Smt. P. D. Hinduja TrustK. P. B. Hinduja College of Commerce

FYBAF2011-2012

Cost AccountingTopic- Economic Order Quantity

Presented by:-

Group no.- 03Name Roll no.

Divya Dadheech………………Divya Ranamt…………………Ekta Manik…………………….Rutuja ……………………………..Poulami Sarkar………………Rushabh Chandan…………

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Economic Order Quantity

EOQ Model

INTRODUCTION OF EOQ

DEFINITION OF EOQ

EOQ MODEL

Uniform/Constant Demand

Constant Unit Price

Constant Carrying Cost

Constant Ordering Cost

Instant Delivery

Availability of Funds

Assumptions of EOQ Model :

HOW TO USE EOQ IN YOUR ORGANISATION ?

How to use EOQ in an Organization ?

How much inventory should we order each month?

The EOQ tool can be used to model the amount of inventory that we should order each month.

Job CostingBatch costing

• Proper Co-ordination• Centralized Purchasing• Proper Scheduling • Proper Classification• Use of Standard Forms• Safe Storage• Reduce Cost

Importance of EOQ :-

How EOQ Works ?

How EOQ Works ?

The Principles Behind EOQ: The Total Cost Curve

&

The Principles Behind EOQ: The Holding Costs

Keeping inventory on hand

Interest

Insurance

Taxes

Theft

Obsolescence

Storage Costs

How EOQ Works ?

Interest…………….

Obsolescence……..

Storage……………..

H o w E O Q Wo r k s ?The Holding Costs

The Principles Behind EOQ: The Procurement Costs

Primarily the labor costs associated with processing the order:

Ordering and requisition

A portion of the freight if the amount very according to the size of the order

Receiving, inspecting, stocking

Invoice processing

How EOQ Works ?

How EOQ Works ?

Total Cost = Purchase Cost + Order Cost + Holding Cost

The Total Cost Formula

The Total Cost Formula

How EOQ Works ?

This represents the unchanging fixed costs

P = Purchase cost per unitR = Forecasted monthly usage

The Total Cost Formula

How EOQ Works ?

This represents the variable order costs

P = Purchase cost per unitR = Forecasted monthly usageC = Cost per order event (not per unit)Q = The number of units ordered

The Total Cost Formula

How EOQ Works ?

This represents the variable holding costsP = Purchase cost per unit

R = Forecasted monthly usageC = Cost per order event (not per unit)Q = The number of units orderedF = Holding cost factor

H o w E O Q Wo r k s ?

The EOQ Formula

Taking the derivative of both sides of the equation and setting equal to zero to find the minimum value of the function, one obtains:

How EOQ Works ?

The EOQ Formula

The result of differentiation

The Economic Order Quantity

Tabular Method

Graphical Method

Algebraic Method

Methods for Valuation of EOQ Model

Real Life Example:

Real Life Example :

Real Life Example :

First, Recall the EOQ Equation:

P = Purchase cost per unitR = Forecasted monthly usageC = Cost per order event (not per unit)F = Holding cost factor

Real Life Example :

R = 5200

C = $10 per order

P = $2

F = 20% of value of inventory per year

R = 5200

C = $10 per order

P = $2

F = 20% of value of inventory per year

Real Life Example :

(10) 2 (5200)EOQ = (2 )(.20)

Real Life Example :

EOQ = 510 cases

EOQ is a tool, not a simple solution.

EOQ is useful in determining optimal order quantity

Understand the equation and what you are trying to find

Find accurate inputs for the equation

Closing Notes :

Fundamentals of Cost Accounting Vipul Prakasharan

http://www.inventoryops.com/economic_order_quantity.htm

http://en.wikipedia.org/wiki/Economic_order_quantity

Cost Accounting - V.K.Saxene

Additional Resources on EOQ