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Hi Mike. Thanks for the support you have rendered many of us to this end. How do one calculate EOQ and hence minimum cost of holding stock given that there is buffer stock. I have fogotten the numbers , only that the question said buffer stock is 10% of mothly demand which turned out to be 10000 units. I am taught that one of the assumptions of EOQ is that there is NO buffer stock. My BPP module does not have the guidance and neigther does the Kaplan module. Thanks
I hope I did it correctly.
Holing cost, with buffer stock: (10000 x $1) + ( $1 x EOQ value / 2) = whatever it was I don’t remember!
My assumption is that the company keeps buffer stock throughout the year. Then, you need to find the holing cost based on the quantity given by the EOQ and add them all together. I hope it’s correct!
How then did you calculate the total ordering costs to add to the holding cost. I just ignored the buffer component only to realise the holding costs and ordering cost could not equal each other as they should when the total cost is minimised
reeb is right. Buffer is always there, so has nothing to do with order quantity.
There was similar question in Dec 2010, you can have a look at the answer in ACCA website.Ninska I have gone through the answer as you suggested. The examiner put a tutorial note that the cost of holding buffer stock can be ignored since it does not change when either of the policies is implemented. I guess it needed an open mind aproach. Surprisingly i printed the dec 2010 paper intending to practise on it but i dont know how i skipped it when i did most of the other F9 past papers. Thanks. All I know is ill be doing P papers next sitting
That’s a good point Ngu, that the buffer holding cost will be the same (in this particular question), whether using the existing system, or the EOQ system. I can’t remember how the question was phrased now, but I have a feeling it asked for the total costs, and in which case I assume they wanted us to include the buffet holding cost. If you didn’t include it, I guess you could have made a note, that you didn’t include it because it would be the same in either scenario, and wouldn’t have influenced the decision.
Ngu,
the ordering cost is as usual, you dont need to work out your buffer stock in this.
Buffer cost is to do with HOLDING of the stock as the holding cost per unit per year.
ordering cost= cost of ordering x demand / EOQhope that helps
thats good i did buffer as 10000 on each calculation as it was 40% of sales which were spread evenly throughout the year!!! which was ($300,000/12)*40% gave us the buffer which i added to average inventory x holding cost!
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