Accounting for material cost
Term material related to all commodities supplied to undertaking it can be direct or indirect
Advantages
Effective control in costly items
Save time for non important items
Optimum investment is possible
Minimum total cost
High inventory turn over
Re order quantity or economic order quantity:
No of units ordered is treated as a reorder quantity
if quantity is ordered in such a way that total cost will be minimized such re order quantity will be EOQ
At EOQ level total of ordering and carrying cost is minimum as well as both are equal.
Ordering cost:
Above cost is incurred for acquiring the input.
Placing an order, transportation, inspection etc.
There is a inverse relationship between cost and size of order. If size of order are increased, no of order reduced hence ordering cost reduced or vice versa
Carrying cost
Cost incurred in maintaining a given level of inventory.
Storage space, insurance and salary of staff etc.
Relationship between the size and carrying cost is positive if order size is larger, carrying cost is higher and vice versa.
Formula:
EOQ =2AO/C under root
A = annual consumption
O = ordering cost per order
C = carrying cost per unit per annum
Above formula only can be used if there is a prior knowledge of annual consumption, constant rate of usage, constant order size, carrying cost, delivery period etc.
Methods of calculation EOQ
Graphical method :-
Tabular or trial and error method:
under this method, at different level total cost will be calculated
Format is given below order size
| particulars | I | II | III |
| A annual consumption | |||
| B order size | |||
| C no of orders = A/B | |||
| D cost of per order | |||
| E total ordering cost=C*D | |||
| F Avg inventory =
order size/2 |
|||
| G carrying cost per unit | |||
| H total carrying cost=
F*G
|
|||
| I total cost = E+H |
At different level of order total cost will be calculated and order size which gives lowest cost should be accepted when discount will be granted by supplier at different order size only above method can be used for considering total cost.
Material cost is also required to be added in above.
order size
| particulars | EOQ | month No dis | Month 4%dis |
| A annual consumption | 24000 | 24000 | 24000 |
| B order size | 1200 | 2000 | 2000 |
| C no of orders = A/B | 20 | 12 | 12 |
| D cost of per order | 90 | 90 | 90 |
| E total ordering cost=C*D | 1800 | 1080 | 1080 |
| F Avg inventory =
order size/2 |
600 | 1000 | 1000 |
| G carrying cost per unit | 3 | 3 | 2.88 |
| H total carrying cost=
F*G |
1800 | 3000 | 2880 |
| I purchase cost | 600000 | 600000 | 576000 |
| J total cost = E+H+I | 603600 | 604080 | 579960 |
EOQ level will be best if no discount.
But if discount is given monthly order with 4% discount is better.
Stock level:
To avoid the under stocking or over stocking of various level of stock should be considered.
Maximum stock level:
It is a level of the stock normally beyond which not to allow to exceed this level.
Maximum level = Re order level + Re order quantity – (minimum consumption * minimum reorder period)
Minimum stock level
It is the lowest quantity level beyond which not allowed to fall
Minimum level = re order level – (normal consumption * normal re – order period)
Re order level
It is a level at which fresh order should be placed
Re order level = maximum consumption *maximum re order period
Or
Minimum level +