c) The segregation of toxic and dangerous materials in a separate location d) Security of materials by restriction of access to authorized personnel only The location of stores should ensure a) Nearness to point of use to minimize expenditure on handling costs b) Specialist stores e.g. spare parts for machinery should be located close to the point of use. Stock Level and its control Management must make decisions about the control of stock levels with a view to minimizing the cost of the company while achieving more efficiency in the availability of material to fulfill planned usage requirements. Consideration should be given to the following control levels: a) Minimum stock level b) Maximum stock level c) Re-order level d) Re order quantity (Note the re-order quantity is not necessary the EOQ) a) Minimum stock level COST ACCOUNTING
Cost Accumulation 76 This is the level below which stock should not fall. It is essentially a base (buffer) stock level. If stock falls below this point, there is a danger of stockout. Minimum stock level = Reorder level – (Normal consumption x normal reorder period) b)Maximum stock level This is the upper limit above which stock should not be allowed to rise. Each material to be kept in store must have a maximum level and stock should not be allowed to go beyond this level Maximum stock level = Re-order level +re-order Quantity - (Minimum consumption x minimum re-order period) c) Re-order level Is a point that lies between minimum and maximum stock levels at which purchase orders must be placed to ensure that goods ordered are received before the minimum stock level is reached? It is the level of stocks at which replenishment must be made to avoid a stock- out. Re-order level = maximum consumption X maximum re- order period COST ACCOUNTING
77 Lesson Three d)Re-Order quantity This is the quantity of stock ordered once the re-order point is reached. The quantity is such as to minimize stock costs taking into consideration the cost of holding stocks and making an order. This is also regarded as the Economic Order Quantity (EOQ). It is computed as follows: Where D is the annual demand (knits) Co is the cost of making one order Ch is the holding cost per unit per annum Ch O DC 2 EOQ Economic Order Quality (EOQ) Define the EOQ model and the three methods of computing EOQ. - Assumptions of the model. Illustration The following information was extracted from the books of Danex Holdings regarding its stocks: i. Reorder quantity 1,800 ii. Reorder period 4 weeks iii. Maximum consumption 450 units/week iv. Normal consumption 300 units/week v. Minimum consumption 150 units/week Vi Maximum reorder period 5 weeks Vii Minimum reorder period 3 weeks Required Determine the following stock levels for Danex Holdings: COST ACCOUNTING
Cost Accumulation 78 i. Re-order level ii. Maximum stock level iii. Minimum stock level COST ACCOUNTING
79 Lesson Three Solution i) Re-order level = Maximum consumption X maximum reorder period = 450 units X 5 weeks = 2,250 units ii) Maximum stock level = reorder level + reorder quantity-
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