Page 46 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 3: Material Control

If the quantity ordered is larger in volume, the following are some of the important advantages: Notes

The bulk purchase order reduces the ordering cost of the materials.
The greater the size of the order leads to reduce the number of the orders in procuring the
materials.

Quantity discounts: The discount can be classified into two categories viz trade discount and
cash discount.
!

Caution What is trade discount?
Trade discount is the discount granted by the supplier to the buyer of materials at the
moment of bulk purchase. This % of discount is greatly possible only during the periods of
greater volume of purchase, which reduces the overall cost of the acquisition.
If the quantity is procured in lesser volume, the following are construed as advantages:

The carrying cost will come down in the case of lesser inventories.
The cost of storage is lesser as far as the lesser quantities of materials.
Loss due to deterioration, obsolescence, wastage will be minimum.
Insurance cost is less due to lesser volume of materials.

Note
The formula to compute EOQ is:
2AO
EconomicOrderingQuantity(EOQ) =
I
A = Annual requirement in units

O = Ordering cost
I = Cost of storing per year or cost of carrying the inventory

Example:

Annual requirement = 20,000 units
Ordering cost = ` 100 per order
Cost per unit = ` 4
Carrying cost = 16%

Determine the EOQ of the fi rm and finally justify the EOQ
2AO
EconomicOrderingQuantity(EOQ) =
I
2×20,000× 100
`
=
16% on 4
`
=2,500units

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