Ordering cost
Ordering cost is the relevant cost of placing and receiving an order, excluding the purchase price where that is modelled separately. In the basic EOQ model, annual ordering cost equals annual demand divided by order quantity, multiplied by the cost per order. Include costs that actually change with the number of orders rather than automatically assigning unchanged purchasing-department salaries. Ordering and holding costs trade off as order size changes.
Worked example
Annual demand is 12,000 units, order quantity 1,000 and incremental cost per order $40. There are 12 orders and annual ordering cost is $480.
Common mistake
A large order reduces order frequency but does not necessarily reduce purchase cost unless a valid price discount applies.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
