------------------------------------------------------
Bank Reconciliation Statement
----------------------------------------------------------------------------
  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

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

 

 

Home                         Download material                         Contact us                         Privacy policy                         Link to us                         Advertise

Copyright 2011