Economic Order Quantity (EOQ) - Problem - Material Cost - B.COM / CMA /CA INTER - By Saheb Academy

hello everyone you're watching saheb Academy if you like our videos then please subscribe to our Channel and also hit the bell again for the regular updates and also follow us on Instagram so have Academy now let's go to the video hi everyone in this video we are gonna start this new topic of material costing that is a oq economic order quantity so now this Coq topic it's a very simple and very easy topic so first let's start off with the concept of a oq and then we are going to solve some problems in this video and fine so see ya economic order quantity what is this yoke you say yo Q is nothing but a quantity that you order ok it's just a quantity that said ya 500 units 600 unit that's it it is the size of the order how much to order yeah that is what is yo Q so now it's a quantity which is the most optimal and most beneficial that is why it is called economic economic order quantity a quantity that is most economical for the factory or the business to make an order why because if you make an order at that quantity then what happens is your total of ordering and carrying cost becomes minimum yeah it is the size of the order for which total of ordering and carrying cost are at minimum so now let's dive into that what is this ordering and carrying cost see here when you want to purchase raw materials right there are mainly three cost involved purchase cost ordering cost and carrying cost so now see here purchase cost let's say in your factory for a year you need 10,000 units for a year you need 10,000 units that's called annual consumption annual demand or annual requirement yes 10000 units you need in a year for your factory so now you wanna purchase 10000 units of raw material right unless is the cost per unit is rupees 10 so you need to buy 10,000 raw materials 10,000 units of raw material and the cost per unit is in 210 so then your cost would be your purchase cost would be one lakh you have to pay one lakh to purchase this 10,000 units of raw material yeah and this cost will be fixed that is what is purchased cost simple what you pay to purchase the goods fine and then there is ordering cost now what is ordering cost or drink cause is the cost that you incur each and every time you make an you know such as shipping charges transportation charges yes you are purchasing from your supplier but you might have to incur the shipping charges yourself yes and then some documentation work can be done so for that also there may be some expenses and then there may be inspection charges also after receiving the order you might have to check the quality and the quantity and for that although you might have to incur some expenses here that's inspection charges so all these comes under ordering costs yeah each time you make an order let's say the ordering cost is let's say per order the ordering cost is one thousand one thousand yeah so if you're making ten orders if you're making ten orders in a year in two one thousand each time you make an order you incur the ordering cost so if ordering cost is one thousand per order and if you're making ten orders then ten into one thousand right so it would be ten thousand ten thousand would be your what ten thousand would be the ordering cost see this is what is ordering cost the cost which are associated here which are directly related with the purchase or order of materials example transportation cost documentation quotation charges inspection simple and then we have carrying cost now what is this carrying cost see here after making the order and receiving your materials what you have to do with the raw materials simple you have to store the raw materials isn't it you have to store them and where you will do that in the warehouse or go down yes that is what you will do so for that also there is cost yes you might have to you know take a warehouse on lease or maybe you have to purchase a warehouse yes rent is there so so many things are there so that would be your carrying cost yes storing cost and also insurance also there can be accidents also in the warehouse right your stock of raw materials can be burned it can be destroyed sometimes so you have to get an insurance also so all this is work carrying cost or you can also say holding cost you have to hold or carry the materials with you isn't it yes so this is what three costs are involve urges cost ordering cost and carrying cost understood so now here purchase cost is always fixed okay but these took ordering cost and carrying cause you know they have a negative relationship if ordering cost is more carrying cost would be less and if carrying cost would be more ordering cost will be less let's understand that see here now let's say you want to purchase 10000 units for your factory 10000 units okay fine so now let's understand the relationship between ocn si si yeah ordering cost and caring course es very simple see here let's say you wanna purchase 10000 units now so now what you can do is you can order see here I'll just give you 3 scenarios see here 10000 units you need isn't it now you wanna order let's say quarterly every three months yeah so that would be divided by four yes in a year there are four quarters right 3 3 3 3 isn't it so you will be making how much 2500 quantity order and you will making four orders is ended 2,500 2,500 2,500 2,500 that's 10,000 quantity yes 10,000 units Union it yeah and you'll be making order every quarter so divide by 4 yes 4 quarters are there so 2500 quantity you will be ordering each time and then total it will be 4 orders so four orders and let's say the ordering cost we are per order is 1,000 yeah this example so into 1,000 let's see here 4 orders will be making into 1,000 yeah 1,000 is the ordering cost yes and the total ordering cost would be 4,000 isn't it you will be making what 4,000 ordering cost you will be incurring 4000 ordering constant ok then what will happen to the carrying cost the holding cost see here you have to get a warehouse that can accommodate 2500 quantity each time because you will be getting 2500 quantity each quarter isn't it you'll be receiving at the warehouse 2500 quantity of raw material and you have to store them yeah so your cost would be less okay your cost