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Accounting for materials

Systems of inventory control

3.1 Re-order level

This level will be determined with reference to the time it will take to receive an order
and the possible inventory requirements during that time. When this level of
inventory is reached a new order must be placed to prevent stock outs.

Re-order level = maximum usage × maximum lead time

Re-order level = (maximum usage × maximum lead time) + buffer

A business uses 5,000 units of raw material per week and it takes 3 weeks to receive
the goods after the order has been placed. The business also keeps additional
inventory of 2,500 units in reserve.

Calculate the re-order level.

5,000 units × 3 weeks + 2,500 buffer inventory = 17,500 units

Illustrations and further practice

Now try TYU question 5 from Chapter 5

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