From the historical records of the organization cost

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from the historical records of the organization. Cost per order = Total ordering costs/number of orders = TOC/ No. of orders Total ordering costs = Cost per order x No. of orders = CPO x No. of order No. of orders = Annual demand/order size = AD/OS Annual demand represents the annual need or requirements of the business. Order size refers to the number of units or amount purchased per order batch.
Sample Problem Ordering Cost Big City Corporation expects to use 10,000 units of materials XPO per month in 2014. Last year, the total ordering costs amounted to P200,000 for a total of 40 orders. It is expected that prices in 2014 would be 10% higher than that of last year. Determine the expected ordering costs in 2014 if the company orders in batch of 12,000 units or 24,000 units. 7
Solutions / Discussions The annual demand is 120,000 units (i.e., 10,000 units x 12 months). The expected cost per order in 2014 is P5,500 (i.e., P200,000/40 orders x 110%) The total ordering costs based on the 12,000-unit and 24,000-unit order sizes are: Order size 12,000 units 24,000 units Annual demand 120,000 units 120,000 units No. of orders (120,000/12,000) 10 (120,000/24,000) 5 Cost per order P 5,500 P 5,500 Total ordering costs P55,000 P27,500 It should be observed that a lower the number of orders means lower total ordering costs. The higher the number of orders, the higher the total ordering costs.
Carrying Costs 9 Are those spent in transferring the goods from the receiving department to the warehouse, holding, maintaining or warehousing inventories such as warehousing and storage costs, handling and clerical costs, property taxes and insurance deterioration and shrinkage of stock, obsolescence of stocks, interest, and return on investment ( e.g. lost return on investment tied up in inventory). Carrying cost per unit = Total carrying cost/Av. Invty. = TCC/Average inventory Total carrying costs = Carrying costs per unit x Ave. invty. = CCPU x Ave. inventory Average inventory = Order size / 2 Also; Carrying cost per unit = Unit cost x Carrying Cost ratio = UC x CCR Carrying cost ratio = Carrying cost per unit / Unit cost = CCPU/UC
Sample Problem Carrying costs In 2013, Fit Company incurred a total of P800,000 for inventory carrying cost with an average inventory of 200,000 units. What would be the total carrying costs in 2014 if the order size is 500,000 units or 900,000 units, assuming the company does not maintain safety stock quantity. P4
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Sample Problem Average Inventory - Graphical Method 11

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