Page 8 - Cost Accounting - Ready Reckoner

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Carrying Cost has two components:
1. Storage cost
2. Interest cost for funds locked up in materials.

Carrying cost in total is computed on average inventory, because it is the average
inventory that is held in stock at a point of time.

CC = x CC p.u p.a
2

At EOQ, OC = CC and gives the minimal total cost.

Derivation of EOQ Formula:

OC = CC

= A = Annual Consumption
x O x C
2 O = OC

2
AO = C = CC p.u. p.a

2 Q = Ordering Quantity
2 = Q 2

Q = 2
√ , Thus EOQ formula

If supplier grants a discount on bulk purchases, discounted purchase price
should be considered while calculating purchase cost and carrying cost also must be
calculated at such discounted purchase price.
When difference slab rates of purchase orders are given by the supplier, the sum
shall be handled in a way the lower units of a slab is considered for evaluation and that
slab or group which gives least total cost shall be the Ordering Quantity.

Stock Levels:

 Reorder Level (ROL) = Max. Consumption X max. Re-order period

 Minimum Stock Level:
ROL – (Normal Consumption x Normal Re-order period)

 Maximum Stock Level:
ROL + ROQ – (Minimum Consumption X minimum Re-order period)