1. Profile photo of John Moffat says

    To calculate the holding cost of inventory over a year.

    Order quantity/2 is the average inventory throughout the year, ignoring any buffer inventory (which is what is usually the case in the exam). If there is buffer inventory, then the average inventory is higher by that amount throughout the year.

      • avatar says

        thank you sir.
        one more question please

        when is this formula used? ‘(buffer inventory + order quantity/2)*holding cost per unit’.

  2. avatar says

    Hi John,
    Thank you for your efforts, it is really effective and help.
    Could you please enplane once again Example 8. You deducted 210 from 480, but in descriptions we see that the re-ordering quantity is 1000 units each time. So for e.g. in the beginning we’ve got 1000 units, during 3 weeks we’ve sold 210, so we’ve got 1000-210=790 units left. Next order 1000+790=1790 – max inventory level
    Thank you!

    • Profile photo of John Moffat says

      1,000 is the quantity that we order each time.

      To be certain of not running out of inventory we need to place an order when we have enough to supply 120 units a week for 4 week. So we place an order when we have 480 left.

      The minimum we will supply is 70 a week for 3 weeks – 210 units. So the maximum that will be left just before the new order arrives is 480 – 210 = 270. The new order is for 1,000, so the maximum inventory is 1270.

      • avatar says

        You took as base max 480 units. But from description we can also decide that base units in the beginning is 1000.
        Anyway I understood the point.
        Thank you for your explanation!

      • Profile photo of John Moffat says

        At the very beginning there are certainly 1000, but we will be supplying them gradually to customers and we will only place a new order (the reorder level) when there are 480 left in inventory.

      • avatar says

        Aha, absolutely! If in the very beginning we had 1000 units and if we would like to get max. level of stock than we should assume that next 1000 units should be supplied after 3 weeks (min. lead time). We do not need wait till stock will become to 480 units.
        Sorry for dispute. I clearly understand that is not important topic but anyway :)

      • Profile photo of John Moffat says

        But we do need to wait. The whole point is not to carry more inventory than we need (because it costs money to hold more inventory) but at the same time to remove the risk of running out (and therefore turning away customers).

        If the supplier could deliver instantly then we would wait until the inventory was zero and then place another order. Because there is a lead time, we have to order when we still have some left.

  3. avatar says

    I cant seem to work out the answer. Please help.

    Sky ltd wishes to minimise its inventory costs. At the moment its costs are $10 per order and holding costs are $0.10 per unit per month.Sky ltd estimates annual demand to be 15000 units.

    What is the optimal reorder quantity (to the nearest 100 units)?
    A.500 B.1000 C.1200 D.1700.

    • Profile photo of John Moffat says

      You just use the formula on the formula sheet given in the exam.

      D – the annual demand = 15000
      Co – the cost per order = 10
      Ch – the holding cost per unit per annum = 12 x 0.1 = 1.20

      Using the formula you should get the EOQ = 500

      Hope that helps :-)

      (PS This doesn’t actually have anything to do with my lecture on ‘reorder level’. Please in future ask this sort of question in the F2 Ask the ACCA Tutor Forum and I will answer you there :-) )

  4. Profile photo of Javeria says

    i just dont understand the requirement of this question ?????????????????????///

    A company purchases 5,000 units per quarter at 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?


      • avatar says

        I am sorry but the total inventory cost = ordering cost + annual holding cost, right? then why the answer is 2,000? My answer is 2,080 which does not exist in the choices. Lol

      • Profile photo of John Moffat says

        The EOQ is 400 units (demand = 20,000 per year; holding cost = $5; order cost = $20)

        With an EOQ of 400, it means 50 orders a year, so cost = 50 x $20 = $1,000
        The average inventory is 400/2 = 200, so cost = 200 x $5 = $1000

        So total inventory cost if $2,000.
        I cannot imagine where 2,080 came from.

    • Profile photo of John Moffat says

      Inventory control techniques are examinable in Paper F9 as well as in F2.
      Certainly reorder levels are unlikely, but it is so little that it is better to be safe than sorry.
      The rest of inventory control certainly does get examined.

    • Profile photo of John Moffat says

      If you go to the F9 page you will find a link to all the F9 lecture available.

      (Lectures can only be viewed online – only Course Notes are downloadable – it is the only way that we can keep this website free of charge.)

      • Profile photo of tandi says

        I have downloaded the notes and printed them. Section on EBQ and reorder level are missing. It is only EOQ and JIT in the notes.

        John would You mind going to the notes and double checking what we are saying please?

        I really appreciate these lectures and am enjoying this course. Thank you so much.

      • Profile photo of John Moffat says

        EBQ and reorder levels are examinable in Paper F2 and are in the F2 Course Notes.

        They are not examinable in Paper F9 which is why they are not mentioned in the Paper F9 material.

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