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query about costing

Abhinandan (student) (407 Points)

17 December 2010

someone please tell me about the logic behind this formula..

Maximum stock level= Reorder level+ Reorder quantity- minimum consumption

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CA Vasiullah (Vasi) (Audit Executive) (1823 Points)
Replied 17 December 2010

Well, accounting is not a pure science.... So here you'll not always find cause and effect relationship.....

thats why formulae and principles on accounting are based on general principles and logic...... although these principles sometimes do seems to be illogical due to the reason mentioned above.....

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Deepesh Khatri (CA) (167 Points)
Replied 17 December 2010

Consider the following points -

- A firm will order only at reorder level.

- A firm will order the same quantity which has been determined using EOQ.

- Order placed at reorder level will take some time to arrive (lead time). When the order arrives, the stock would be reorder level + the order quantity if there is no consumption in lead time. However during this time, stock out of the reorder level would be consumed. That is why we reduce consumption from the sum of reorder level and reorder quantity. We are not sure whether the consumption would be minimum or maximum, but we want to quantify the maximum stock which would ever be. Hence we take the possibility of minimum consumption.

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vikas verma (Chartered Accountant) (282 Points)
Replied 17 December 2010

agree with deepesh

question yourself

how much quantity you can hold at maximum

the apply the logic of deepesh

(Guest)

Originally posted by : anchal abhinandan
	someone please tell me about the logic behind this formula.. Maximum stock level= Reorder level+ Reorder quantity- minimum consumption

CA ANKUSH AGGARWAL (CHARTERED ACCOUNTANT) (2782 Points)
Replied 17 December 2010

Originally posted by : Deepesh
	Consider the following points - - A firm will order only at reorder level. - A firm will order the same quantity which has been determined using EOQ. - Order placed at reorder level will take some time to arrive (lead time). When the order arrives, the stock would be reorder level + the order quantity if there is no consumption in lead time. However during this time, stock out of the reorder level would be consumed. That is why we reduce consumption from the sum of reorder level and reorder quantity. We are not sure whether the consumption would be minimum or maximum, but we want to quantify the maximum stock which would ever be. Hence we take the possibility of minimum consumption.