Safety stock, Financial Accounting

Assignment Help:

Safety Stock

What must be the level of safety stock? In a simple condition where merely the usage rate is variable and the maximum usage rate can be given, the safety stock needed to search for total protection against stock out as:

(Maximum usage rate - Average usage rate) × Lead time

As both the lead time and usage rate vary, that is frequently the case and the range of variation is broad complete protection against stock out may need an excessively large safety stock.  For illustration, if the lead time different in between 60 days and 180 days along with an average value of 90 days and the usage rate varies in between 75 units and 125 units per day along with an average value of 100 units daily, a safety stock of 13,500 units is needed for finish protection against stock-out.  It has been worked out given as:

Maximum possible usage

-

Normal or Average usage

Maximum daily usage

X Maximum lead time

125  × 180

-

×

-

Average or Normal daily usage

Average lead time

100 × 90  = 13,500

Because inventory-carrying costs are proportional to the point of inventories carried, this rarely having sense to search for total protection against stock-out. In view of the trade-off between stock-out cost and inventory carrying cost, the optimal level of safety stock is generally much less than the level of safety stock needed to attain total protection against stock-out.

A manufacturing company will need 50,000 units of a product throughout the next year. The cost of processing a demand is Rs.20 and the carrying cost per units is 50 paise per year.  Lead-time of a demand is 5 days and the company will maintain a safety stock of two days usage.

You are needed to compute:

a. Economic Order Quantity;

b. Re-order Point;

c. Minimum Inventory; 

d. Maximum inventory and

e. Average Inventory. Here assume 250 days in a year.

Solution

a. Economic Order Quantity

EOQ = √(2RO/C)

Here R = Annual Requirements or Usage

O   =     Ordering cost per order

C   =      Carrying cost per unit per year

EOQ = √ (2 × 50,000 × Rs.20/Re .0.5)

=   √40,00,000

= 2,000 Units

b.   Re-order Point

R.O.P.  = (L× UR) + S

Where; L = Lead Time;

U = Usage Rate (50,000 ÷ 250) = 200 (units per day);

S = Safety Stock

R.O.P.  = (5 × 200) + (2 × 200)

= 1,000 + 400

= 1,400 Units

c.  Minimum Inventory

It is the Safety Stock kept by the company that is 400 units.  Minimum inventory will be zero, if there is no safety stock.

d.   Maximum Inventory

Maximum Inventory =  EOQ + Safety Stock

=  2,000 + 400

=  2,400 units.

 e. Average Inventory

 = (Maximum Inventory + Minimum Inventory)/2

= (2,400 + 400)/2

= 1,400 Units


Related Discussions:- Safety stock

Help, #The ABC Organization Unadjusted Trial Balance As of 31 December 2012...

#The ABC Organization Unadjusted Trial Balance As of 31 December 2012 Account Codes Dr Cr Cash 10,789 Furniture and fixtures 60,000 Supplies inventory 8,531 Pledged contributions r

Nature of a deeds of arrangement-bankruptcy and liquidation, Nature of a De...

Nature of a Deeds of Arrangement To avoid the expense and delay involved in a bankruptcy, a debtor in trouble may make a private arrangement with the creditors to accept paymen

What is the cash flow from assets for 2010, The following question are base...

The following question are based on above table:- Question 1 What is the change in net working capital from 2009 to 2010? Question 2 What is net capital spending for 20

Prepare the appropriate entry, LCI Cable Company grants 1.4 million perform...

LCI Cable Company grants 1.4 million performance stock options to key executives at January 1, 2013. The options entitle executives to receive 1.4 million of LCI $1 par common shar

Us gaap, US GAAP follows the Historical Cost Concept in valuing the cost of...

US GAAP follows the Historical Cost Concept in valuing the cost of Long-Term Assets. Explain this principle and how it compares to the standards used in the reporting of Long-Term

Invoices before Inventory, How should I handle Booking an invoice in one mo...

How should I handle Booking an invoice in one month for Raw material that has not been received until the following month?

Difference between npv and irr, Function to return the phase of a complex n...

Function to return the phase of a complex number 1. What is Annuity kind of cash flow? 2. What do understand by Portfolio risk? 3. What do you understand by 'Loan Am

Normal values of accounting ratios, Comparison with Sector Averages Any...

Comparison with Sector Averages Any conclusion relating to the signs of overtrading needs to be put in the context of the normal values of accounting ratios indicated by the se

What is amount per share, Q. What is Amount per share? Par Value - Amou...

Q. What is Amount per share? Par Value - Amount per share set in ARTICLES OF INCORPORATION of a CORPORATION to be entered in CAPITAL STOCKS account where it's left permanently

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd