L4M8 Outcome 3 Whole Life Costs Flashcards
What is Economic Order Quantity (EOQ)
The economic order quantity (EOQ) is a company’s optimal order quantity that meets demand while minimizing its total costs related to ordering, receiving, and holding inventory. Demand from last year was 10,000 units. The average order cost was $5,000. The holding cost is $3 per unit, per year. Based on this company’s results, the economic order quantity is 5,774 units per order, roughly twice per year.
EOQ = √ [2 x D x S / H]
= √ [ (2 x 10,000 x $5,000) / $3]
= √ [33,333,333.33]
= 5,774 units
What are the costs used in calculating EOQ?
Three Variables (or Inputs) are used to calculate EOQ.
There are several variations of the formula used to calculate EOQ. One popular EOQ formula is based on these variables, also called inputs:
D = Demand in units (annual)
S = Order cost
H = Holding costs (per unit, per year) EOQ = √ [2DS/H]
What does MPS stand for?
Master Production Schedule
What are the five elements of Six Sigma?
Define Measure Analyse Improve Monitor
What are the benefits of leasing assets?
No initial capital outlay.
Total amount to pay is shown.
Budgeting is easier.
Fewer tax and depreciation calculations.
Tax efficiency in some situations.
What are the cons of leasing assets?
Commit to payment over a period of time.
Overall price may be higher.
Don’t own it.
Limits on usage.
Contractual stipulations made by supplier.
What are the benefits of buying assets?
Ownership
Upgrades can be made.
Usage is not limited.
What are the cons of buying assets?
Have to calculate depreciation.
More difficult to upgrade.
Maintenance costs are incurred.
What is the impact on the accounting process when an asset is removed due to the end of its useful or cost effective lifetime?
Depreciation
Fixed asset register
e.g.
Cost of mash tun £100K
Less accumulated depreciation £79K
Book value £21K
Proceeds from sale £20K
Less on removal £1K
