Carrying costs of inventory-relevant costs of eoq model, Managerial Accounting

Carrying costs of inventory

These are costs incurred because the firm has decided to maintain inventories. They generally consist of:


•    Stock-out costs
•    Insurance costs
•    Warehouse and storage costs
•    Material handling costs
•    costs of obsolescence

Total Ordering Cost = (Total demand for period x Ordering Costs per period) / Quantity Ordering
                             = DO/Q


Total Holding Costs  = (Quantity Ordered x Holding Costs per unit) / 2
                             = Q H/2


Therefore total relevant costs (TC) for any order quantity can be expressed as:

TC = DO/Q + Q H/2
                           


We can determine a minimum of this total cost function by:

i. Differentiating the above formula with respect to Q and setting the derivative (1st) equal to zero.

dTC/ dQ = (-DO/Q2) + H/2 = 0

2286_formula1.jpg

                        
ii. Equating ordering costs to holding costs.

DO/Q = Q H/2

1753_formula2.jpg

 

Posted Date: 12/6/2012 6:07:47 AM | Location : United States







Related Discussions:- Carrying costs of inventory-relevant costs of eoq model, Assignment Help, Ask Question on Carrying costs of inventory-relevant costs of eoq model, Get Answer, Expert's Help, Carrying costs of inventory-relevant costs of eoq model Discussions

Write discussion on Carrying costs of inventory-relevant costs of eoq model
Your posts are moderated
Related Questions
LIFE CYCLE COSTING Introduction Life cycle costing as its name implies costs the cost object i.e., product project etc. over its projected life. It is used to explain a s

State Factors determining Working Capital requirement.

In this section we have discussed the motives for conducting cash balances. In addition, we have discussed cash deficit or surplus situation and how it can be contained by the use

VALUE ADDED STATEMENTS Are intended to show how much wealth or value has been created by the company’s operations and how the wealth has been shared out to interested groups e.

Queuing problems There are two main approaches to queuing problems: •    simulation •    queuing theory formula Where simple situations apply, queuing theory should be used

The subsequent short-term investment opportunities are obtainable to companies in India to invest their temporary cash excess. a) Treasury Bills: Treasury Bills are short-term

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 place

differentiate between multiple product, selling product and margin managent

Once the cash budget has been arranged and suitable net cash flows established the finance manager must ensure that there does not exists an important deviation in between actual a

Credit Limit A credit restriction is the maximum amount of credit that the firm will extend at a point of time. This indicates the extent of risk taken through the firm through