would be less we are carrying cost but then let us come to the second scenario in the second scenario let's say you will be making order every six month yeah so see here see here 10000 quantity you need in a year that's your annual demand divided by six month so that's / - right there are two six months in a year right so divided by two 5,000 5,000 quantity order you'll be making twice in a year right because you need only 10,000 that's your annual demand annual consumption that's your annual requirement so five thousand five thousand two times you will order so if you order two times what will happen two orders into one thousand your ordering cost per order so simple mm mm - one thousand two thousand your ordering cost will be two thousand but then what will happen to your carrying cost your carrying cost of holding cost will increase isn't it because the same warehouse compared with the first scenario the same warehouse which you purchase or you took it on rent right which can accommodate two thousand five hundred contrary wouldn't be enough to store five thousand quantity at once right you will be getting five thousand quantity yes so can you accumulate the five thousand quantity in that same warehouse no you have to get a bigger warehouse isn't it so that is why your what will happen here your carrying cost will increase you have to take a bigger warehouse on trend or you might have to purchase a bigger warehouse simple so see here or drink oz came down from four orders we are making two orders but then what happened we are making an order of high quantity yes our ordering cost came down because we are making only fewer orders two orders but then we are receiving high quantity at the warehouse our holding cost is increasing simple let's come to the last scenario see here what is 10000 quantity we need right so what is we order the whole 10000 quantity at once on the full January itself we are ordering 10000 quantity all at once so now what will happen we are making only one order we need 10,000 units we are making only one order so ordering cost will come even down yeah it will be more reduced just one thousand only one order into one thousand that is 1000 1000 will be the ordering cost but then what will happen to the holding cost to the carrying cost it will increase more why because now 10000 quantity at once will come to the warehouse and again the same thing the warehouse wouldn't be able to accommodate the warehouse compared with the second scenario the warehouse which we had for 5000 quantity wouldn't be enough to store 10000 quantity so we have to get even bigger warehouse even go down you see here ordering cost is decreasing but our carrying cost is increasing increasing increasing see this is the thing you know so see here see here cost quantity this graphical representation see here this is carrying cost this is ordering cost as you go on increasing the quantity in an order then what will happen you'll be making fewer orders and your ordering cost will come down it will come down okay the ordering cost see here this is cost right so cost will come down ordering cost will come down but then what will happen the carrying cost as quantity increases yes as quantity increases your carrying cost will be higher and higher and higher isn't it that's what we see right see here 2500 quantity it was yeah it was little cost was there and then when you raise to 5000 quantity orders you made fewer orders ordering cost came down but then your holding cost increase you are carrying costs increase and then when you made 10000 quantity order then what happened then it increased even more the carrying cost but the ordering cost came down carrying cost went on increasing yeah this is what happens you know carrying cost and ordering cost they have negative relationship you know they have what negative relationship understood carrying cost and ordering cost have negative relationship so that's why what we do is in this yoke you toq is a quantity where the ordering and carrying cost is a minimum okay it is minimum and it is equal so that is why what we do is we calculate this e oq e oq is a point where carrying cost and ordering causes equal and it's the point where the carrying cost and ordering causes minimum so that is the optimal and the best point that is the best quantity that is what the best quantity at which we have to order understood yo Q is the quantity at which a carrying cost and ordering cost is equal okay they are equal and they are minimum okay there are minimum so that's the best quantity to order fine simple you understood they have negative relationship and we have to use the formula to calculate e oq is very simple so let's see see here ordering costs right we saw that caring called the cost for holding of inventories in store example cost of storage yeah rent of warehouse insurance called etc how the formula is very simple see here yo Q is equal to root of 200 divided by C 200 divided by C what is this a see here a is the annual demand consumption how much you need in a year annually yes we saw in this example 10,000 units so that's your annual demand how much you need in a year okay we always see you know your figures because we prepare the financial statements for a year right so that's why even six months you know figures are given we'll convert it into year and if even three months quarterly figures are given you will convert it into yes right that's what we do so annual demand okay and then oh oh is ordering cost ordering cost per order okay if you want to make one order then how much is the cost that is your o or drink cost per order and then C is the carrying cost per unit carrying cost per unit remember this okay carrying cost per unit all right so this is C holding cost per unit or carrying cost per unit okay you understood this is the formula C you have an example yeah problem one see here suppose the company purchases raw material at a cost of rupees 16 per unit okay this is the purchase cost cost per unit they have given us okay that is not useful to us while calculating your Q well you see here the annual demand is 25,000 units see here we have got the annual requirement this thing yeah so we have got the a is what 25,000 units right then the carrying cost per unit is 6.4 P so we have got