1. avatar says

    Does the cost of the inventory itself (in this case $25/unit) not matter? The question is about calculating the cost of Inventory p.a (which I think includes the purchase price of the inventory)

    Also if we used that, would it distort the EOQ?

    • Profile photo of John Moffat says

      The cost of the inventory of $25 if not relevant because it would be the same total cost over the year however many we order each time. We are still ordering the same total number of units over the year, and so the total purchase price will be the same. We are costing out over the year and only the total order and total inventory costs will change with the number ordered each time.

      The purchase price is only relevant if the holding cost per unit is a % of the purchase price (but only relevant for calculating the holding cost per unit), or if there are discount offered for purchasing larger quantities each time (which is dealt with in the later lectures.)

  2. Profile photo of Sophia says

    Thx for lectures,John.
    but I have a small question,I bought a latest text book published by BPP,and I planned to look though each chapter of the book after watching lectures ,but the contents of your lectures are quiet different from the book,which makes me confused %>_<%

    • Profile photo of John Moffat says

      The chapters may be in a different order, but the contents are not quite different! Our lectures go through most of what is needed for the exam.
      If you understand our lectures you do not really need to use the Study Text, but what you must have is a Revisiom Kit because it is vital to practice as many questions as possible.

      • Profile photo of Sophia says

        sorry I didn’t express myself properly, I do wanna say the order is different…
        But it’s good to know that I don’t have to go through the whole textbook coz it’s too much in the book!
        THX AGAIN!^_^

  3. avatar says

    Dear Mr Moffat

    I’ve got a question. The Ex.1 says: “Inventory holding costs amount to 10% p.a. of inventory value.” But inventory value’s defined by the price of the desk, which is $25, isn’t it? so, I assume we can’t say that holding of 1 unit is equal to $2.5, because it includes several decks, for ex. in case of 500 units it’s 40,000 / 500 = 80 (desks per unit), and then holding 1 unit of 80 desks will cost us $200. And so on. Where is my mistake, plzzz?

    • avatar says

      I mean, therefore, the holding of 1 unit of 80 desks will cost us 80 * 2.5 = $200. And on average we are being charged on 250 units for the whole year, so it’ll be 250 * 200 = $50,000.
      In case of 750 units we’ve got 40,000 / 750 = 53.(3) (desks per unit), therefore 53.(3) * 2.5 = $133.(3) per unit, and (750 / 2) * 133.(3) = $50,000 (total payment for holding). I mean, it should be the same in any case, because the number of desks and the price of 1 desk are constant in the task.


  4. avatar says

    Hi. First of all thanks a million for these free videos.
    I have question regarding option a. If you order 500 units and they charge you 10% p.a of inventory value in a day-to-day basis. So you pay 625$. I understand that after you sell those units, you will order another “batch” of 500 units. So shouldn’t 625$ be charged again and again (for 80 times) by the storehouse?

    • Profile photo of John Moffat says

      Because it is being charged on a day-to-day basis, some days you will be charged on a full 500 units and some days on zero units (because the inventory level keeps going between 500 (when you receive an order) and 0 (just before you receive the next order). So it is as though on average you are being charged on 250 units for the whole year.

  5. avatar says

    Thank you for presenting the lectures. I have a question about the calculations of inventory cost in example 1 part 2 where the order quantities are 750 units. When calculating the reorder cost, it seems not quite realistic to use 53.33 times 20 because the real number or orders should be 54. It is true to use 53.33 if the system is in long run, but here it is just for one-year base. And in terms of the calculations of holding costs, the average inventory level for the last “period” should be 250/2=125. Therefore, I think the calculations for the reorder cost should be 54*20=1080, the inventory cost should be ((750/2)*(53/54)+(250/2)*(1/54))*2.5=926 assuming that the interval between each replenishment is the same, or(((750*3/2)/3)*(159/160)+(250/2)*(1/160))*2.5=933.6 assuming that the items are sold at the same rate.

    Could you please correct my faults in this. Thank you

    • Profile photo of John Moffat says

      Why do you say it is just for one year?
      The question says there is a demand of 40,000 desks per year – this implies every year.

      As I explain in the lecture, some years there will be 54 orders and some years only 53 orders. However there will be 53.33 orders a year on average.

      We always make this assumption (and it is important in the exam not to round it).

      Without this assumption, the EOQ formula itself is not valid.

    • Profile photo of John Moffat says

      Because the level of inventory keeps moving between the order quantity (when an order has just been received) and zero (just before the next order is received).

      So the average inventory throughout the year is the order quantity / 2.

      • avatar says

        Sorry I still cant understand this. Do u mean because there are 2 choices? that is why it is divided by 2? :s

      • Profile photo of John Moffat says

        No – there are not two choices.

