The document discusses Economic Order Quantity (EOQ) as a method to minimize total inventory costs, including acquisition, ordering, and holding costs. It outlines inventory control techniques such as ABC analysis, where items are classified based on their consumption value, and presents formulas for calculating stock levels to avoid under- or over-stocking. Additionally, the document details a perpetual inventory system for continuous stock monitoring and emphasizes the importance of maintaining effective stock levels to ensure uninterrupted production.

1. Cost Accounting
EOQ & Inventory Control
Dr.T.Sivakami
Assistant Professor
Department of Management Studies
Bon Secours College for Women
Thanjavur

2. Economic Order Quantity (EOQ) Definition
• Economic Order Quantity (EOQ) is the order quantity that minimizes total inventory costs.
• Order Quantity is the number of units added to inventory each time an order is placed.
• Total Inventory Costs is the sum of inventory acquisition cost, ordering cost, and holding
cost.
• Ordering Cost is the cost incurred in ordering inventory from suppliers excluding the cost
of purchase such as delivery costs and order processing costs.
• Holding Cost, also known as carrying cost, is the total cost of holding inventory such as
warehousing cost and obsolescence cost.

3. EOQ Formula…
• Economic Order Quantity = √ ( 2 × Co × D / Ch )
• Where:
 Co is the cost of placing one order
 D is the annual demand
 Ch is the annual cost of holding one unit of inventory

4. Assumption of Economic Order Quantity
(EOQ):
•
• EOQ is based on the following assumptions:
• 1. Prices of the item remain constant which keep carrying cost stable.
• 2. The quantity of the item to be consumed during a particular period is well known, i.e., quantity to be
consumed is certain.
• 3. There are dynamic conditions of the supply which enable a firm to place as many orders as it needs.
• 4. Purchase price of material per unit is constant.
• 5. Ordering cost per unit is constant.
• 6. As soon as the previous stock is finished, ordered material is received.

5. Techniques of Inventory Control
 1. Budgetary techniques for inventory planning
 2. A-B-C. System of inventory control
 3. Economic Order Quantity (E.O.Q.) i.e., how much to purchase at one time economically
 4. VED Analysis
 5. Perpetual inventory system and the system of store verification
 6. Fixation of Stock Level
 7. Control Ratios

6. Budgetary Techniques
 For the purchase of raw materials and stocks, what we required is a purchase Budget to be prepared in terms of
quantities and values involved. The sales stipulated as per sales Budget of the corresponding period generally works
out to be the key factor to decide the production quantum during the budget period, which ultimately decides the
purchases to be made and the inventories to be planned.

7. ABC Analysis
A items are goods where annual consumption value is the highest. Applying the
Pareto principle (also referred to as the 80/20 rule where 80 percent of the output is
determined by 20 percent of the input), they comprise a relatively small number of
items but have a relatively high consumption value.
B items are interclass items. Their consumption values are lower than A items but
higher than C items. A key point of having this interclass group is to watch items
close to A item and C item classes that would alter their stock management policies
if they drift closer to class A or class C.
C items have the lowest consumption value. This class has a relatively high proportion
of the total number of lines but with relatively low consumption values.

8. A-B-C Analysis:
 ABC Analysis: ABC System: In this technique, the items of inventory are classified according to the value of usage.
Materials are classified as A, B and C according to their value.
 Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory
is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the
total value of the inventory.
 Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage
value may be about 15% of the total value.
 Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of
the total usage value of the inventory.
• The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be
followed is that the high value items should be controlled more carefully while items having small value though large in
numbers can be controlled periodically.

9. Economics Order Quantity:
 Economics order quantity represents the size of the order for which both order, ordering and carrying costs together are
minimum. If purchases are made in large quantities, inventory carrying cost will be high. If the order size is small,
ordering cost will be high. Hence, it is necessary to determine the order quantity for which ordering and carrying costs
are minimum. The formula used for determining economics order quantity is a s follows:

10. VED Analysis:
• VED- Vital, Essential, Desirable- analysis is used primarily for control of spare parts. The spare, parts can be divided into
three categories – vital, essential or desirable – keeping in view the critically to production.

11. Perpetual Inventory System:
Perpetual Inventory system means continuous stock taking. CIMA defines perpetual inventory system as ‘the recording as they occur of receipts,
issues and the resulting balances of individual items of stock in either quantity or quantity and value’. Under this system, a continuous record of
receipt and issue of materials is maintained by the stores department and the information about the stock of materials is always available.
Salient Features of Perpetual Inventory System:
i) It requires more efforts to maintain inventory under this method.
ii) Quantity balances shown by the store ledger and bin cards are reconciled.
iii) A number of items are physically checked systematically and by rotation.
iv) The method is comparatively costly as compared to periodical inventory system.
v) Store ledger and bin cards keeps inventory record up-to date and decent.
vi) The method applies to those concerns usually that sell high-value items (Such as car, personal computer, equipments etc.) not at a large quantity
as compared to items under periodic system.
vii) Causes for difference between physical balances and book balances can be explored.
 viii) Making corrective entries in case of discrepancies.

