Comments

  1. Profile photo of shahz20 says

    Very well explained lecture :) I am planning to sit F2 asap and F5 this june,
    out of curiosity I wanted to ask, what is the equation that has to be differentiated to arrive at the formula? Would you mind telling me, I want to give it a go. A bit rusty in maths now but still my favourite subject :)

    • Profile photo of John Moffat says

      If Q is the order quantity (and the other symbols are as per the formula), then the total reorder cost over the year is D/Q x Co; and the total holding cost over the year is Q/2 x Ch.

      So the total of the two, TC = (D/Q x Co) + (Q/2 x Ch).

      To get the minimum total cost, we differentiate this with respect to Q and then make it equal to zero.

      (I have answered because you want to give it a god, but do please appreciate that you can not possibly be expected to differentiate in any ACCA examinations)

  2. avatar says

    i have a question where it states how discounts can affect a certain EOQ calculation (say 2000 units) and subsequent stock costs.

    do I have to work out an actual full question with discounts , comparing it to the EOQ
    then explain ?

    2) I would also like to know what the two major costs associated with
    a) holding stock
    b) ordering stock

    • Profile photo of John Moffat says

      You will not get a full question because of the nature of the exam.
      However you can be asked to calculate both with and without discounts.

      With regard to costs there are not just two major costs, there are several. I take about the types of costs in the free lectures.

  3. avatar says

    great lecture, i must say. However i would like to ask why in some instances when we are calculating the total costs, we add the re-order cost+holding cost plus (purchase price *demand)
    whereas you only added the total holding costs with the ordering costs when computing the total costs. Is my method wrong?

  4. avatar says

    Hello Sir, I’m new to this website, forgive me if the question I pose is talked on in later lectures but I was wondering, how the EOQ will me modified for say international businesses? Or will it be stay the same? In the sense that, duty fees will we part of fixed costs per order.

    • Profile photo of John Moffat says

      Have you actually watched the lecture (because I go through examples of calculated the total cost in the lecture)?

      The EOQ is 1,000, but it is certainly not $’s!!!!

      To get the total cost you multiply the average inventory by Ch – this gives the total holding cost.
      You multiply the number of orders by Co – this gives the total order cost.

  5. avatar says

    A company uses components at the rate of 500 units per month,which are bought in at a cost of $1.20 each from supplier.It costs $20 each time to place an order,regardless of the quantity ordered.The total holding cost is 20% per annum of the value of inventory held.
    The company should order ……….. components
    The total annual cost will be???? Can plz give the answer,Sir??

  6. avatar 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?

    • Profile photo of 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.

    • Profile photo of 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)

  7. avatar says

    A company uses 5000 units of a component per anum. ordering cost is $36. holding cost of one unit of component is $4 What is the e.o.q for that component, assuming 52 weeks year, what is the average frequency at which purchase orders should be placed? plz help me on this question

    • Profile photo of John Moffat says

      Because we are calculating the costs per year, and over the year the total number of units purchased (and therefore the total cost) does not change. It is only the inventory costs that will change depending on the number ordered each time.

      The only time we need consider the purchase costs is if the supplier offers a discount for purchasing a large quantity each time, and this is dealt with in a later example.

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