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query about costing

Abhinandan (student) (407 Points)

31 December 2010

SOM1 PLS TELL ME THE LOGIC BEHIND THESE FORMULAS

MINIMUM LEVEL= REORDER LEVEL- (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

REORDER LEVEL=MAXIMUM REORDER PERIOD *MAXIMUM USAGE

NORMAL USAGE* (MINIMUM STOCK PERIOD+ AVERAGE DELIVERY TIME)

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7 Replies

Sunshine (Helping All) (10575 Points)
Replied 31 December 2010

these are formulas ... u want explaination abt the terms??

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CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26263 Points)
Replied 31 December 2010

MINIMUM LEVEL=

REORDER LEVEL- (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

REORDER LEVEL=

MAXIMUM REORDER PERIOD *MAXIMUM USAGE

Firstly, to understand Cost Accountancy in perfect manner; assume yourself as one who is owner of a factory.

Reorder Level : This is the level which alarms us to Order for Raw Materials.

Suppose in a day maximum use of Raw Materials in the factory of 1000 pcs.

If you order today; it will take maximum 6 more days to receive the supply.

It means you have to take 1000*7 = 7,000 pieces in your hand (including today's consumption) so that at least you will have uninterrupted supply of raw materials for your factory till the raw materials is received.

Hence the formula is perfect one.

......................................................................................................................

Regarding Minimum Level :

Since the Reorder level considers the maximum period and maximum usages hence to know the minimum level we have to deduct the normal usages during the period.

Suppose normal usages is 500 pcs. and normal delivery period is 3 days then it means total 1500 pcs. would be consumed if the circumstances are normal.

If we deduct these 1500 pieces from the Reorder Level (which is based on maximum) then we will get the Minimum Level.

The confusion may arise that we should have Minimum Level of 1500 pieces only.

This is not correct because after 3 days we would have NIL stock at the factory.

When we run a factory where 5000 workers are working and crores of rupees plant and machinery is running; then if for a single day our plant remains closed due to non-supply of Raw Materials; then heavy losses would be incurred.

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Vikrant (Chartered Accountant) (601 Points)
Replied 31 December 2010

MINIMUM LEVEL= REORDER LEVEL- (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

explanation: we know that REORDER LEVEL= MINIMUM LEVEL + (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

suppose i had 500 units left and my consumption is 40 units per day,also average period of delivery is 10days, and minimum level to be maintained for meeting emergencies is 100units then, i need get the goods when my 400 units which are left will be over plus when only the min.stock will be left...after 10 days my daily consumption will flourish my 400 units and i would not like to spend my 100 units which are kept for emergencies hence i will re order before 500 units..

hence for the above example we get the following eq. by applying the following formula:

REORDER LEVEL= MINIMUM LEVEL + (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

i.e. REORDER LEVEL= 100units + (40units/day * 10 days)

i.e. REORDER LEVEL= 100units + 400units = 500units

By deriving this formula only we get :

MINIMUM LEVEL= REORDER LEVEL- (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME)

hope made you clear.....

Sunshine (Helping All) (10575 Points)
Replied 31 December 2010

@ Surendra sir...your explaination is just FANTASTIC.....!!!

we get to learn new things everyday at CCI....great ....

Abhinandan (student) (407 Points)
Replied 31 December 2010

superb explanation Surendra sir, I was expecting something like that, thats y i asked this question, par aapne superbly answer diya, sab aasan ho gaya...........if possible give me ur mail ID sir to ask further questions if any...and thanks so much for answering this question......Anchal

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CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26263 Points)
Replied 31 December 2010

You may ask your queries here at caclub so that more students would be benefited

because many students hesitate to ask their queries publicly.

Bharat Patel (nope) (31 Points)
Replied 10 January 2011

Originally posted by : CA SURENDRA KUMAR RAKHECHA
	MINIMUM LEVEL= REORDER LEVEL- (NORMAL USAGE PER PERIOD* AVERAGE DELIVERY TIME) REORDER LEVEL= MAXIMUM REORDER PERIOD MAXIMUM USAGE Firstly, to understand Cost Accountancy in perfect manner; assume yourself as one who is owner of a factory. Reorder Level : This is the level which alarms us to Order for Raw Materials. Suppose in a day maximum use of Raw Materials in the factory of 1000 pcs. If you order today; it will take maximum 6 more days to receive the supply. It means you have to take 10007 = 7,000 pieces in your hand (including today's consumption) so that at least you will have uninterrupted supply of raw materials for your factory till the raw materials is received. Hence the formula is perfect one. ...................................................................................................................... Regarding Minimum Level : Since the Reorder level considers the maximum period and maximum usages hence to know the minimum level we have to deduct the normal usages during the period. Suppose normal usages is 500 pcs. and normal delivery period is 3 days then it means total 1500 pcs. would be consumed if the circumstances are normal. If we deduct these 1500 pieces from the Reorder Level (which is based on maximum) then we will get the Minimum Level. The confusion may arise that we should have Minimum Level of 1500 pieces only. This is not correct because after 3 days we would have NIL stock at the factory. When we run a factory where 5000 workers are working and crores of rupees plant and machinery is running; then if for a single day our plant remains closed due to non-supply of Raw Materials; then heavy losses would be incurred.