ACCA Financial Management (F9) Certification Practice Exam

What is the maximum inventory level calculated based on reorder levels?

1. Reorder level - minimum usage x minimum lead time

2. Reorder level + reorder level - (minimum usage x minimum lead time)

3. Reorder level + (average usage x average lead time)

4. (Reorder level + minimum usage) / maximum lead time

The correct answer is: Reorder level + reorder level - (minimum usage x minimum lead time)

The maximum inventory level is a crucial concept in inventory management, reflecting the highest quantity of stock that a business should carry at any given time. The correct answer centers around the relationship between reorder levels, usage rates, and lead times. When you calculate the maximum inventory level, you're looking to ensure that you have enough stock on hand to meet demand during lead time and to manage fluctuations effectively. The correct formula embodies this approach, as it takes into account not only the reorder level but also the expected consumption during the lead time. The formula combines the reorder level with the expected usage over the period of lead time. By using average usage and lead time, it ensures that the business is well-prepared to meet customer demand without running into stockouts, while also avoiding excess inventory that can lead to increased holding costs. Understanding this formulation is vital since it integrates two critical components: the point at which new stock should be ordered (the reorder level) and the estimated requirements for that stock during the time it takes for new stock to arrive. This ensures effective inventory management and operational efficiency.