However do appreciate that the total purchases cost over the year will be the same whatever the eoq, unless there are discounts involved. Without discounts it is only the total of the holding and order costs that will change.

Have you watched the main lectures on this (as opposed to the quick revision lectures)?

In the real exam the question will make it wry clear which total is wanted. This example is just a quick one for me to use revisin the topic.

thank you so much.that means if they want inventory cost I will take purchase n ordering cost.n if they want full total cost then I will include the purchase cost as well.

Sir, what about this :
A supermarket carries inventory of a certain for which of the following information is available :
The demand is 500 units per day; the lead time is 4 days; the re-order quantity is 3,000 units. At what level of inventory should a replenishment order be placed in order to ensure that there are no stock-outs?
(answer is 2000 units) i do not know how to work this one out.

There is no formula – think about it. If you are selling 500 a day, and it takes 4 days to receive an order, then you need to have 2000 left when you place a new order!!!!

Sir, how do you work this out?
A company purchases 5000 units per quarter at an even rate throughout the year. Each order placed with the supplier incurs a delivery charge of $20. The annual cost of holding one unit in inventory is $5. What is the minimum total of the inventory costs (order costs plus holding costs) per year?

Sorry if this has been asked before, but when calculating the total cost p.a. at the EoQ, if the number of orders calculated returns a decimal answer (such as 11.25 orders in the question above), shouldn’t we round to 12 and then apply the order cost? Surely there’s no sense is calculating the cost of 11.25 orders…(unless we live amongst unicorns).. or is this like an average and in reality you’d make 10 orders of 160 and an 11th order of 200 units (or what ever other arrangement)

However (and I do explain this in the lecture) we assume that it is a long term decision. In the first year you will place 12 orders, but there will be some inventory left at the end of the yea. So in the second year you will only need 11 orders, and so on.

On average there will be 11.25 orders, and it is important for the costings not to round this.

Farzana sultana says

y have not we taken the purchase cost here?total cost means purchase ,ordering n holding cost.m I wrong.plz explain.

John Moffat says

It depends what the question asks for.

However do appreciate that the total purchases cost over the year will be the same whatever the eoq, unless there are discounts involved. Without discounts it is only the total of the holding and order costs that will change.

Have you watched the main lectures on this (as opposed to the quick revision lectures)?

In the real exam the question will make it wry clear which total is wanted. This example is just a quick one for me to use revisin the topic.

Farzana sultana says

thank you so much.that means if they want inventory cost I will take purchase n ordering cost.n if they want full total cost then I will include the purchase cost as well.

John Moffat says

Correct.

Erica says

Sir, what about this :

A supermarket carries inventory of a certain for which of the following information is available :

The demand is 500 units per day; the lead time is 4 days; the re-order quantity is 3,000 units. At what level of inventory should a replenishment order be placed in order to ensure that there are no stock-outs?

(answer is 2000 units) i do not know how to work this one out.

John Moffat says

To not run out, the need to reorder when they have 4 days x 500 units left – i.e. a reorder level of 2,000 units!

Erica says

what formula did you use?

John Moffat says

There is no formula – think about it. If you are selling 500 a day, and it takes 4 days to receive an order, then you need to have 2000 left when you place a new order!!!!

Erica says

Sir, i left a comment under Financial performance measurement lecture chapter. Thanks

Erica says

Sir, how do you work this out?

A company purchases 5000 units per quarter at an even rate throughout the year. Each order placed with the supplier incurs a delivery charge of $20. The annual cost of holding one unit in inventory is $5. What is the minimum total of the inventory costs (order costs plus holding costs) per year?

John Moffat says

First you use the formula on the formal sheet to get the Economic Order Quantity.

D = 4 x 5000 = 20,000. Co = 20; Ch = 5.

So the EOQ = 400 units.

Then you calculate the annual cost:

Delivery costs per annum = 20,000/400 x $20 = $1,000

Holding cost = 200/2 x $5 = $1,000

So total = $2,000.

Erica says

i see, thanks! Sorry if I may ask, are you the one who sets the question for FMA?

John Moffat says

We are not the ACCA 🙂

The ACCA employs an examiner (and an examining team) – they set the exam questions.

Farzana sultana says

I dint get the answer.per quarter means after every 4 months.then how come u multiply by 4.it should b 3 for getting demand

Mohammed says

Sorry if this has been asked before, but when calculating the total cost p.a. at the EoQ, if the number of orders calculated returns a decimal answer (such as 11.25 orders in the question above), shouldn’t we round to 12 and then apply the order cost? Surely there’s no sense is calculating the cost of 11.25 orders…(unless we live amongst unicorns).. or is this like an average and in reality you’d make 10 orders of 160 and an 11th order of 200 units (or what ever other arrangement)

John Moffat says

Obviously you cannot make 11.25 orders.

However (and I do explain this in the lecture) we assume that it is a long term decision. In the first year you will place 12 orders, but there will be some inventory left at the end of the yea. So in the second year you will only need 11 orders, and so on.

On average there will be 11.25 orders, and it is important for the costings not to round this.

edge says

In question a you’ve calculated EOQ to be 160 yet used 200 in the calculation for total cost p.a. Can you please explain why?

edge says

@edge, nevermind, you’ve corrected your mistake later.

danishtaleef says

what about minimum inventory control level…?

just did a few questions , did them all, but i don’t get its logic…

pepperoniii says

sorry but the video ended before (d) was answered. I suppose the answer is 20000-14000= 6000 units? or am i wrong