Economic order quantity formula, Financial Accounting

Assignment Help:

For getting the EOQ formula we shall use the subsequent symbols:

U = annual usage/demand

Q = quantity ordered

F = cost per order

C = per cent carrying cost

P  = price per unit

TC = total costs of ordering and carrying

Specified the above assumptions and symbols, the net costs of ordering and carrying inventories are equivalent to

TC = U/Q × F + Q/2 × P ×C

In the equation, the initial term on the right-hand side is the ordering cost, acquired as the product of the number of orders (U/Q) and the cost per order (F) and the next term on the right-hand side is the carrying cost, acquired as the product of the average value of inventory holding (QP/2) and the percentage carrying cost C.

The total cost of ordering and carrying is minimized as:

Q =    √(2FU/PC)

That can be acquired by putting the first derivative of TC regarding Q and equating this with zero.

dTC/dQ = ( - UF/ Q2 )+ (PC/2) = 0

- 2UF + Q2PC = 0

Q2 PC + 2UF

Q2 =  2UF/ PC

Q =    √(2UF/ PC)

Suppose here the second derivative condition is satisfied:

The formula embodied in the equation is the EOQ formula. This is a helpful tool for inventory management. This tells us what must be the order size for the purchase of items and what must be the size of production run for manufactured items.

The EOQ model may be demonstrated with the assist of the subsequent data relating to the Ace Company.

U = annual sales = 20,000 units

F = fixed cost per order =Rs. 2,000

P = purchase price per unit = Rs. 12

C = carrying cost= 25 per cent of inventory value.

Plugging in these values in eq. (2) we determine that:

Q = √(2 × 2,000× 20, 000)/( 12×0.25)

= 5.164


Related Discussions:- Economic order quantity formula

AS-10.., WHAT IS dEPRECIATION?

WHAT IS dEPRECIATION?

Investment appraisal, The business is considering two proposals for their p...

The business is considering two proposals for their promotions of the professional courses.Proposal one could give a stable return throughout the period. Proposal Two would give hi

Capital expenditure as a percentage of total asset, Analyze one completed M...

Analyze one completed M&A transaction from recent times There are two main requirements (1) an analysis of the strategic and economic rationale behind the merger, and (2) an analy

Continuous compounding, In Section we had established an association among ...

In Section we had established an association among the effective and nominal rate of interest where compounding arise n times a year that is as given: r = (1 +  k/m ) m - 1

Various types of accounting changes can affect the financial, Various types...

Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material

The rectification entries, Show the rectification entries for the following...

Show the rectification entries for the following:                                        (10 marks) a.    The Sales account is undercast by Rs.15,000 b.    Goods returned by

Absorption costing, Absorption costing is a cost accounting method that ...

Absorption costing is a cost accounting method that tries to charge all direct costs and all production costs of an organization to specific units of pr

Prepare the journal entry at the date of the bond issuance, On January 1, 2...

On January 1, 2012, Osborn Company sold 12% bonds having a maturity value of $800,000 for $860,651.79, which provides the bondholders with a 10% yield. The bonds are dated January

Admission of a new partner, Admission of a new partner When a new partn...

Admission of a new partner When a new partner joins the firm/partnership, the new partner will enjoy the benefits arising as a result of goodwill created by the old existing pa

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd