Minimum Limit or Minimum Level of Stock:
Definition and Explanation:
The minimum
level or minimum stock is that level of stock
below which stock should not be allowed to fall. In
case of any item falling below this level, there is
danger of stopping of production and, therefore, the
management should give top priority to the
acquisition of new supplies.
Formula:
Minimum level or
minimum limit can be calculated by the following
formula or equation:
Minimum limit or level = Re-order level or ordering
point – Average or normal usage × Normal re-order
period
Or
the formula can be written as:
Minimum limit or level = Re-order level or ordering
point – Average usage for Normal period
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 |
Calculate: minimum limit or level
To
calculate minimum limit of materials we must
calculate re-order point or re-order level
first.
Calculation:
|
Ordering point or re-order level =
Maximum daily or weekly or monthly
usage × Maximum re-order
= 130
× 30
=
3,900 units |
|
Minimum limit or level = Re-order
level or ordering point – Average or
normal usage × Normal re-order
period
= 3900
– (100 × 27.5*)
1150
units
*(25 +
30 ) / 2 |
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