12. System
 A) Easy detection of errors: Errors and frauds can be easily detected at an early date. It helps in preventing their occurrence.
 B) Better control over stores: The system exercises better control over all receipts and issues in such a manner so as to give a complete
picture of both quantities and values of stock in hand at all times.
 C) No interruption of production process: Production process is not interrupted as the physical verification of stock is made on a planned
and regular basis.
D) Acts as internal check: Under the system, records are made simultaneously in the bin cards and stores ledger accounts which acts as a
system of internal check for detection of errors as and when they are committed.
 E) Investment in materials kept under control: The investment in materials is kept at a minimum level as the actual stock is continuously
compared with the maximum level and minimum level.
 F) Early detection of loss of stock: Loss of stock due to shrinkage, evaporation, accident, fire, theft, etc. can be easily detected.
 G) Accurate and up-to-date accounting records: Due to continuous stocktaking, the store-keeper and stores accountant become more
vigilant in their works and they maintain accurate and up-to-date records.
 H) Easy to prepare interim accounts: It is possible to prepare periodical profit and loss account and balance sheet without physical stock-
taking being made.
• i) Availability of correct stock data- Correct stock data is readily available for settlement of insurance claims.

13. Fixation of stock level:
 The object of fixing stock levels for each item of material is to maintain required quantity of materials in the store and
thereby the expenses may be reduced. The different stock levels are: (1) Minimum stock level (2) Maximum stock level
(3) Reorder stock level
 a. Minimum stock level: It represents the minimum quantity of an item of material to be kept in the store at any time.
Material should not be allowed to fall below this level. If the stock goes below this level, production may be held up for
want of materials. This stock is also known as safety stock level or buffer stock.
 b. Maximum stock level: It is the stock level above which stock should not be allowed to rise. This is the maximum
quantity of stock of raw materials which can be had in the stock. It is goes above, it will be overstocking.
• c. Reorder stock level: It is the point at which the storekeeper should initiate purchase requisition for fresh supply.
This level lies between the maximum level and the minimum level

14. Control Ratios:
The control ratios are mainly two:
a) Inventory Turnover Ratio which we have studied and
b) Input-output Ratio.
Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during a period to the average
value of inventory held during that period.
If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover period is short,
the material is said to be fast moving. So if the rate of consumption is fast or if the inventory turnover rate is good, it is a
healthy measure of efficiency of materials control, as the capital employed is properly utilized.

15. Determination of Stock Levels:
• In order to guard against under-stocking and over-stocking, most of the large companies adopt a scientific
approach of fixing stock levels.
• These levels are:
• (i) Maximum level
• (ii) Minimum level
• (iii) Re-order/ ordering level
• (iv) Danger level, etc.

16. Factors Affecting Stock Levels:
• Some of the factors which influence the stock levels are:
1. Anticipated rate of consumption
2. Amount of capital available
3. Availability of storage space
4. Cost of storing
5. Procurement cost
6. Reliability of suppliers
7. Minimum order quantities imposed by suppliers
8. Risk of loss due to (a) obsolescence (b) Deterioration (c) Evaporation and (d) Fall in market prices, etc.

17. Maximum Stock Level:
• This is that level above which stocks should not normally be allowed to rise. The maximum level may
however, be exceeded in certain cases, e.g., when usually favourable purchasing condition arise.
• It is computed by the following formula:
• Maximum Stock Level = Re-order level + Re-order Quantity – (Mini. Consumption × Mini Re-order
Period)

18. Maximum Stock Level:
• The following factors are taken into account in setting this level:
• 1. Rate of consumption of material
• 2. Risk of obsolescence and deterioration
• 3. Storage space available
• 4. Cost of storage and insurance
• 5. Availability of funds needed
• 6. Seasonal considerations, e.g. bulk purchases during seasons at low prices
• 7. Reorder Quantity
• 8. Restrictions imposed by Government or local authority in respect of certain materials in which there are
inherent risk of fire, explosion, etc.
• The idea of setting maximum stock level is to ensure that capital is not unnecessarily blocked in stores and
also to avoid loss due to obsolescence and deterioration.

19. Minimum Stock Level:
• It is that level below which stock should not normally be allowed to fall. This is essentially a safety stock and is not normally touched. In
case of stock falling below this level, there is a risk of stoppage in production and thus top priority should be given to the acquisition of fresh
supplies.
• It is computed by the following formula:
• Minimum Stock Level = Reorder level – (Normal Consumption x Normal reorder period)
• In fixing this level, the following factors are considered:
• 1. Rate of consumption
• 2. The time required to acquire fresh supplies under top priority conditions so that stoppage in production can be avoided.

20. Re-Order Level or Ordering Level:
• This is that level of material at which purchase requisition is initiated for fresh supplies. This level is fixed somewhere
above minimum level. This is fixed in such a way that by re- ordering when materials fall to this level, then in the normal
course of events, new supplies will be received just before the minimum level is reached.
• It is calculated with the help of following formula:
• Re-order level = (Max. Consumption × Max. Re-order Period)
• 1. Rate of consumption of the material
• 2. Minimum level
• 3. Delivery time
• 4. Variation in delivery time.

21. Danger Level:
• This is a level at which normal issues of materials are stopped and materials are issued for important jobs
only. This level is generally fixed somewhat below the minimum level. When stock reaches danger level,
urgent action is needed for the replenishment of stock so that stoppage in production can be avoided.
Purchasing materials on an urgent basis results in higher purchasing cost.
• It is calculated with the help of following formula:
• Danger Level = (Normal Consumption x Maximum re-order period under emergency condition)

22. Average Stock Level:
• It is calculated with the help of following formula:
• Average Stock Level = 1/2 (Mini. Stock level + Max. Stock level).

23. Thank You