ECONOMIC ORDER
QUANTITY
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Accounting - ECONOMIC ORDER QUANTITY, Study notes of Accounting
ECONOMIC ORDER QUANTITY - Quantity for which order is place everytime the stock reaches the re-order level. COSTS TO BE TAKEN IN ACCOUNT Ordering cost Cost of carrying stock.
Typology: Study notes
2010/2011
1 / 12
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ECONOMIC ORDER
QUANTITY
ECONOMIC ORDERECONOMIC ORDER
QUANTITY QUANTITY
Quantity for which order is placeQuantity for which order is place
everytime the stock reaches the re-everytime the stock reaches the re-
order levelorder level
Also known as RE-ORDER QUANTITYAlso known as RE-ORDER QUANTITY
It gives maximam economy inIt gives maximam economy in
purchasing any material andpurchasing any material and
ultimately contributes towardsultimately contributes towards
maintaining the material at optimummaintaining the material at optimum
level and at minimum cost.level and at minimum cost.
Ordering cost:
- It is the cost of placing an order with the
supplier.
- It decreases with increase in the size of order.
- Factors involved:
1.Cost of stationary
2.Salaries of those engaged in placing order
3.Salaries of those engaged in receiving and
inspection etc.
Cost of carrying stock:
- It is the of holding the stock in the
storage.
- It includes:
1.Cost of operating the store
2.Detoriaton an wastage of materials
3.Incidence of insurance cost
Methods for Calculating the EOQ
•Tabular Method
•Formula based
FORMULA BASED:
Formula:
(Square root of) 2.A.B./C.S.
Where A=Annual consumption in units
B=Buying or ordering cost per order
C=Cost per unit
S=Storage or carrying cost as a percentage of average
inventory
Alternatively: EOQ=(square root of) 2.A.B./S
Where S=Storage cost per unit annum
TABULAR METHOD:
•This method is used when prices vary according to the
quantity to be purchased.
•The most economic size of the quantity to order
i.e.,where the cost is least can be obtained using a table.
Illustration:Determine EOQ from the following information
using table.
•Annual consumption - 12000 units
•Cost of ordering - Rs.15 per order
•Cost of material - rs.1.25 per unit
•Carrying cost - 20% of average inventary
No.ofNo.of orderorder perper yearyear
UnitsUnits perper orderorder
ValuesValues perper orderorder (Rs.)(Rs.)
OrderiOrderi ngng costcost (Rs.)(Rs.)
CarryinCarryin g Costg Cost (Rs.)(Rs.)
TotalTotal costcost (Rs.)(Rs.)
(^11 1200012000 1500015000 1515 15001500 )
(^22 60006000 75007500 3030 750750 )
(^33 40004000 50005000 4545 500500 )
(^44 30003000 37503750 6060 375375 )
(^55 24002400 30003000 7575 300300 )
(^66 20002000 25002500 9090 250250 )
(^77 17141714 21422142 105105 214214 )
(^88 15001500 18751875 120120 188188 )
99 13331333 16671667 135135 167167 302302
1010 12001200 15001500 150150 150150 300300
1111 10911091 13641364 165165 136136 301301