lecture presented by ramoore for unit 2 CAPE ACCOUNTING

1. Economic Order Quantity

2. Raw material cost
• This is major cost to manufacturing firms.
• It causes (a high percentage of) ongoing cash
outflow for each period.
• It requires very close control over its usage
and storage.

3. queries
• What to order? [EOQ]
• When to order? [reorder point]
• How much to keep? [safety stock]
• How it should be valued? [closing stock calcu]

4. Costs of inventory
• Purchase and/or inventory [quoted price less
discount allowed, plus carriage charges]
• Ordering [associated with preparing,
receiving, and paying for an order]
• Storage [carrying cost of keeping
one unit in stock for the period]

5. Economic Order Quantity
• Is an estimate of the number of units per
order (that will be the least costly) that will
bring balance between the costs of ordering
and the costs of holding inventory.

6. Economic Order Quantity

7. Assumptions of EOQ
• Demand rates are known and hardly vary
• The cost of item does not vary with order size
• All of the order is delivered at one time
• The cost to make the order is always the same
• Cost of holding stock is linear

8. Reorder Point
• Is the level of inventory that triggers the
placement of an order for additional units.
Daily usage x lead time
• Usage is the quantity used/sold each day
• Lead time is the period between placement
and arrival of the units ordered

9. Safety Stock
• Is the quantity of inventory kept on hand in
the vent of fluctuating usage. It impacts the
re-order point.
(Daily usage x lead time) + safety stock
• It generally acts as a buffer against stockouts

10. Stock valuation methods
• Used to calculate the value of the closing stock
• FIFO [closing units x last price(s)]
• LIFO [closing units x starting price(s)]
• AVCO [closing units x (total spent/total units)]
• SIM* [report of actual physical units sold ]
*Specific Identification Method