Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Possibility of stock outs
- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- September 15, 2017 at 3:52 pm #407675
I am studying F9 from BPP and I came across this for the “Maximum and buffer safety inventory”.
“If, however, you are given a question where the risk of stock-outs is assumed to be worth taking, and the costs of stock-outs are quantified, the re-order level may not be calculated in the way described above. For each possible re-order level, and therefore each possible level of buffer inventory, calculate:
– The costs of holding buffer inventory per annum
– The costs of stock-outs (Cost of one stock-out * expected number of stock-outs per order * number of orders per year)
The expected number of stock-outs per order reflects the various levels by which demand during the lead time could exceed the re-order level.”Followed by this example –
“Possibility of stock-outsIf re-order level is 4 units, but there is a probability of 0.2 that demand during the lead time would be 5 units, and 0.05 that demand during the lead time would be 6 units, then expected number of stock-outs =((5 – 4) * 0.2) + ((6 – 4) * 0.05) = 0.3.
(Stock-outs are defined as the number of units not available in inventory when required.)”I don’t understand the explanation. They don’t calculate the cost of stock outs entirely as you can see. Please, help me out here.
Can I use this formula to calculate the costs of holding buffer inventory per annum?
Costs of holding buffer inventory per annum = (Re-order quantity/2) * Cost of holding per unit of inventory per annum
September 16, 2017 at 6:22 am #407709Firstly, it is very rare for stock-outs and buffer inventory to be mentioned in Paper F9. It is a Paper F2 topic (and the free F2 lectures deal with it).
Secondly, the question you have typed out from BPP does not ask for the cost of the stock-outs – just for the expected number of stock outs. (To get the cost you would need to multiply by the cost per stock-out and you would have to be told that in the question because it could not otherwise be calculated – it is things like lost goodwill.)
Stock-outs occur because the demand over the lead time is greater than the level at which a new order was placed.
Buffer inventory is where the company holds more inventory throughout the year that they should really need to (in order to be ‘safe’). The cost of holding it is simply the level of buffer inventory multiplied by the holding cost per unit.
What you have written “(reorder quantity/2) x holding cost per unit” is the normal cost of holding inventory assuming that there is no buffer inventory (which is normally what we assume for Paper F9). If there was buffer inventory then the cost of this would be added on to the normal cost.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
September 16, 2017 at 7:53 am #407712I am aware it is kind of rare to ask questions like this but I wanted to cover all possible areas in F9.
Thanks for your help, Mr. Moffat.
September 17, 2017 at 7:20 am #407794You are welcome 🙂
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