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Afternoon John, Mike and fellow ACCA students,
I’ve discovered the following question in the Kaplan exam kit that has confused me:
Manufacturing Company uses 28k components evenly per annum. Each order is for 1500 components, which is also the EOQ. The Company holds buffer inventory of 700 components. Annual cost of holding a component is £3
What is the total annual cost of holding inventory of the component
Q/2 x Ch
Q= 1500 (also the EOQ)
Ch=£3(1500/2) = 750 x £3 = £2250
The above is the normal approach that I have taken so far.
With regard to Open Tuition, I’ve watched the Chapter 5 lectures in entirety as well as Revision lecture Part 7 (Inventory Control)
The answer as provided by Kaplan Exam Kit is:
[ Buffer Inventory + (EOQ/2) ] x AHC per component
[ 700 units + (1500/2) ] x £3 = £4350
What on earth is this? I’ve never worked with a deviation from the formula in this manner?
EOQ/2. Well I would assume that would be the same as Q/2, as EOQ provides us with the optimal QUANTITY that locates the lowest holding and ordering costs.
AHC I would assume is the same as Ch
My concern is with regard to adding on the buffer inventory in this manner. On a side note I’ve reviewed the LSBF and Kaplan Study notes. Absolutely nothing like this has ever cropped up in either text.
Is this another deviation from the standard formulas that we need to learn & remember. If anybody can shed any light on this I would be grateful. Thanks.
In future, if you wish for me to answer then you should ask in the Ask the Tutor Forum.
The average stock assuming that they are ordering the economic order quantity is EOQ/2. That assumes (as explained in my free lectures) that they are holding no buffer (or safety) inventory.
Here they are holding buffer inventory of 700 units which means that they are holding an extra 700 units of inventory throughout the year just in case a delivery from a supplier arrives late. So the cost per annum of holding inventory is higher than normal by the holding cost of the extra 700.
Paper F2 is not a question really of learning formulae – the questions are more designed to check that you understand rather than you have simply learned formulae.
My free lectures are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.
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