ACCA Financial Management (F9) Certification Practice Exam

How is the reorder level determined?

1. Annual demand + minimum lead time

2. Maximum usage x maximum lead time

3. Average usage x average lead time

4. Reorder volume x cost of holding

The correct answer is: Maximum usage x maximum lead time

The reorder level is a critical point that indicates when it is necessary to replenish stock to avoid running out. It is determined using the concept of estimating the maximum consumption of inventory and the maximum lead time required to replenish that inventory. Choosing the option related to maximum usage and maximum lead time aligns with the principle of ensuring that you have sufficient stock on hand to meet demand during the entire time it may take to restock. If the business experiences a spike in demand or if there are delays in the supply chain, relying on maximum usage combined with maximum lead time provides a conservative buffer. This approach minimizes the risk of stockouts, which can negatively impact sales and customer satisfaction. On the other hand, other methods such as simply considering annual demand or average values may not adequately account for variability in demand or lead time, potentially leading to insufficient stock levels. Using average figures tends to smooth out peaks and troughs in demand, which could sometimes result in underestimating the required stock. Similarly, focusing on holding costs does not directly relate to determining when to reorder inventory.