Untitled-29

(^246) Financial Management
Avg. Stockholding
67,500
0
20000
40000
60000
80000
100000
120000
140000
0 3 6 9 12
Months
Quantity
Avg. Stockholding
33,750
0
10000
20000
30000
40000
50000
60000
70000
0 3 6 9 12
Months
Quantity
not the average holding which will be influenced by the stockholding costs illustrated in
the previous paragraph.
Pattern of Procurement and Stockholding
Assuming that an item is in constant demand there are no difficulties in obtaining
supplies, it would be normal to take a supply into stock and then use it up steadily
until it was exhausted, when a new supply would be obtained. Taking the example
from the paragraph on control of stock where sales were to be Rs.1,35,000 per annum,
assume, that this represents 1,35,000 units of an item of stock at Rs.1 each. If demand
is steady, the monthly usage of this item would be 11,250 units.
Now it would be possible to buy all 1,35,000 units at the beginning of the year and to use
them progressively as shown in the following diagram:
If this was done then:
l there would be only one purchase, so the related costs in the buying department
would be low;
l the average stock holding would be 62,500 units, so there would be 62,500x12 =
7,50,000 unit-months to influence the costs of stock-holding.
An alternative action would be to buy twice during the year, as shown in the next
diagram. This would double the procurement costs, but would reduce the average
stockholding to 31,250 units so that stockholding costs would be determined by only half
the previous number of unit-months.