How much to order, Managerial Accounting

Assignment Help:

How much to order

Supposing the estimated annual usage of a component by Machinery Ltd is 20,000 units.  Usage is even throughout the year and only one order per annum is placed with the supplier.  Because only one delivery is made, average stock will be high, i.e. 20,000/2 = 10,000 and consequently stockholding costs will be very high. On the other hand, the costs of ordering will be negligible. If two orders are placed there will be less in stock (i.e. average 5,000), which will reduce holding costs, but ordering costs will increase. Thus, the higher the number of orders placed, the lower are stockholding costs, but the higher are ordering costs.

Stockholding costs include interest on the capital invested in stocks, storage, insurance, rates, security, building maintenance, heating, etc. Ordering costs include buying-department staff costs, receiving and handling.

Assuming that the cost of each component is £10, that holding cost is 10% of stock value and the cost of placing an order is £1, the total annual cost of stockholding and ordering when different numbers of orders are placed, is as follows:

2292_table.jpg

 

1202_graph.jpg


Figure: Economic Order Quantity

Placing 100 orders a year results in the lowest of ordering and holding cost of £200, therefore the economic order quantity is 200 units.

The same information is graphed in figure above, showing that the economic order quantity (EOQ) is the point where ordering and holding costs are equal, and total £200.

 

 


Related Discussions:- How much to order

What are the advantages of standard costing, Advantages of standard costing...

Advantages of standard costing 1) Measuring efficiency: standard costing is a yardstick for measuring efficiency. The comparison of actual costs with standard costs enables t

Explain the various stages of product life cycle, Various stages of product...

Various stages of product life cycle Typically the life cycle of a manufactured product will consist of the following stages: 1) market research : before any investment in

Transfer pricing with third party consequences, Transfer pricing with third...

Transfer pricing with third party consequences Transfer prices are used not only for internal record keeping and performance evaluation purposes. There are several settings

Make and b, The Rohr Company’s old equipment for making subassemblies is wo...

The Rohr Company’s old equipment for making subassemblies is worn out. The company is considering two courses of action: (a) Completely replacing the old equipment with new equipme

What are direct expanses, What are Direct expanses These are expanses ...

What are Direct expanses These are expanses which can be directly, conveniently and wholly allocated to a specific cost centres or cost units examples of such expanses are hir

Cash to debt service ratio, Cash to debt service ratio  Cash to debt s...

Cash to debt service ratio  Cash to debt service ratio also known as debt cash flow coverage ratio is an improvement over the interest coverage ratio and is calculated. The

Working capital management, A managerial accounting strategy focusing mainl...

A managerial accounting strategy focusing mainly on maintaining efficient levels of both components of working capital that is current assets and current liabilities, with respect

Accounting method, Accounting Method is the method by which income and expe...

Accounting Method is the method by which income and expenses are accounted for taxation purposes. The Internal Revenue Service needs taxpayers to select an accounting method that p

Strategy, Strategy A business characteristically invests considerable t...

Strategy A business characteristically invests considerable time and money in developing or creating its strategy. Employees, harried with day-to-day tasks, sometimes fail to s

Funds generated from operations, Funds produced from operations, throughout...

Funds produced from operations, throughout an accounting period, raise working capital by an equivalent amount. The two major components of funds generated from operations are depr

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