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June 22, 2022 at 4:28 pm
Hi Sir, thank you for the wonderful lecture. 2 questions:
1) I understand the buffer inventory is just the extra inventory that we hold just to be safe (and hence need to add to total holding cost for the year). But do not we not have to consider the ordering cost and the purchasing cost of such buffer inventory?
2) I have seen elsewhere that Total Inventory Cost is equal to Holding Cost+ Ordering Cost +Purchase Cost. In your lecture you always refer to Total Inventory cost as only Holding Cost+ Ordering Cost. Which version should I stick to for the exam?
Thank you in advance for your guidance.
John Moffat says
June 22, 2022 at 5:25 pm
1. No, because it is only bought the one time 🙂
2. Strictly the inventory cost is just the holding cost plus the ordering cost. However in the exam it doest matter whether or not you also include the purchasing cost, unless either the question specifies to include it or there is a quantity discount in which case it has to be taken into account when deciding the quantity to order.
June 22, 2022 at 6:34 pm
Thank you Sir. Could you please help me to understand a bit more on 1)? Technically speaking even if we purchase the buffer inventory for only one time, say the business is in its first year of operations, then wouldn’t this be part of the “total purchase cost” of total inventory? Also as the business goes on and say some of the buffer inventory is used for sale (for e.g. during a sudden unexpected surge in sales), then the business should need to replenish the buffer inventory to maintain at previous level, so wouldn’t this be included into the “total re-order cost” of inventory for that particular period?
Thanks a lot for your help in advance!
March 24, 2022 at 9:19 am
Sir I have three questions regarding this lecture I would be really grateful if you could explain it.
1) Why is buffer inventory irrelevant to EoQ ?
2) there were assumptions of constant lead time and demand. why make this assumptions
3) what causes cost to be higher when using inventory higher than the first discount inventory?
sorry for My bad english
March 24, 2022 at 3:38 pm
1. Because the buffer inventory is extra inventory that is held throughout the year at the same level. So the cost of holding it is the same whatever the order quantity each time is.
2. Because if the lead time and the demand were not constant they would have to oder different quantities each time (high quantities when demand is high and low quantities when demand is low). We assume they are constant and so it is the same order quantity throughout the year.
3. I am not quite sure what you mean. If you are referring to the example with quantity discounts then any of the discount levels could be the cheapest depending on what the costs are – we obviously choose whichever ends up giving the lowest overall cost.
January 10, 2022 at 3:04 am
For example 3
After calculating the inventory cost for each level of order ie. 5,000 and 10,000, we then add the purchase cost for the entire year.
Why don’t we include the inventory costs for the entire year at the specific levels and then add the purchase cost for the entire year?
January 10, 2022 at 7:26 am
We do include the inventory costs for the entire year and this is what I do in the lecture.
January 15, 2022 at 2:11 am
Thank you SIr. I have re-looked at the example and understand.
January 15, 2022 at 9:03 am
September 5, 2021 at 6:46 pm
Happy Teachers day Sir! Thanks a lot!
September 5, 2021 at 7:49 pm
Thank you very much 🙂
June 1, 2021 at 3:42 pm
There’s calculation for the buffer inventory quantity ?
June 1, 2021 at 4:07 pm
Not in these lectures because it is exactly the same as in Paper MA (was F2) and so is revision.
Buffer (or safety) inventory is just holding extra inventory through the year in order to be safe.
June 1, 2021 at 4:15 pm
June 1, 2021 at 5:40 pm
You are welcome 🙂
January 9, 2021 at 7:00 pm
ah! you lectures are fantastic, so clear . I’m planning to take this paper after 7 years break.
my only problem is a buffer. Where to add this? To the average inventory units on holding cost calculation eg: (5000+buffer)/2 or add new holding cost calculation for the buffer = buffer x (10% x 25X99%) ?
Does the re order cost need to be adj too? =40,000/(5000+buffer) x20 ?
it might be helpful to add example, it is tested quite often.
January 10, 2021 at 9:01 am
The whole of the buffer is added when calculating the total holding cost. It does not affect the reorder cost.
