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Inventory Control (part 1) The EOQ Formula – ACCA Management Accounting (MA)

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  1. Thank you, Sir, for the lectures. I suppose the reason purchase cost is not included in determining EOQ is because as your note says, the purchase cost does not change no matter the number of orders. Therefore, it is irrelevant in the calculation.

    Please correct if i am wrong.

  3. Greetings sir. I wanted to pass on to you an easy way to teach everyone how to remember the EOQ formula. I got it from one of my teachers in the past.

    It would be the way you would order at a Fish & Chips Restaurant 馃檪 :

    2 COD fish / 1 CHips please.

    I hope you benefited.

    Wish you the best.

  4. Hello sir,

    I have a question….Example 2 says – “calculate the inventory costs for this order quantity”. Shouldn’t we also include purchase costs as it is also an inventory cost? I do get when it said that purchase costs doesn’t make a difference if there are no discounts or something but the question clearly says to calculate inventory costs……

  5. Dear Sir
    I had a doubt. In the example which we solved wherein we were supposed to calculate inventory cost for different order quantities. In that, while calculating holding cost, why did we multiply the average inventory by 10% of $25 (the price of each desk). Holding cost is 10% PER ANNUM. Won’t multiplying 10% to each desk’s price be wrong?

    • If we are costing over a year (as we usually are) then it is correct to take 10% of $25. From day to day the inventory levels (and therefore the holding cost will be higher and lower). However we are multiplying the average inventory (the average level held throughout the year) by the $2.50 per unit.

  7. Hello! At the beginning of this chapter we said that there are 3 costs in inventory holding system: 1) the purchase cost 2) the reorder cost and 3) the inventory cost. Why we did not include the purchase cost in our examples when we calculated inventory costs?

    • As the graph you draw near the start of the lecture shows, the new 1000 units are added after each use. The first time you put 1,000 units in the warehouse, Inventory holding cost is created, and even after you run out of units, the next 1,000 units are added. Why not calculate the maximum Inventory holding cost and use average instead?

      • There are times that your warehouse not holding the maximum 1000 units, so that cost during these times might get smaller value (10% of the current units in the warehouse)
        That is the reason why we should take the average value of units

  9. hello sir :))

    in your example, when asked fr the total inventory cost, you only included the holding cost and ordering cost. However, in the kaplan books, they include purchase cost as well.

    which should we follow when asked in the exam??

    • Because the level of inventory fluctuates between the order quantity and zero units. Therefore the average inventory throughout the year is half the order quantity.
      I illustrate this with a graph near the start of the lecture.

    • Because the level of inventory fluctuates between the order quantity and zero units. Therefore the average inventory throughout the year is half the order quantity.
      I illustrate this with a graph near the start of the lecture.

      • We are assuming that half of the inventory is always there in our storage?

        could you please elaborate on the average. if its an assumption its totally fine i get that but practically its not like that or is it?

        why are we taking avg. only, it be any other ratio let say 1/3 or 1/4 of order quantity?

        thanks in advance.

      • We are certainly not assuming that half of the inventory is always there!!

        Immediately after a new delivery is received then the inventory will be the amount ordered. This inventory is used up over time and falls to zero immediately before the next order is received. So the level of inventory is fluctuating between the full order amount and zero. On average it will therefore be held way between the two.

        Please watch the start of the lecture again where I illustrate this with a graph.

      • That is true the inventory will be between the two levels but i think we can not simply take avg. lets say we reorder at 10 units in inventory considering buffer inventory. total need is 100 units every month. practically we wont let the inventory reach zero right. for sake of MA we are assuming inventory reached zero.

        so in the above example we will be holding 100 units but we can not simply take 45 just because on average we are holding between 0 to 90 as the inventory is fluctuating between 0 and 90.

        i did watch that illustration but i am still confused, as we are just placing line in between to define that on average.

        really appreciate your help.

      • If we hold buffer (or safety) inventory, then the average inventory will be higher by the amount of the buffer. However this will not effect the calculation of the EOQ.

  15. Thank you. Very Clear clarifying.
    After I watch lectures I get it. Although when I read from BPP Study book, I get confused. I don’t know whether they give hard examples and question or the exam standart is like that.

    • The lectures cover everything needed to be able to pass the exam well.
      However you must also buy a Revision Kit from one of the ACCA approved publishers – they are full of exam standard questions for practice, and practice is vital to passing the exam.

    • The level of inventory will fluctuate throughout the year. It will be high every time a new order is received, and will then go low as the inventory is used. The cost of holding it will therefore be high when the inventory is high, and will be low when the inventory is low. So we base our costing on the average level throughout the year – half way between the highest level and the lowest level.

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