Inventory Control (part 3) – Economic Batch Quantity – ACCA Management Accounting (MA)
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Why is there a multiply sign written down next to ch (1-d/r) if we are dividing and not multiplying?
Shouldn’t it be clear that it’s ch divided by 1-d/r?
If you are referring to the EBQ formula then we are multiplying Ch by (1 – D/R) in the denominator.
But you say “2x200x50000 divided by 3, divided by 0.9”
When I do square root of 2x200x50000 divided by 3 times 0.9 I get 2,449.48
If 5000 units are received over 3 days, and 100 units are sold over 3 days, why is it necessarily the case that the inventory could never exceed 4900? Couldn’t the receipt of 5000 units and sale of 100 units be distributed in a way that makes this possible? Thank you.
Sir, you write in you economic order quantity calculation 3 X 0.9 square root. But you say and do 3 / 0.9 square root. Whcih is correct?
I do not do what you write that I ‘say and do’. It is exactly as I write in the lecture.
Sir, What does this 0.9, the final answer represents that we have derived from the calculation (1-D/R) of ?2×CoD÷Ch(1-D/R) of EBQ. Does it represent how fast the factory can produce units?
It is effectively the speed of producing the demand required
What is the difference of EOQ and EBQ? The lecture note mentioned “we assumed we purchased goods from a supplier who delivered the entire order immediately”, which means in reality, we do not use EOQ at all?
We use the EOQ formula when the supply delivers each order all at once. We use the EBQ formula when we make our own goods and therefore each order arrives over a few days.
In both cases the formula calculates the best quantity to order each time.
while calculating the economic batch quantity, why did you not multiply 3 with 0.9 in the denominator?
But that is exactly what I do in the lecture!!!
Mr John you are the best. I hope I pass my Ma exam in December with open tuition an my Kaplan revision kit that I’m going to do 10000 times!
Thank you for your comment 🙂
This man is amazing, he is like opening your brain and sorting the information on the shelves inside in an oganaized neat clean way and then close it again, with no efforts shown. He is intelligent. This is just to appreciate this great work. Good luck
Great
ohkay so this holding cost i.e 7349 is called called the holding cost/year right?
So instead of reorder or delivery cost , we will be calculating setup costs?
Yes
How are you sir ? Your lectures are amazing and useful as always.
I had a question, why do you always only ask not to round off the Reorder Quantity or Set up Cost, but EBQ, you are rounding up.
I certainly do not say to round off the Reorder quantity – I say not to round the number of orders (which is not the same thing). The EBQ and EOQ have to be rounded because it is not possible to order fractions of units.
With regard to the number of orders (and I do explain this in the lecture!!), we are thinking long term and although some years there will be more orders and some year less orders, we are looking at the average number of orders.
Well put. May God increase your forbearance with us students, and bless you with more wisdom & eloquence.
You are welcome 🙂
Hello, thank you for the well-explained lectures.
Is it correct to say that Inventory value per unit = Purchase cost per unit ?
A well explained chapter Mr. Moffat.
Thank you so much ,
Im eager to see what comes next !
Hope you’re well & staying safe in these trying times.
Thank you for your comment 🙂
Hi John.
is it safe to say that Inventory cost = Holding cost + Reorder cost ?
and that Total cost = Inventory cost + purchase cost?
Correct 🙂
Wouldn’t Purchase cost be accounted for as one of the parts of Inventory cost, besides Reorder and Holding Cost ? We were just not calculating earlier because it was not affecting our cost. Why consider it separate to the Inventory Cost as the user demonstrated above, and you approved.
No. The purchase cost itself is not a cost of holding inventory. It is a cost of sales regardless of how much is kept in inventory.
Hello. Thank you for your lectures. They are very clear.
I wonder can the period for which we get the D, R and other data, different from one year, example a week or month? Do we always need yearly data?
It can be any period, provided that D is the demand for the period (e.g. for a month) and Ch is the stockholding cost for the same period (e.g. per month).
When using the EBQ formula, then again R is the production rate for the same period.
Thank you. It makes sense :). Was looking at an exercise in a book that apparently was a mistake as had data for different periods of time and used them in a formula as they were. Just wanted to make sure. thanks again 🙂
You are welcome 🙂
Hallo sir
On the EBQ are we not supposed to multiply by 0.9 hence getting 2449 units instead of dividing and getting 2722 units
No, we do not multiply by 0.9, and the EBQ is 2722 units as I show in the lecture.
I am guessing that you are confusing it with the average inventory which is the EBQ divided by 2 and multiplied by 0.9.
ok thank you
You are welcome 🙂
Why has the purchase cost not been included in the total cost? 50000 x 30$ = 1500000$
i.e. does the ‘shop’ not buy the unit off the ‘shops factory’ or our they provided free-of-charge?
The purchase cost is incurred anyway – whatever the order quantity is each time. It is therefore irrelevant in deciding what the economic order quantity is.
when you worked out the holding cost , why did you multiply bu 0.9 ?
As he explained earlier we never reach maximum level of inventory because we use inventory gradually while it is produced, so we use this coefficient.
Basically CH x 1 = CH only. Consider “1” as 100% of CH amount. By doing (1-D/R) we are considering “1” as the whole 100%, and now we have to reduce this. The more your Demand over the Manufacturer’s Rate capacity, the more time it would require to produce that batch and deliver to your Warehouse, and the lower your stock will get by the time all the stock arrives because customers are still buying and reducing your stock. Therefore the more the demand, the more time it will require, and the lesser from that 1(100%) your figure calculated out of (1-D/R) will get. So if it becomes 0.9, then it means 0.9 (90%) of Holding Cost we calculate.