Page 47 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes The following table illustrates the justification of the EOQ at the level of 2,500 units.
Annual requirement of 20,000 units
Particulars 1 2 3 4 5
Size of the Orders 20,000 10,000 5000 2,500 500
Number of order to placed 1 2 4 8 40
Total Annual Need
=
Size of the order

Size of the order 10,000 5,000 2,500 1,250 250
Average stock =
2
Average stock value =Average stock 40,000 20,000 10,000 5,000 1,000
× cost per unit `
Carrying cost = Average Stock value 6,400 3,200 1,600 800 160
× 16% `
Ordering cost ` 100 200 400 800 4,000
Total cost ` 6,500 3,500 2,000 1,600 4,160

Example: Calculate EOQ
Annual requirement = 1600 units
Cost of materials per unit = ` 40
Cost placing and receiving = ` 50

Annual carrying cost of inventory = 10% on value
2AO
EconomicOrderingQuanitity (EOQ ) =
I
2 × × 1600 ` 50
EOQ = = 200units
10% on` 40

Example: Consumption during the year = 600 units
Ordering cost = ` 12 per order

Carrying cost = 20% on price
Price per unit = ` 20
2AO
EconomicOrderingQuantity (EOQ ) =
I
2 × × 600 ` 12
EOQ = = 60units
20%on` 20

Task Given the annual consumption of material is 1,800 units, ordering costs are
` 2 per order, price per unit of material is 32 paise and storage costs are 25% per annum of
stock value. Find the economic order quantity.

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