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Accounting for materials

3.5 Maximum and minimum inventory levels

These values provide ‘warning’ levels for the inventory. If the maximum or minimum
levels are reached then a business may need to investigate if usage or lead times
have changed.

Maximum level = Re-order level + re-order quantity – (minimum usage ×
minimum lead time)

Minimum level = Re-order level – (average usage × average lead time)

A business, which orders 450 units each time, has looked at the delivery time and
usage for the raw material and it has the following data:

Usage: between 100 and 500 a week

Lead time: between 1 and 3 weeks

Calculate the maximum inventory level

Re-order level = 500 × 3 = 1,500

Maximum = 1,500 + 450 – (100 × 1) = 1,850 units

Calculate the minimum inventory level.

Average usage = (100 + 500) ÷ 2 = 300

Average lead time = (1 + 3) ÷ 2 = 2 weeks

Minimum = 1,500 – (300 × 2) = 900 units

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