EOQ- Economic Order Quantity Method in Hindi with solved numerical(Easy Calculation) JOLLY Coaching
Order Quantity is the number of units added to inventory each time an order is placed. Total Inventory Costs is the sum of inventory acquisition cost, ordering cost, and holding cost. Ordering Cost is the cost incurred in ordering inventory from suppliers excluding the cost of purchase such as delivery costs and order processing costs. Holding Costalso known as carrying cost, is the total cost of holding inventory such as warehousing cost and obsolescence cost. If we change the order quantity, it can affect the different types of inventory costs in different ways.
Larger order size results in lower order costs because fewer orders need to be placed to cover the annual demand. This however results in higher holding costs because of the increase in inventory levels. Conversely, smaller order size results in lower holding costs because of the decline in average inventory level. However, as lower quantity of inventory is ordered each time, the number of orders needed to increase in order to fulfill the annual demand which leads to higher ordering costs.
Reducing the order size may also affect the cost of purchase due to the loss of trade discounts that are based on the order quantity. So the question arises how we can find the optimal order quantity that minimizes the total inventory costs.
EOQ model offers a method of finding the optimal order quantity that minimizes inventory costs by finding a balance between the opposing inventory costs. How is the EOQ formula derived?
Ordering Costs increase linearly with an increase in number of orders, e. If we plot this information for a number of orders on the graph, it will appear as follows. Holding costs on the other hand decrease with an increase in number of orders because doing so reduces the average units of inventory ordered and therefore held.
To illustrate, let's assume that annual demand is units and it costs 10 cents for holding one unit of inventory for one year. If only one order is placed at the start of the year, the order quantity needs to be units to meet the demand for the whole year.
The inventory units on the first day of the year will be units and it will gradually reduce to zero units on the last day of the year. The average inventory will be in between the two extremes, i. Now if the number of orders is increased to two, the average inventory will reduce to half along with the annual holding cost.
The lowest total cost occurs where order costs and holding costs are the same.If you are a highly organized person and give importance to every detail then you can definitely make a career in Inventory management. There is a growing demand for inventory managers in the manufacturing units, retail units, food service, pharma units and other inventory-intensive industries. In an inventory management job you will get experience in supervising the flow of inventory, storage of goods and controlling the quantity of goods.
An inventory management job is important in both small businesses where you can use Excel and for large businesses where you can work on ERP software. On www. You can also prepare yourself for the job interview by reading the inventory management job interview questions and answers that are available on our page. Question 1. Answer : A inventory should be taken at least once a year. If items are perishable, seasonal or highly demanded a inventory should be taken more often.
Question 2. Answer : Yes, In the market today there are many computer software packages that can compute forecasted demand for goods held in inventory. Question 3.
Question 4. Answer : Yes, through the use of forecasts inventory levels can be set to meet the demands while keeping levels as low as possible. Question 5. Tell Me What Is Forecasting? Answer : Forecasting is the process of estimating the future demand of a product.
Question 6. What Is Raw Material? Answer : Are those basic inputs that are converted into finished product through the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions.
Question 7.Economic order quantity EOQ is the order size that minimizes the sum of ordering and holding costs related to raw materials or merchandise inventories. In other words, it is the optimal inventory size that should be ordered with the supplier to minimize the total annual inventory cost of the business. Other names used for economic order quantity are optimal order size and optimal order quantity.
The economic order quantity is computed by both manufacturing companies and merchandising companies. Manufacturing companies compute it to find the optimal order size of raw materials inventory and merchandising companies compute it to find the optimal order size of ready to use merchandise inventory.
The two significant factors that are considered while determining the economic order quantity EOQ for any business are the ordering costs and the holding costs. The ordering costs are the costs that are incurred every time an order for inventory is placed with the supplier.
Examples of these costs include telephone charges, delivery charges, invoice verification expenses and payment processing expenses etc. The total ordering cost usually varies according to the frequency of placing orders.
Mostly, it is directly proportional to the number of orders placed during the year which means If the number of orders placed during the year increases, the annual ordering cost will also increase and if, on the other hand, the number of orders placed during the year decreases, the annual ordering cost will also decrease. The holding costs also known as carrying costs are the costs that are incurred to hold the inventory in a store or warehouse. Examples of costs associated with holding of inventory include occupancy of storage space, rent, shrinkage, deterioration, obsolescence, insurance and property tax etc.
