Economic
order quantity (EOQ) is a decision tool used in cost
accounting. It’s a formula that allows you to calculate the ideal quantity of
inventory to order for a given product
Economic order quantity uses three variables:
demand
relevant ordering cost
relevant carrying cost.
·Demand: The
demand, in units, for the product for a specific time period.
·Relevant
ordering cost: Ordering cost per purchase order.
·Relevant
carrying cost: Carrying costs for one unit. Assume the unit is in stock for
the time period used for demand.
Note that the ordering cost is calculated per order.
The carrying costs are calculated per unit. Here’s the formula for economic
order quantity:
Economic order quantity = square
root of [(2 x demand x ordering costs) ÷ carrying costs]
Q is the economic order quantity (units). D is demand (units,
often annual), S is ordering cost (per purchase order), and H is carrying cost
per unit.
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