Base stock method definition
/What is the Base Stock Method in Inventory Accounting?
The base stock method is a valuation technique for the inventory asset, where the minimum amount of inventory needed to maintain operations is recorded at its acquisition cost, while the LIFO method is applied to all additional inventory. This approach is not acceptable under generally accepted accounting principles.
What is the Base Stock Method in Inventory Management?
The base stock method is used to calculate the point at which additional units of stock should be reordered. This approach balances the need to keep some inventory on hand with the cost of that inventory. This approach is comprised of the base stock (the minimum inventory level considered acceptable to meet demand), plus lead time demand, which is the additional amount of demand that may arise while restocking goods are in transit from the supplier.
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Example of the Base Stock Method
Imagine that Hawaii Electronics, a retailer specializing in smartphone accessories, uses the base stock method to manage its inventory of wireless chargers. After analyzing sales data, the company’s inventory manager determines that she must always have at least 500 units of wireless chargers on hand as a safety buffer to meet unexpected demand — this is its base stock level. She also knows that its average weekly sales are around 300 units, and that it takes two weeks for a new order to arrive from the supplier. Therefore, its lead time demand is estimated to be 600 units (300 units x 2 weeks).
Using the base stock method, The inventory manager sets the company’s reorder point at the sum of the base stock and the lead time demand, which is as follows:
500 units (base stock) + 600 units (lead time demand) = 1,100 units
This means that every time the inventory level falls to 1,100 units, BlueWave immediately places a new order. This system ensures that, even during the supplier's lead time, the company will have enough stock to meet customer demand while avoiding excessive inventory carrying costs.