        Suppose that the order quantity is 500 each time. You get a deliver of 500, so you have 500 in your warehouse. You sell these 500 over a few weeks/months, and the level of inventory in the warehouse falls to zero. Then you get a new delivery of 500 and the level goes back up to 500. This keeps repeating, so throughout the year the inventory level keeps moving between 500 and zero.
        Therefore on average the level is (500 + 0)/2 = 250 units.

        Have a look at the lecture again – I draw a little graph to illustrate how the inventory level keeps changing and therefore why the average inventory is the order quantity divided by two.

  6. avatar says

    Hi John

    I have a problem with a phrase:

    Overtime is paid at a rate of time and a quarter.
    what does it mean? if the workers are paid $4 per hour.

    and total overtime 26 hrs, which is 8 hrs for specific order and the rest is general order.

    question asking to compute the direct cost of specific overtime.

    May u help about it?

    • Profile photo of John Moffat says

      Please do not ask a question about labour under a lecture on inventory control! Ask in the F2 Ask the Tutor Forum.

      ‘Time and a quarter’ means that for every hour they work they are paid for 1.25 hours.
      So…..if overtime is 26 hours they will be paid 26 x 1.25 x $4 for the overtime.

      Direct cost of labour is basic pay, plus overtime premium on specific job. (Rest is indirect cost)

  7. Profile photo of houyam says


    am unable to see any of the lecture videos, even after refreshing many times and following the support instruction.
    i didnt face these problems in last december revision time, did open tuition change anything in the format of the videos since last december?

  8. avatar says

    i have a problem with connectivity.When i play these lectures they would do fine upto around 5 mins and its starts to freeze in intervals of 2 then 5 upto 20 seconds at times and would deteriorate until it does not play at all.what can i do to rectify this problem

    • Profile photo of John Moffat says

      You can include it, but only if asked for. It is not relevant for the decision because it is the same over the year regardless of how many are ordered each time.

      However, the one time when it has to be considered is when there are quantity discounts (see the next lecture).

  9. avatar says

    Thank you for the opentuition initiative. Overall it is outstanding. I just have one comment regarding this section. The average assumption used is too simple. This number should either be given, or additional information provided to calculate it. eg: In the example, the 500 unit average is given as 250, by simply dividing 500 by 2. If stock levels are being ordered every 4.5 days, one would assume the average sales per day to be around 111. This would make the average stock level closer to 333 for the year (try it out with ta simple excel table). By over simplifying examples in the material, a problem could be created in the exam and time could be wasted by the students trying to get their heads around the disconnect.

    • Profile photo of John Moffat says

      I am sorry, but you are completely wrong!!!

      If 500 units are ordered each time, then the inventory levels vary between 500 and zero and the average inventory is 250 units. The days between orders will be 365 / number of orders, and the number of orders will be the demand per year / the order quantity. It will not be a random 4.5 days!

      The EOQ formula itself depends on the assumption that the average inventory level is the order quantity divided by 2 (try proving it yourself, even if though the proof is not in the syllabus).

      We do not over simplify the examples and a problem cannot be created in the exam as a result. To say that time could be wasted by students trying to get their heads round the disconnect is quite simply rubbish – there is no disconnect.

    • Profile photo of John Moffat says

      The demand is 40,000!!!

      So it is 40000/1250*20 which is equal to $640!!

      (I know that in a hurry I wrote 4000 instead of 40000, but it should have been obvious that it was meant to be 40000 for the same reason that it was 40000 for each of the other 4 calculations!)

    • Profile photo of John Moffat says

      @fourteenapril2012, You can invent your own formula if you want, but in the exam you will be tested that you understand – not that you have just learned a formula for the cost. So do not learn a formula – make sure that you understand how the costs have been calculated. Once you understand then it is very easy.

    • Profile photo of John Moffat says

      @success4u, You should also make sure that you study from one of the study texts available. It is also very useful to have a Revision/Exam Kit, because practicing questions is the best way of all of learning for the exam.

  10. avatar says

    for the lding cost calcuation, where its divided by 2 to get the average. i understand the graph drawn to illustrate how and why the average was calculated. but my question is why not take the whole qantity? instead of the average, which will give only an approximation.

    • Profile photo of John Moffat says

      @zeeprincess, we assume that holding costs are charged on a day by day basis – a large cost when the warehouse is full, and no cost when it is empty.
      So the total cost over the year will be the average inventory level multiplied by the holding cost per unit.
      I do not see why the average is an approximation!

  11. avatar says

    The purchase cost will stay the same regardless of the quantity being ordered. However in later chapters when discounts is introduced the purchase price/cost will become relevant in the decision making.

Leave a Reply