BCA

1. ECONOMIC ORDER QUANTITY
BCA
Financial Management Accounting
UNIT 5

2. Definition
• The following terms are used in this Standard with the
meanings specified:
Inventories are assets:
• (a) held for sale in the ordinary course of business;
• (b) in the process of production for such sale; or
• (c) in the form of materials or supplies to be consumed
in the production process or in the rendering of
services.
• Net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make
the sale.

3. INVENTORY
• There are three basis approaches to valuing inventory
that are allowed by GAAP:
• (a) First-in, First-out (FIFO): Under FIFO, the cost of
goods sold is based upon the cost of material bought
earliest in the period, while the cost of inventory is
based upon the cost of material bought later in the
year. This results in inventory being valued close to
current replacement cost. During periods of inflation,
the use of FIFO will result in the lowest estimate of cost
of goods sold among the three approaches, and the
highest net income.

4. Cont.
• Last-in, First-out (LIFO): Under LIFO, the cost of goods
sold is based upon the cost of material bought towards
the end of the period, resulting in costs that closely
approximate current costs. The inventory, however, is
valued on the basis of the cost of materials bought
earlier in the year. During periods of inflation, the use
of LIFO will result in the highest estimate of cost of
goods sold among the three approaches, and the
lowest net income.
• Weighted Average: Under the weighted average
approach, both inventory and the cost of goods sold
are based upon the average cost of all units bought
during the period. When inventory turns over rapidly
this approach will more closely resemble FIFO than
LIFO.

5. ECONOMIC ORDER QUANTITY-(EOQ)
• RE-ORDER QUANTITY is the quantity for which order is
placed when stock reaches reorder level. by fixing this
quantity, the purchaser doesn’t have to recalculate the
quantity to be purchased each time he orders for
materials.
• Re-order quantity is known as economic order
quantity because it is the quantity which is most
economical to order. in other words EOQ is that size of
the order which gives maximum economy in
purchasing any material and ultimately contributes
towards maintaining the material at the optimum level
and at minimum cost.

6. EOQ
• While setting economic order quantity, two
types of cost should be taken in to account-
• 1-ordering cost.
• 2-cost of carrying stock.
• EOQ= 2.A.B/C.S
• A=annual consumption in units
• B=buying or ordering cost per order
• C=cost per unit
• S=storage or carrying cost as a percentage of
average inventory.

7. EOQ
• Alternatively
• EOQ= 2AB/S
• Where S=storage or carrying cost per unit per
annum

8. ABC ANALYSIS
• ABC technique is a value based system of
material control .in this technique , materials
are analysed according to their value so that
costly and more valuable materials are given
greater attention and care .all items of
materials are classified according to their
values ,which are known as A.B and C items
respectively.ABC technique is sometime called
always better controlmethod.

9. ABC
• ‘A’ items-these are high value items which
may consist of only a small percentage of the
total items .so in tight control.
• ‘B’ items-These are medium value materials
which should be under and normal control.
• ‘c’ items-these are low value material which
may represent a very large no. of items .these
materials should be under simple and
economical methods of control.

10. JUST IN TIME(JIT)PURCHASING
• Just in time purchasing is the purchase of materials
immediately before these are required for use in
production .
• According to CIMA London JIT purchasing is “matching
receipts of materials closely with usage so that raw
material inventory is reduced to near zero level.” the
purpose of JIT purchasing is to reduce stock levels to
the minimum through creating closer relationship with
suppliers and arranging frequent deliveries of smaller
quantities .it results in enormous savings in storage
cost ,material handling cost ,spoilage, obsolescence
etc.

11. JIT
• An important effect of JIT purchasing is that
with frequent purchasing the issue price is
likely to be closer to market prices .in order to
save on ordering costs ,long term agreements
may be entered in to with suppliers.

12. References
• Accounting for Managers by Dr. Sakshi
Vasudeva Galgotia Publishing Company
Chapter 27 Economics Value added and
Performance Measurement page no. 956

13. • Thank you