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Sir, For a manufacturing concern, do we include the total inventory cost derived by using the economic order quantity equation along with the production cost for ascertaining the cost of the inventory, or do we only consider this EOQ for ascertaining the cost of an inventory for a trading concern which only buys and sells goods and who does not manufactures goods?
Sir, Why do we find the EOQ and EBQ from a management accountant perspective? Does it have any connection with setting the price of a product?
The EOQ is for a business that does not manufacture their own materials. The EBQ is for a business that does manufacture their own goods.
The reason for finding them is not do with setting a selling price. It is simply to minimise the costs associated with holding inventory.
(Have you watched my free lectures on inventory control? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well 🙂 )
Yes, I did watch your lectures, Now my doubt is almost cleared, Sir. Sir, as a result, do we include the total cost of inventory derived from either EOQ( if it is a trading concern that only buys and sells goods or EBQ( If it is a manufacturing unit) as a distribution cost in our financial statements(P&L)?
It will be shown as part of the cost of sales. (However this is not relevant for Paper MA. It would only be relevant in financial accounting in the Statement of Profit and Loss – it is not called the P&L these days 🙂 )
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