In this summary on Inventory Control, I will briefly explain the terminologies being used in this topic and also state their formulas in a way you can easily remember.
These formulas have been abbreviated in this article just for reference purposes and to help you remember them without stress. Please do not abbreviate while solving questions on Inventory Control in tests and examinations. Watch the video below
Video Guide on Inventory Control
First of all, Inventory Control, Inventory Management or Stock Valuation is concerned with the material (inventory) itself. The control on inventories is taken to ensure that various stock levels established by the organization are maintained throughout the control period.
In this video, you’re going to learn how the stock or inventory are been controlled and the formulas used to derive these stock items. Also, you’ll be able to derive these formulas by yourself and get used to them.
Inventory Control Formulas
MAXIMUM STOCK LEVEL:
This is the stock level that stock items should not be allowed to exceed hence capital would be tied down and lead to high-interest payment.
RL + RQ – (MinDP x MinU)
Re-order Level + Re-order Quantity – (Minimum Delivery Period × Minimum Usage)
MINIMUM STOCK LEVEL:
This is the level below which stocks should not be allowed to fall. It is also called buffer stock. If stocks go below this level there will be a danger of production stoppages.
RL – (ADP x AU)
Re-Order – (Average Delivery Period × Average Usage)
This is the point at which it is essential to initiate purchase requisition for fresh supplies of the materials.
(MaxDP x MaxU)
Maximum Delivery Period x Maximum Usage
This is also known as economic order quantity (EOQ). It is the most economic quantity to order, in other words, it is the ordering quantity at which the controllable cost of ordering is minimized.
MaxS + RL – (MinU x MinDP)
Maximum stock level + Re-order Level – (Minimum Usage × Minimum Delivery Period)
AVERAGE STOCK: This is the average of the minimum stock level and the maximum stock level.
AVERAGE STOCK LEVEL
Maximum Stock Level + Minimum Stock Level / by 2
Maximum Usage + Minimum Usage / by 2
AVERAGE DELIVERY PERIOD
Maximum Delivery Period + Minimum Delivery Period