Inventory Management – Economic order quantity – ACCA Financial Management (FM)
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Great lecture!
Dear Sir,
Why you didn’t add purchase cost (USD 20 per unit) to the total inventory cost ? I mean you took only reorder and holding costs
Thanks
It depends what a question is asking for. If it is only the stock costs that are asked for then it is only the reorder and holding costs. (Obviously the total purchase cost over the year will be the same whatever the order quantity, and so it doesn’t affect the decision, unless there are quantity discounts which is explained separately in the lectures)
Hi John
Under what situation can we add the purchase cost to the re-order and holding cost.
Hello,
Thanks for all efforts you are doing. This is really much appreciated.
When calculating the holding cost, why didn’t you also take into consideration the number of orders as the $1,000 stands for the holding cost of one order while we are supposed to calculate the handling charges for the whole year?
Thanks
The total holding cost is the average inventory level multiplied by the holding cost per unit. The average level of inventory throughout the year is half of the order quantity.
Hello,
Thanks for all efforts you are doing. This is really much appreciated.
When calculating the handling cost, why didn’t you also take into consideration the number of orders as the 1,000 stands for the handling cost of one order while we are supposed to calculate the handling charges for the whole year?
Thanks
I don’t understand the part whereyou took average by dividing 500/2. Why divided by 2 ?
Because the level of inventory keeps going from 50 down to 0. So on average the level is 25.
Thank you so much sir. I am using open tuition for the first time for my dec attempt of FM. I am doing self study. I will try to take reference from kaplan. Hope i pass. Your lectures are awesome.
Thank you for your comment 🙂
i did not get it why 2, and is it always 2 ?
It is always 2. To get the average of two numbers you add them together and divide by 2.
why did we divide the total amount of desks by the amount of orders? (40,000/750) we got 53.3 but what does this 53.3 mean?
Thank you for your efforts!
The average number of orders placed per year.
Why it was divided by 2? (500/2)(750/2)
So as to get the average level of inventory throughout the year.
Thankyousomuch for these wonderful lectures and notes. I have been studying at open tution since start, now Alhamdulillah, I will appear for F9. I thank all my teachers who taught me through out this journey. Much love!!! I recommend all Acca students to use their materials. This will not only help you clear your exams, but good marks as well.
Thank you for your comment 🙂
Hi there John
In the calculations we have done on Example 1 , why is it that the Holding Cost of Inventory does not include a proportion of the Ordering Cost?? ( 4c for an order of 500 units, 2.67c for an order level of 750 units, 2c for an order level of 1000 units and 1.6c for an order quantity of 1250 units??
Isnt that the Cost Of Inventory should include all costs associated in bringing the goods to their present condition and form?? (ie Purchasing Cost , Ordering Costs , Conversion Cost and so on??
Isnt it that the 10% of Inventory Cost should be (Average Inventory *( Purchase Cost/Unit + Ordering Cost/Unit))*0.1
Regards.
Two separate things. Firstly we are not trying to calculate a financial accounting cost of inventory, we are simply trying to get the lowest cost per year of getting the inventory.
Secondly, where the holding cost includes the interest cost on the purchase price (which it doesn’t always in the exam – it depends whether the question gives it), then I accept there would be an argument for including the ordering cost as well. However we never do in exam questions 🙂
Dear Sir, Thank you for lecture. I’ve question regarding 2nd example part b. It’s been asked to calculate total inv costs for this order quantity. Why don’t we take into account purchase costs of inventory and add only holding cost and ordering costs?
Thanks in advance.
The purchase cost itself isn’t actually a cost of keeping inventories.
However it makes no difference to the decision as to the economic quantity because the total purchase cost over the year will be the same whatever the order quantity.
thanks
Hi Sir, Thank you very much for your efforts to make the video, easy to understand, we find it very much helpful 🙂
Could you please tell me, isn’t the purchase price per desk subject to change over time within a year, Might it not go up from 25 to say 30/desk, due to inflation or any other reason, or may that not get cheaper as well, then how are we ignoring that change?
Kindly explain this sir 🙂
Of course the price may change over time, but we cannot deal with that unless we know how it will change. In addition it would only affect the EOQ formula if the holding cost were a % of the purchase price. If the holding cost is a fixed amount the the purchase cost is of not relevant to the decision.
Oh, okay understood, Thank you so much sir 🙂
You are welcome 🙂
Thanks for this one. I do appreciate the graphical approach used in illustrating total inventory costs as it more sensible to me.
Thank you for your comment 🙂
sir i have a doubt here, why do we take average of the units while calculating the holding cost , is it compulsory to take ……i didnt get the logic behind this. Plz explain.
thank you
The level inventory will keep changing throughout the year and therefore the cost of holding it will keep changing.
To get the cost over the year we therefore use the average level of inventory (and it is compulsory to use it!)
Thanks for the graph as it was not included in the lecture notes on this chapter. The key is determine the order quantity that minimizes cost for the business (EOQ). Just -in-time is as important if the business is to meet demand quickly and it thus ensure that the business maintain a reduced level of inventory.
I have a question with regard to the quantity order of 750 units whereby taking 40 000/ 750 = 53.333 times and given that it is USD 20 per order irrespective of the quantity of the order placed should we then use 54 times and calculate the ordering cost as USD 1080 instead of using 53.333 times since the 0.3333 represents another order which would anyway cost USD 20? Thank you.