Periodic order system

Cost/Management Accounting notes

The firm receives a new order of the amount specified by the order quantity at equal intervals of time. The order quantity is based on the likely demand (factors that affect demand of the firms product) and the current stock levels. The firm determines the maximum and minimum inventory, the safety stock and the reorder level. For instance, a firm may be supplied with fixed amount of stock every Monday of the week for the entire period under consideration. This is mostly the case where consumption is uniform throughout the period.
The stock levels are reviewed at fixed intervals and a replenishment order is issued where necessary. The reviewed is deemed beneficial as obsolete stock can be identified and eliminated at the earliest possible instance. Spreading of purchasing department load may yield economies in placing orders. Furthermore, because orders will be sequential, there may be production economies due to more efficient production planning and lower set up costs.
However, periodic order system requires larger stocks as reorder quantity must take into account the period between the reviews and lead times too. More so, the reorder levels are not always the EOQ. Where there arises a change in consumption habits and demand goes up significantly, stock out costs may result. In other words, to come up with an appropriate period of review, the demands must be reasonably consistent.

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