Methods of Computing Economic

Order Quantity
 TABULAR METHOD
~ Several purchase order quantity alternatives
are listed in separate columns.
 Total order
Total
Order No. of Total Average &
Carrying
size Orders Order Cost Inventory Carrying
Amount
cost

100 100 P 1,000 50 P 40 P 1040

300 33 .330 150 120 450

500 20 200 250 200 400

700 14 140 350 280 420

900 11 110 450 360 470

EOQ= 500 units (0rder size where total cost= 400
Order size = no. of units per order
No. of Orders = 10,000/order size
Total order cost = no. of order x P 10 per order
Average Inventory = order size / 2
Total carrying cost = average inventory x P 0.80
Total order & carrying cost= total order cost + total carrying cost
 FORMULA METHOD
~ The formula is easy to use and it produces an
exact figures.

~ EOQ= economic order quantity

C= cost of placing an order
N= no. of units required annually
K= carrying cost per unit of inventory
 Example:
No. of units or materials
required annually 10, 000

Cost of placing an order P 10. 00

Annual carrying cost

per unit of inventory P 0. 80
 Order Point
~ Lead time- period between placement of the
order and the receipt of the materials ordered.

~ Inventory usage rate- quantity of materials used

in production over a period of time.

~ The order point should be where the inventory

level reaches the number of units that would be
consumed during the lead time.
 Example:

Expected daily usage of an

item of material = 100
Lead time = 4 days

Order point = 100 units x 4 days

= 400 units
 Safety Stock
~ A safety stock calculation should arrive at a figure
which properly balances the risk of a stock out
against the additional carrying costs incurred by
the extra inventory.

*The order point is computed by adding the safety

stock to the product of daily usage and lead time.
 Example:
Daily usage = 100 units
Lead time = 4 days
Safety stock = 800 units

100 units x 4 days 400 units

Safety stock 800 units
Revised order point 1,200 units
Business Papers Used
to Support Material
Transactions
 Purchase Requisition
~ it is a written request, sent to inform the
purchasing department of a need for
materials or supplies.

* Name of an entity making the request

* Quantity of items
* Description of items
* Unit prices
* Order data
* Required delivery date
* Authorized signature
 Purchase Order
~ it is a written request to a supplier for specific
goods at an agreed upon price.

* Name and address of company placing order

* Purchase order no.
* Name and address of supplier
* Quantity, description, unit and total price
* Order date and delivery date
* Delivery and payment terms
* Shipping, handling, insurance, and related cost
* Total cost of entire order and authorized signature
 Receiving Report
~ The goods are checked to be sure that they not
damaged and they meet the specifications of the
purchase order.

* Suppliers name
* Purchase order no.
* Date delivery received
* Quantity and description of goods
* Discrepancies from the purchase order
* Authorized signature
 Materials Requisition Slip
~ to issue the materials to the entity presenting
a properly executed requisition.

* Department requesting the goods

* Quantity and description
* Unit cost
* Total cost the goods issued.