Uncertainty of demand-determining the safety stocks level, Managerial Accounting

UNCERTAINTY OF DEMAND

Demand is the most troublesome variable to predict accurately. Actually, demand may fluctuate from day to day, from week to week or from month to month. Thus, the firm takes the risk of running out of stocks if there are sudden increases in demand. Hence safety stock is the extra inventory held as a buffer of protection against the possibility of stock due to higher demand.

However, a larger inventory of safety stock will involve a higher inventory carrying costs, and on the other hand, the higher safety stock will decrease stock-out costs. Therefore one has to make a balance between these two costs in order to find out an optimal safety costs.

The optimum safety-stock level exists where the costs of carrying an extra unit are exactly counter balanced by the expected stock-out costs. This would be the level that minimizes the annual total stock-out and carrying costs.

Posted Date: 12/6/2012 6:33:59 AM | Location : United States







Related Discussions:- Uncertainty of demand-determining the safety stocks level, Assignment Help, Ask Question on Uncertainty of demand-determining the safety stocks level, Get Answer, Expert's Help, Uncertainty of demand-determining the safety stocks level Discussions

Write discussion on Uncertainty of demand-determining the safety stocks level
Your posts are moderated
Related Questions
Interpretation of equity ratio As equity ratio show the relationship of owner funds to total assets higher the ratio or the share of the shareholders in the total capital of th

M/s Sunrise Industries estimates its net cash requirement at Rs. 20 million for the subsequent year. Opportunity cost fund is 15 percent per annum of the Companies. The company wil

Product life cycle Every product has a life cycle. The life cycle of a product vary from months to various years. For example in the case of cameras photocopying machines etc.

Constraints 1) A constraint of the type ≤ (≥) can be converted to an equation by adding a slack variable to (subtracting a surplus variable form) the left side of the constrain

Comparing real and planned outcomes and responding to Divergences from Plan The final phases in the process outlined in figure shown below of comparing real and planned outcome

Q. Evaluate a proposed investment? BMP Consulting (BMPC) conducted an analysis of Delta Corp. and found that the firm consists of two different divisions: Pet Lovers, a pet sup

what is semi average trend analysis using regression analysis method?

Explain Ranking of decision packages - zero base budgeting Ranking of decision packages: by ranking the decision packages a company will be able to weed out a lot of marginal e

Explain TWO limitations of using accounting ratios to assess the performance of a firm and suggest how each limitation may be improved

What is meant by the term Open Book Management? How does Open Book Management improve the organizations ability to achieve and improve results?