Formulae to learn

Question 1

Cost Behaviour

How to determine the total cost, fixed cost or variable cost element of any expense.

Answer 1

Total cost = Fixed cost + Variable cost/unit x number of units

Question 2

Cost Behaviour.

How to use the ‘high/low’ method to calculate the variable cost per unit of production, or the fixed cost element of production.

Answer 2

High/Low Method.

1. Find highest & lowest output & costs.
2. Find the difference between outputs & difference between costs.
3. Calculate the VC/unit = change in £/change in output
4. Substitute back into to y = a+bx formula to find the fixed cost (a) element.

Question 3

Inventory Control Levels.

What is the reorder level?

Calculate the minimum inventory level

Calculate the maximum inventory level

How would you calculate the average inventory level?

Answer 3

Calculating Inventory Control Levels

Reorder level = max usage/day x max lead time

Minimum level = reorder level - (avg usage/day x avg lead time)

Maximum level = reorder level + reorder quantity - (min use/day x min lead time)

Avg inventory = minimum inventory + 1/2 reorder quantity

Question 4

Inventory Cost Analysis.

How would you calculate the purchase cost of an annual inventory?

How would you calculate the ordering costd incurred annually?

How would you calculate the annual holding costs for an inventory?

Answer 4

Inventory Cost Analysis.

Purchase costs = purchase price x annual demand =

P x D

Ordering costs = cost/order x annual # of orders =

Co x D/Q

Holding costs = cost of holding one unit for a year x avg inventory = Ch x (Q/2 + min inventory)

Question 5

Total Annual Inventory Costs.

Total Inventory Costs = Purchase Costs + Ordering Costs + Holding Costs

Answer 5

Or in formulaic terms

TC = P x D + (CoD/Q) + (ChQ/2)