CAT / FIA FMA Syllabus C. Cost Accounting Techniques - Establishing reorder levels - Notes ^{8 / 23}

When inventories reach the reorder level, an order should be placed to replenish inventories.

The reorder level is determined by consideration of the following.

• The maximum rate of consumption
• The maximum lead time

The maximum lead time is the time between placing an order with a supplier, and that order arriving.

When the reorder level is reached, the quantity of inventory to be ordered is known at the reorder quantity (EOQ).

When demand in the lead time is constant,

Reorder level = maximum usage × maximum lead time

Illustration

Weekly demand 700 units
Lead time 7 weeks

What is the ROL?

Solution

700 units x 7 weeks = 4,900 units