3. Accounting for Materials (p61) Flashcards
How do you calculate holding costs?
Total annual holding cost
= Holding cost per unit of inventory (Ch)
× Average inventory held (Q/2)
Where average inventory held is half of the order quantity Q.
How do you calculate costs of ordering inventory?
Total annual ordering cost
= Cost of placing an order (Co)
× Number of orders (D/Q)
Where the expected num of orders in a year (annual demand D) is divided by the order quantity.
How do you calculate total annual cost of inventory?
Total annual cost (TAC)
= Total purchasing costs (P)
× Annual demand (D)
+ Total ordering costs (Co×D/Q)
+ Total holding costs (Ch×Q/2)
How is reorder level calculated if demand in the lead time is constant?
Reorder level
= Maximum usage
× Maximum lead time
What is the formula for EOQ?
Economic Order Quantity
= Q
= √((2Co×D)/Ch)
Where
D = Demand per annum
Co = Cost of placing one order
Ch = Cost of holding one unit for one year
What are the important assumptions related to EOQ?
- Demand and lead time are constant and known
- Purchase price is constant
- No buffer inventory is held
How do you calculate EOQ when quantity discounts are available?
- Calculate EOQ ignoring discounts
If EOQ is smaller than min purchase quantity for discount then:
2. Calculate annual inv holding costs, inv ordering costs and inv purchase costs at EOQ
3. Calculate the same things instead at quantity that qualifies for discount
4. Compare total costs and select the lower one
5. If further discounts are available at higher quantities then repeat
How do you calculate EBQ?
Economic Batch quantity
= √((2×Co×D)/(Ch×1-(D/R)))
Where:
Q = Batch size
D = Annual demand
Ch = Cost of holding one unit for one year
Co = Cost of setting up one batch ready to be produced
R = Annual replenishment rate
How do you calculate AVCO (or WACO)?
Weighted average cost of inventory
= Total costs before issue
/ Total number of units before issue
