Economic Order Quantity(EOQ) And Its Related Costs

Concept And Meaning Of Economic Order Quantity(EOQ)

Economic order quantity is also known as reorder quantity. Economic order quantity (EOQ) is a level of inventory where the total cost of holding inventory is at minimum. Economic order quantity is the level of quantity at which the cost of ordering will be equal with the storage cost of materials. In other words, the quantity of materials which is economical to be ordered at one time is known as economic order quantity. The total costs of materials consists of the ordering cost and carrying cost. While determining the economic order quantity, the ordering cost and carrying cost should be considered.

Ordering Cost

The ordering cost is the repurchase cost and is repeated in nature. Purchasing of large quantities of materials helps reduce the ordering cost. The following costs are included in the ordering cost.
* Cost of staff appointed in the purchasing, inspection and payment departments.
* Cost of stationary purchases, telephone charge, email charge, fax charge etc.

Ordering costs also includes the cost of floating tenders, the cost of making comparison among quotations, cost of paper work, cost of transpiration etc.

Carrying Cost

Carrying cost is concerned with the storage of materials. It suggests purchasing in small quantities. If small quantities of material purchased, the storing cost will below. The following costs are included in carrying costs.
* Cost of storage ( warehousing, salaries, rent etc.)
* Cost of spoilage in stores and handling
* Insurance cost of materials
* Interest on capital blocked on materials or opportunity cost
* Cost of maintaining the materials to avoid deterioration
* Cost of obsolescence due to a change in the process or product.