MA-2
MATERIAL- NECESSARY THEORY
Chapter: Material
Necessary Theory
-Average Inventory Held = Order Quantity /2
-Average Inventory Held = Safety Inventory + Order Quantity /2
- Inventory Holding Cost = Price Per Unit Per Annum x Average Inventory Held
-Total annual stock holding cost = Average inventory held x inventory holding cost per Kg.
- Average Inventory = Safety Inventory + ½ Reorder Quantity
- Re Order Level = Maximum Usage x Maximum Lead Time
- Minimum Level = Re-Order level – (average usage x average lead time
- Maximum level = Reorder Level + Reorder Quuantity –(Minimum usage x Minimum lead time)
- Buffer Quantity:
Keep a certain amount of inventory in reserve this reserve of inventory is known as Buffer Quantity.
Objective of BQ:- To cope with the fluctuation with the demand. In order to obtain bulk purchase discount.
So Buffer Quantity = Safety Inventory = Minimum Level of Inventory
EOQ= Economic Order Quantity = √2CoD/√Ch
Here,
Co = cost of ordering a consignment from a supplier
Ch = cost of holding one unit of inventory for one time period
D = demand during the time period
1 FIFO rather than LIFO when the material price is falling then:
Production Cost will be higher and profit will be lower
In order to calculate EOQ then the following costs will be needed:
i) The cost of storing materials
ii) The cost of interest incurred in financing materials
iii) The cost of ordering materials
iv) The cost of insuring materials
Holding Cost: Inventory theft, Warehouse rent, interest on inventory, inventory investment are examples of holding cost.
Perpetual Inventory System is to record every receipt and issue of inventory as they occur. It will ensure that there is a continuous record of the balance of each item of inventory.
Perpetual Inventory System is to record every receipt and issue of inventory as they occur. It will ensure that there is a continuous record of the balance of each item of inventory.
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