Accounting for Material Where,

A = Annual requirement or need

Economic Order Quantity [EOQ]:
EOQ is an extremely effective tool for managers because they can use it to
figure out what is the optimal amount of inventory to be purchased in one lot.
EOQ is the order size that minimizes the sum of ordering and holding costs related
to raw materials. In other words, it is the optimal inventory size that should be
ordered with the supplier to minimize the total annual inventory cost of the
business.
The economic order quantity is the optimum quantity of an item to be
purchased at one time in order to minimize the combined annual costs of ordering
and carrying the item in inventory.
O = The ordering costs / Procurement costs are the costs that are incurred
every time an order for inventory is placed with the supplier.
♦ Cost of telegram, Telephone and fax
♦ Shipping cost, Transportation, Trucking, Loading & unloading charge
♦ Set up cost for an order
C = The holding costs / carrying costs are the costs that are incurred to hold
the inventory in a store or warehouse.
♦ Insurance, Material handling cost, Storing cost
♦ Opportunity cost, Interest on investment, Rent of warehouse
♦ Loss/Damage of material, Obsolescence cost, Spoilage cost, Depreciation

√ 2 AO Stock Levels:
(1) EOQ = Inventories make the bridge between the production and sales. Inventory is the
C stock which firm maintains to meet its future requirement for the production and
sales. The basic reason for holding inventory is to keep up the production activities
(2) No. of order (N) = A unhampered.
EOQ
(1) Re-order level [ROL] = Maximum consumption x Maximum re-order period
(3) Total cost of EOQ: ROL = Min. stock level + (Normal consumption x Normal re-order period)
(a) Without material cost = A x O + Q x C ROL = Safety stock + (Normal consumption x Normal re-order period)
Q 2
(b) With material cost = A x O + Q x C + A x Cost per unit (2) Minimum stock level = ROL - (Normal consumption x Normal re-order period)
Q 2
(c) Total cost with discount offer = (3) Maximum stock level = ROL + ROQ - (Min. consumption x Min. re-order
A x O + Q x C - A x Cost per unit x Discount % period)
Q 2
(4) Average stock level = Min. stock level + Max. stock level
(4) Length of inventory cycle = Days / Weeks / Months in a year 2
No. of order Average stock level = Min. stock level + ROQ
2

[ Normal / Average = Minimum + Maximum ]

2