Page 7 - Cost Accounting - Ready Reckoner

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CHAPTER – 1

Elements of Cost
Material:

Raw materials are the basic requirement for production of goods. A study under
the chapter, gives knowledge about raw materials and answers where to buy (from
which supplier), how much to buy (quantity), at what time to buy (stock levels) and at
what price to buy (supplier discounts).

Economic Ordering Quantity (Optimal Ordering Quantity):

EOQ is the optimal quantity of materials to be purchased at a time from a
supplier to minimise cost.

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EOQ = √

A = Annual Consumption of Raw Material;

O = Ordering Cost per Order;
C = Carrying Cost per Unit per Annum.

There are 3 costs associated with purchase of Raw Materials:
1. Purchase Cost
2. Ordering Cost
3. Carrying Cost

Ordering Cost is based on number of orders. With more number of orders the
ordering cost will be more.
OC = Number of orders x cost/order
Carrying cost is the cost incurred for carrying the Raw Material purchased.