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Inventory Cost Management and EOQ Explained

The document discusses the importance of minimizing total relevant inventory costs to facilitate effective management decisions, highlighting that some costs increase with inventory quantity while others decrease. It distinguishes between out-of-pocket costs, which are direct expenses incurred by employees, and the cost of capital, representing the opportunity cost of funds tied up in inventory. Additionally, it introduces the Economic Order Quantity (EOQ) model, which helps companies determine the optimal order size to balance demand and minimize holding costs.

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Jane Clarisse Santos
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4 views1 page

Inventory Cost Management and EOQ Explained

The document discusses the importance of minimizing total relevant inventory costs to facilitate effective management decisions, highlighting that some costs increase with inventory quantity while others decrease. It distinguishes between out-of-pocket costs, which are direct expenses incurred by employees, and the cost of capital, representing the opportunity cost of funds tied up in inventory. Additionally, it introduces the Economic Order Quantity (EOQ) model, which helps companies determine the optimal order size to balance demand and minimize holding costs.

Uploaded by

Jane Clarisse Santos
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Inventory Modeling….

The objective of inventory decision is usually to minimize the total relevant costs
while maintaining the quantities of inventories needed for smooth operations. So, why do we need to
minimize the total relevant cost? Since, these costs will able to impact and influence management
decisions, mas better na alisin and mga unnecessary data na maaaring maging kumplikado ang decision-
making process ng company.

So here in inventory cost, some cost increase with quantities of inventory on hand while other costs
decrease.

Carrying costs… increase with the quantity of inventory on hand…. There are two classes of inventory
costs which are the OUT OF POCKET COST and COST OF CAPITAL.

Yung out of pocket costs, ito yung mga gastos na nagamit ng mga employees na kailangang bayaran ng
company. Karaniwang binabayaran ng employer ang mga employees para sa mga nagastos nila through
an expense reporting and check payment system. So, the examples of out of pocket cost are insurance
on the value of the inventory, inventory taxes, rent, obsolescence, record keeping costs, etc.

The other one is Cost of Capital… this is the opportunity cost of having funds in inventory rather than in
other earning areas. Ito naman ay tungkol sa ineexpect na rate of return ng firm from its investment in
order to increase the value of the firm in the market place. In other words, yung COST OF CAPITAL. Ito
yung rate of return ng mga SUPPLIER ng CAPITAL ng isang business bilang kabayaran para sa kanilang
contribution sa capital ng company.

Let’s move to The Economic Order Quantity Model… First, let us identify what is EOQ or optimal Q..
EOQ is a calculation companies perform that represents their ideal order size, allowing them to meet
demand without overspending. Inventory managers calculate EOQ to minimize holding costs and excess
inventory. It is also a calculation sa optimal order quantity ng mga businesses para ma minimize nila ang
kanilang logistic costs, warehousing space, stockouts at overstock costs ng business. The EOQ or optimal
Q answers the question “HOW MUCH TO ORDER?”

So, EOQ can be computed by the equation ………………………………………………………..

So, let’s have illustrative problem.

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