Page 213 - DCOM202_COST_ACCOUNTING_I

Unit 10: Job and Batch Costing

Notes
2US
Economic Batch Quantity =
C
,
224 000 750
×
×
=
225
.
EBQ = 4,000 units
Example: M/s MBO Bearings Limited is committed to supply 24,000 bearings per annum
to M/s Ashok Fans on a steady daily basis. It is estimated that it costs 10 paise as inventory
holding cost per bearing per month and that the set up cost per run of bearing manufacture is
` 324.
(a) What should be the optimum run size bearing manufacture?
(b) What would be the interval between two consecutive optimum runs?
(c) Find out the minimum inventory holding cost.
Solution:

2US
(a) Economic Batch Quantity (EBQ) =
C

×
224 000 324
×
,
=
01012
.
×
EBQ = 3,600 units
(b) Interval between two consecutive optimum runs:
3 600
,
= × 30 = 54 days
,
2 000
(c) Minimum inventory cost per annum:
 Annualpr oduction 
=  × Setupcos t  + (Average inventory × Holding cost per unit × 12)
 EBQ 
× 324
,
,
24 000 ` 3 600
.
×
= + × ` 01012
,
3 600 2
= ` 2,160 + ` 2,160 = ` 4,320
Example: The demand of an item is uniform at a rate of 25 units p.m. The set up cost is
` 30 each time a production is made. The production cost is ` 3 per item and the inventory carrying
cost is 50 paise per unit p.m. If the shortage cost is ` 3 per item p.m. Determine how often to make
a production run and of what size? Also calculate re-order level.
Solution:

2US
(a) Economic Batch Quantity =
C
2 × ×300 30
=
.
05012
×
EBQ = 55 units

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