This is all explained in the Paper MA lectures on the economic order quantity because for this topic Paper FM is just revision of Paper MA (was F2).
January 11, 2021 at 3:59 pm
September 16, 2020 at 4:02 pm
i could’t believe the best accounting lecturers are free.
i took F2,F3,F5, with john moffat and naw F8.
thanks JOHN for the hard times u helped us.
September 16, 2020 at 4:15 pm
Thank you for your comment 🙂
September 16, 2020 at 4:40 pm
September 16, 2020 at 4:41 pm
u are welcome John
September 10, 2020 at 2:09 pm
Thank you for the lecture: its very useful and your lectures are always very clear.
How might we calculate the new EOQ now that we know the 5000>10000 bracket with a 1% discount is more favourable? I understand that 5000 unit batches are more cost effective than the original EOQ of 800 but we have not shown what the new EOQ is.
September 10, 2020 at 2:33 pm
Ignore this. The answer is an obvious one. Thanks.
September 10, 2020 at 3:21 pm
No problem 🙂
April 8, 2020 at 10:05 pm
When adding the “cost of the buffer inventory”, do we add the cost of the entire buffer or must we obtain an average as well?
April 9, 2020 at 7:32 am
We add the whole of the buffer because that is the extra amount held throughout the year.
November 1, 2019 at 7:43 am
In this lecture, you said that if given buffer/safety inventory then it must be added to the average inventory when calculating the holding stock which is correct. But sir, in a situation where we are not provided with the unit of buffer, how then do we calculate it. Thanks
November 1, 2019 at 9:08 am
The question will tell you if there is buffer inventory
November 1, 2019 at 7:39 am
I always love watching your lectures. Thanks for the information.
November 1, 2019 at 9:06 am
September 20, 2019 at 9:59 am
I dont why how could I understand this without your videos. you are the best Thanks a lot
September 6, 2019 at 1:53 pm
Why we decrease holding cost by 10% only in 5000 units and not in 10000 units example?
Should holding cost not be 10% of 25 regardless of the discount applied?
September 6, 2019 at 1:51 pm
Thank you for this lecture.
Can I ask why when calculating holding cost for 1000 units we do not decrease the price by 10 % but when we calculate holding cost we do?
Is that not the case that in all circumstances holding cost should be 10% of 25?
September 6, 2019 at 3:50 pm
We don’t decrease the price by 10%. The holding cost is always 10% of the purchases price. However if you read the question in the free lecture notes you will see that if we order more than 5,000 each time then the purchase price falls by 1% and therefore the holding cost is lower by 1%. Similarly if we order more than 10,000 each time then purchase price falls by 1.5% and therefore the holding cost is lower by 1.5%.
I don’t know where you are getting 1,000 units from.
July 12, 2019 at 4:17 pm
As i have solved the discount questions from the kaplan book, it is totally different ….they haven’t taken the discount on the holding cost as we took …..they are directly taking the holding cost without discounted amt
July 12, 2019 at 4:50 pm
I cannot comment on what Kaplan has done. What I have done is correct (assuming, of course, that the holding cost is given as a % of the purchase price and not as simply a fixed amount per unit).
Samuel Koroma says
July 8, 2019 at 12:22 pm
The most important thing I learnt is that of a change in policy and taking advantage of settlement discount. Under the change of policy the business should consider both the current and new position for receivables and payables and ascertain any fall or increase to determine the net cost/benefit of the change.
July 8, 2019 at 12:31 pm
Note that this comment relates to receivables and payables management and not inventory as was previously thought
January 19, 2019 at 4:46 pm
In real life it is likely that a company will be committed to a warehouse already so will have a certain capacity. Therefore EOQ would be irrelevant as purchasing decisions would be based on whether or not there was enough space. Am I correct to think this way?
I can only think EOQ would be useful if additional storage capacity was being considered or if choosing between different products (seeing what levels of each would be more cost efficient for the space available).
Be grateful for your thoughts
January 20, 2019 at 10:02 am
A company would consider taking on more storage space if it meant that their costs overall would be lower.
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