Maximum Level of Inventory

Maximum level of inventory is maximum  quantity of material which have to keep in store. We should not keep the stock more than maximum level because if we keep more stock than maximum level it will increase the cost of capital because we do not need the stock more than maximum level. Excess stock than maximum level will increase the cost of storing.

Following are the factors which are kept in mind when we take the decision of maximum level of inventory.

Factor Affecting Maximum Level of Inventory 

1. Rate of Consumption 

If we consume the inventory with fast rate of consumption, we need more quantity. So, our maximum level of inventory should be high.

2. Rate of Deterioration 

If there are more rate of deterioration which may normal or abnormal, we should keep the stock at low quantity.

3. Requirements in Production 

If we have high demand and requirement in production, we should buy stock at large quantity. With this, we can get discount facility. We should also compare this discount with storage cost. If discount is more than storage cost, it will be good, if we keep large volume of stock.

4. Storage Cost 

Storage cost is also big factor for deciding maximum level of inventory. If it is very low, we can keep excess stock from maximum level.

5. Insurance Cost 

There is the risk of loss due to fire or any other reason. If insurance cost is very low, we can keep more stock than maximum level of inventory.

6. Availability of Storage Space 

If our storage space is empty, we can use for storing excess quantity of stock than maximum level.

Formula of Maximum Level of Inventory 

Reorder level + Economic Order quantity − (Minimum rate of usage × Minimum lead time)

For Example 

Minimum Consumption 1000 per day

Delivery Time = 8 to 10 days

Reorder Level = 20000 units

Economic Order Quantity = 15000 units

Maximum Stock level = Reorder Level + EOQ - ( Minimum consumption X minimum reorder period)

= 20000 + 15000 - ( 1000 X 8)

= 35000 - 8000

= 27000 units

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Accounting Education: Maximum Level of Inventory
Maximum Level of Inventory
Accounting Education
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