Minimum Limit or Minimum Level of Stock


Minimum Limit or Minimum Level of Stock:

Learning Objective: 

  1. Definite and explain minimum limit or minimum level of stock.
  2. How is minimum limit or minimum level calculated?

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

You may also be interested in other articles from “materials and inventory cost control” chapter.

  1. Need for Materials Control
  2. Requirements of a System of Materials control
  3. Stock Control
  4. Ordering Level or Ordering Point or Re-order Level
  5. Minimum Level or Minimum Limit
  6. Maximum Level or Maximum Limit
  7. Danger Level
  8. Economic Order Quantity EOQ

Other Related Accounting Articles:

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