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Dear sir, kindly help me with the following question.
A manufacturing company uses 28000 components at an even rate during the year. Each order placed with the supplier of the components is for 1500 components, which is the EOQ . The company holds a buffer inventory of 700 components. The annual cost of holding one component in inventory is $3.
What is the total annual cost of holding inventory of the component?
If you ignore the buffer inventory for a moment, then if you order 1500 units each time, then the average inventory will be 1500/2 = 750 units.
Buffer inventory means we keep an extra 700 units all year (just to be safe). It is as thought the extra 700 units are always there, and so the total average inventory will be 750 + 700 = 1450.
The cost of holding one unit is $3, so the total annual costs will be 1450 x $3.
Thnx a lot sir. I also wanted to ask if we have FIFO , LIFO , and AVCO in accounting for inventory?I mean in the syllabus…
Yes – if you look at the syllabus on the ACCA website, they are included in F2.
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