the carrying cost here C's 6.41 dur stood and the cost of placing an order is rupees thirty-two ordering cost is given at rupees 32 so simple we are going to use the EO q formula to AO / C it's very simple let's do that so 2 into what is the a is the 25,000 units isn't it 25,000 into 32 yeah see here into 25,000 that is a annual demand and we'll requirement annual consumption into 30 to the ordering cost per order yeah see you have said the cost of placing an order one order is rupees 32 so into 32 okay equal to that comes out to be how much sixteen lakh divided by the carrying cost per unit that is six point forty guess 6.42 I did by six point forty a six-point 40 then how much you get it is equal to how much to like fifty thousand now apply the route we hace a route simple 500 500 quantity would be your yoke you simple guarded yeah so this is how you have to do it's very simple yeah just identify these and apply the formula to AO divided by C understood yeah so now let's see more examples now here we have a second problem of yoke you see here it's very simple calculate e oq and number of orders to be placed in here so here they have asked us to find yoke you calculate e oq and number of orders to be placed in here fine we'll do that so let's see the information what is given so we have in given see here quarterly consumption of materials four thousand units so here they haven't given us annual consumption they have given us quarterly consumption so we have to convert that okay and then cost of placing one order is given hundred cost per unit is given rupees eighty and then we have got carrying cost storage and carrying cost eight percent of inventory eight percent of raw material that we are going to order right so now here eight percent of inventory means what see carrying cost is always that per unit carrying cost per unit yes that's what we need an e oq formula carrying cost per unit but ordering cost is per order okay leave that see here eight percent of inventory means eight percent of raw material so what are they going to do we are going to multiply eight percent we are going to take eight percent of cost per unit of raw material cost per unit of raw material that is rupees eighty okay so let's solve this problem see it's very simple the formula is 2a o divided by C EO q formula we need annual consumption we need ordering cost we need carrying cost so first let's focus on annual consumption annual demand yes but in this question we have got quarterly consumption so we have to convert that and you know in a year we have got four quarters right four quarters we have got in a year so what are we going to do four thousand into four four thousand into four yeah that's how we are going to convert that photo nine to four 16,000 units simple as that see here what did I say four thousand units into four quarters in a year so multiply that you will get 16,000 units that's your annual consumption so we have got the a annual consumption 16,000 units and then o is hundred it is given in the question cost of placing one order one hundred rupees fine and then we need carrying cost which is not given directly so they have said eight percent of inventory so eight percent of inventory means we have to take 8 percent of cost per unit of raw material of inventory yeah that's what we have to do cost per unit is rupees 80 into 8 percent of that so simple see here cost per unit into 8 percent what is cost per unit rupees 80 so 80 into 0.08 yeah that's 8 percent so if you multiply that we get 6.4 as the carrying cost per unit simple right carrying cost per unit right then we have got everything isn't it a Oh see so now let's apply the e oq formula root of 2 into 16,000 the annual consumption 16,000 in 200 the ordering cost to a oh yeah divided by the carrying cost per unit that is 6.4 we just calculated yeah if you put that into calculator to into 16,000 in 200 that is equal to 32 lakh divided by six point four you get how much 5 lakh so now route it you will get seven zero seven point one that's the quantity but now we have to round it off okay so if we round it off it will become 7 0 7 okay 7 0 7 quantity yeah fine so this is our a oq we have got the eoq you now we have to calculate the number of orders to be placed okay number of orders to be placed see it's very simple now each time you will be ordering this much quantity yo Q quantity yeah your quantity that you will be ordering is 7:07 each time so now you have to know how much orders you are going to make in a in a year how much quantity do you need what is an annual consumption in a year you will be needing how much sixteen thousand units okay so your annual consumption is sixteen thousand units yeah what am I taking annual consumption because they have asked number of orders to be placed in a year yeah in a year how many orders you are going to place the simple I need six thousand units yeah I need sixteen thousand units divided by the EO q what is the EO q 7:07 quantity so simple I need sixteen thousand quantity in a year divided by divided by the EO q each time the quantity you will be ordering a 7:07 okay divided by that so you will get see here twenty two point six orders so you will be making twenty two point six orders yeah but you cannot make you know point six order so you have to round it off it's more than 0.5 so round it off and make it twenty three orders so you will be ordering how much twenty three orders simply a similar problem first you calculated the EO q and then what you have to apply this formula simple annual consumption / EO q you will get the number of orders to be placed in a year twenty three orders in or yeah that's the most important thing yeah simple

Channel: Saheb Academy

Views: 177,272

Keywords: eoq, economic order quantity, material costing, material cost, ca inter, cma, bcom, cost accounting bcom, costing methods, eoq problem, eoq analysis, eoq inventory management, management accounting, operation research, problem and solutions, saheb academy, costing, material control, re order level, maximum level, minimum level, gagan kapoor, naresh aggarwal, eoq diagram, eoq model, cma inter, bangalore, holding cost, ordering cost, purchase cost, eoq formula, simple

Id: xO27v9hiVAU

Length: 18min 55sec (1135 seconds)

Published: Thu Apr 09 2020