50/- and 0.25 respectively and the unit price of the item is Rs. Let us say that during the next year forecast of consumption of an item is 5,000 units, S and I calculated on the basis of last year data are Rs. Average inventory can be calculated as follows: – The method of calculating ICC is to estimate cost against each one of the above elements during the past year and divide it with the average inventory during that year. Any other cost relating to holding of stocks in the stores.Electricity, oil, water and other service charges of stores.Handling expenses paid to contractors, transporters, etc.Telephone, telex, postage and stationery used by stores.Deterioration, damage and pilferage of items during storage.Depreciation of handling equipment, racks, furniture and other facilities used in stores.Depreciation of accommodation (or rent of building) occupied by stored and stores offices.Salaries and perks of the employees engaged in the stores.Interest loss/opportunity loss on the capital locked up in the form of average inventory.Various elements of cost falling under this head are as given below: – Inventory Carrying Cost (ICC): Inventory carrying cost is the cost of holding inventory.

If N is the number of orders placed during the year, ordering cost (S) in Rs. Any other cost (entertainment etc.) incurred for purchasing.Insurance, power, water and other service charges relating to purchase department.Depreciation of accommodation (or rent of building) and equipment used for procurement.

Telephone, telegram, telex, postage and stationery relating to procurement.

Traveling expenses related to procurement.

Also QC department engaged in inspection and testing of purchased items This will include accounts personnel associated with purchase department in evaluating quotations and making payments.

Proportionate part of salary + perk of the executives and employees of other departments spending part of their time in making purchases.

Salaries + Perks paid to all the employees in the purchase department.

Total ordering cost per order can be determined by estimating annual cost actually incurred during the past one year against following elements: Ordering cost is the cost of placing one order.

Total cost for managing inventory of an item depends upon 3 factors: Holding costs are proportional to value of stocks held, similarly, order cost varies proportionately with price.Order costs, holding costs and unit price are constant.Inventory is consumed at a constant rate.The EOQ approach is based on the following assumptions. The EOQ (Economic Order quantity) approach is designed to achieve such a balance.Įconomic order Quantity or optimum order quantity is that size of the order where total inventory costs (holding costs + ordering costs) are minimized. A balance should be struck between the ordering costs and holding costs so as to minimize inventory costs. On the other hand, in case the firm orders large quantities infrequently, its ordering costs will be low but holding costs would rise. If a firm orders small quantities frequently its holding costs would be low but ordering costs will increase. One of the important problems in inventory control is to balance the costs of holding inventories (holding costs) with the costs of placing orders for inventory replenishment (ordering costs).

Economix order quantity