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Sagar Mehta says

When calculating Total Holding Costs i.e = Average Inventory X Holding Cost/Unit

400 X $2.5

Answer comes to $900, so why do we round it up to $1000 ?

John Moffat says

Try using a calculator

400 x 2.5 = 1000 (I did it in my head, but do check me )

Sagar Mehta says

lol. my bad

usama says

A company orders a particular raw material in order quantities of 250 units. No safety inventory is held, the inventory

holding cost is $3 per unit per annum and the annual demand is 2,500 units.

What is the total annual inventory holding cost of the material?

how could i attempt this question?

John Moffat says

If they order 250 each time, then the average inventory will be 250/2 = 125 units throughout the year.

The cost per unit is $3 per year, so the total cost will be 3 x 125 = $375

anyundo says

Why is it that when calculating the holding cost, the order quantity is divided by 2 before multiplying it with the odering cost per unit for the period?

John Moffat says

Because the level of inventory keeps fluctuating between the order quantity (immediately an order is received) and zero (just before the next order is received).

So on average it will be (order quantity) / 2 throughout the year.

Emil says

Can you explain me this question, please?

http://i58.tinypic.com/rlhrx2.jpg

John Moffat says

If you look at the formula, then you will see that the order cost is on the top of the formula.

So if the order cost is lower then the EBQ will be lower as well.

If the EBQ is lower, then the average inventory will be lower and therefore the cost over a year of holding inventory will be lower.

If you are still unsure, make up some numbers – calculate the EBQ and the holding cost. Then do it again with a lower order cost and see what happens.

(Please ask questions like this on the F2 Ask ACCA Tutor forum – this page is for comments/questions about the actual lecture)