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Minimum Level of Inventory

Minimum level of inventory is that level which is needful for continuing of production without any disturbance.  With simple mathematical formula, we can calculate this level. Always this stock should be in the store or factory. When the inventory will go to the minimum level, production or store department should send the notice of inventory requirement to purchase department.


Now, we are explaining the formula of minimum level of inventory

Formula of Minimum Level =

Reorder Level - ( Normal Consumption X Normal Reorder Period )

For Example :

Maximum consumption = 2000 Units per Week

Normal Consumption = 1500 Units

Minimum Consumption = 1000 Units

Delivery Time = 8 to 10 weeks

Re-order Level = 20000 Units

Minimum Level = 20000 -( 1500 X 9)

= 20000 - 13500 = 6500 units

* Normal re-order period is the average of minimum and maximum reorder period
= 8+10 /2 = 9 week.

* Re-order level = Maximum consumption X Maximum Re-ordering Period

If we have A, B and C type material, we will calculate its minimum level through excel sheet.



Importance of Minimum Level of Inventory 

From above example, we find the minimum level 6500 units. It means, when there are only 6500 units in our stock, we should issue the purchase order or manage for getting stock fastly, otherwise production will stop and our machine and labor and other invested capital will be free. So, our fixed cost will increase.

 If we issue the purchase order at this level, we can reduce the cost of keeping stock in the store. There are also other factors like rate of consumption, procurement time, availability of substitutes and nature of item which affect the minimum level. If there are many substitutes which are available near us, we will more wait of reaching stock danger level from minimum level of inventory. Some organisation issues order at re-order level instead on the minimum level because after placing order of purchase, we do not get the stock immediately. So, it is the possible when stock will reach at minimum level, we will receive new stock .

Resource Relating to Inventory Cost Control

Material Control
Material purchase procedure
Techniques of Material Control
Continuous Stock Verification
Economic Order Quantity
Control Ratio

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Accounting Education: Minimum Level of Inventory
Minimum Level of Inventory
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Accounting Education
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