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| Corporate Accounting Treatment |
Economic order quantity(EOQ)-Formula -With Practical Examples:
Economic Order Quantity (EOQ) is a fundamental inventory management concept used to determine the optimal quantity of stock to order so that total inventory costs are minimized. These costs typically include ordering costs (the cost of placing orders) and holding costs (the cost of storing and maintaining inventory). EOQ helps businesses strike a balance between these costs, allowing them to operate more efficiently and reduce unnecessary expenses.
Formula for EOQ:
The formula to calculate EOQ is:
Where
D = Demand for the product (units per period)
S = Ordering cost per order
H = Holding or carrying cost per unit per period
Explanation of the formula:
Demand (D):
The annual quantity of items required or expected to be sold.
Ordering Cost (S):
The cost incurred every time an order is placed, regardless of the order size. This could include administrative costs, shipping, and handling fees.
Holding Cost (H):
The cost of storing a single unit of inventory for a specific period, including warehousing, insurance, and opportunity costs for the capital tied up in inventory.
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= 632 units
This means the company should order 632 units each time to minimize its total inventory costs.
Benefits of EOQ:
Cost Efficiency:
Reduces the total costs of ordering and holding inventory.
Inventory Control:
Ensures
the right amount of stock is on hand, minimizing the risk of stock outs or
excess inventory.
Decision-Making:
Helps businesses make informed decisions about how much stock to order and when.
EOQ is particularly useful for businesses dealing with large inventories, ensuring that they avoid over-ordering or under-ordering, which can lead to either high storage costs or lost sales.