what is minimum level ?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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In accounting, minimum level refers to a level of stock that a company has to maintain to overcome any contingency. The minimum stock level is the difference between the level at which the company places a reorder and the product of normal consumption and normal reorder period.

For example, consider a manufacturer A of umbrellas that require 5 different raw materials; one of them is not mass produced and needs to be specially ordered. The demand of the product manufactured by the company is not constant but varies depending on the weather. If there is a change in weather that increases the demand for products, the company cannot afford to place a special order for one of the raw materials and keep its operations on hold. While it is waiting, the increased demand is being catered to by competitors and when A is actually ready to deliver the umbrellas there may no longer be a demand for them.

To take care of these situations, minimum levels are fixed for some supplies. Under normal circumstances, the minimum level is not used, but it is essential to maintain these to take care of unexpected situations.

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