How much to order, Managerial Accounting

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.

 

 

Posted Date: 12/5/2012 8:01:48 AM | Location : United States







Related Discussions:- How much to order, Assignment Help, Ask Question on How much to order, Get Answer, Expert's Help, How much to order Discussions

Write discussion on How much to order
Your posts are moderated
Related Questions
Cost-Volume-Profit assumptions The main assumptions required in C-V-P analysis are: 1) The relationship holds merely within the appropriate range. The relevant range is a ba

Explain Programmer budgeting According to burkhead According to burkhead a program budget serves a different purpose than performance budget. A performance budget is useful fo

Stock-out costs These are the opportunity costs of running out of stock. They comprise: 1) The costs of lost customer sales, and therefore lost contribution to fixed costs.

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

From the subsequent financial data describe: a) How the airline company has grown-up b) How the company has been capable to earn grater margins at higher levels of sales

Funded debt to total capitalization ratio The ratio establishes a link among the long term funds raised from outsider and total long term funds available in the business. The

Define the Balanced Score Card? 1. Distinguish between standard control and budgetary costing. 2. Define the ‘Balanced Score Card? Explain the steps in implementing ‘Balance

can you better explain to me the classification by traceability and the classification by function?

CONTIGENCY THEORY Some researchers have argued that the context in which budgetary control is used is as important as the style in which it is implemented and used. This is ter

a cost-allocation base may be any of the following except: a. cost driver b. cost pool c. way to link indirect cost to a cost object d. nonfinancial quantity