The total holding cost usually depends upon the size of the order placed for inventory. Mostly, the larger the order size, the higher the annual holding cost and vice versa. The total holding cost is some time expressed as a percentage of total investment in inventory. The economic order quantity is the level of quantity at which the combined ordering and holding cost is at the minimum level. There is an inverse relationship between ordering cost and holding cost.
Keeping the annual demand constant if for example the number of orders decreases, the ordering cost will also decrease but the holding cost will rise and vice versa. The material DX is used uniformly throughout the year. The data about annual requirement, ordering cost and holding cost of this material is given below:. The economic order quantity for material DX is units.
The holding cost and ordering cost at EOQ tend to be the same. Under tabular approach of determining economic order quantity, the combined ordering and holding cost is computed at different number of orders and their respective order quantities.
This approach is also known as trial and error approach of determining economic order quantity. Other order quantities that result in more or less than six orders per year are not so economical.
The application of tabular approach is not common as it is more time consuming as compared to formula approach. Moreover, in some situations, it provides only an estimate of economic order quantity and is therefore not as accurate as the formula approach.
If a question regarding economic order quantity is asked in the examination, the students should avoid using tabular trial and error approach; rather they should use the formula approach which is comparatively less time consuming and which also provides the most accurate answer. The John Sports Inc. The John Sports will sell 34, dozens of tennis balls evenly throughout the year. The assumptions described above are also known as the limitations of economic order quantity EOQ.
Found this material useful.Do you like to switch your career? Here's our recommendation on the important things to need to prepare for the job interview to achieve your career goals in an easy way. Inventory Planning protects a company from fluctuations in demand of its products. It keeps a smooth flow of raw-materials and aids in continuing production operations. It checks and maintains the right stock and reduces the risk of loss.
Candidate should have good command on all functionalities to be done. There is huge demand for jobs related to Inventory Planning. One can check the availability of the job across cities including Mumbai, Delhi, Bangalore, Pune and Hyderabad. Follow Wisdomjobs page for Inventory Planning job interview questions and answers page to get through your job interview successfully.
Question 1. Answer : The EOQ works if its four assumptions match the case it is used on. The assumptions are:. Question 2. Answer : To determine which numbers to use you must look for the following items. The number of items per order is the quantity Q. The number of items that can be sold is D. D may be the forecast demand for that particular good.
The cost of placing the order is used for S. The final number to find is the carrying cost C which is the cost of the item to be held in inventory. Question 3. Answer : There are several types of reordering systems, in this module we discussed three. The fixed order quantity uses fixed quantities of goods ordered at various order points to replenish inventory. The fixed order period use fixed times of reorder with various order quantities to replenish inventory to preset levels.
The final system, just in time uses a constant flow of goods to match the level of demand. Question 4. Answer : A good forecast model will have reasonable costs. The model will have ample data available for its use and a relevant time span.
The model finally will have a low interference level. Question 5. Answer : In order to compare stock costs when using the EOQ model you must compute the costs for both the original level and the EOQ level of order quantities. Question 6. Answer : The letters in the formulas represent the quantity ordered Qthe carrying cost of a unit Cthe demand for the units D and the cost of completing a order S.
Question 7. Answer : Total stocking cost is the cost to the store of holding a good in its inventory. The stocking cost consists of the carrying cost times half the quantity in inventory and the order completion cost times demand divided by the quantity. Question 8. Answer : Times for reordering goods vary dependent on the control system you use and its lead time.
In fixed order quantities reorders should be placed when the safety stock is reached. In fixed period systems the reordering is done at set time periods.L earn how to send your quiz to others.
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Inventory planning Interview Questions & Answers
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Click General.Find the annual total inventory cost Solution: a. What is the optimal order quantity?
Inventory Management Interview Questions & Answers
What is the annual total inventory cost? Solution: a. Example Azim furniture company handles several lines of furniture, one of which is the popular Layback Model TT chair.
The manager, Mr. Farmerson, has decided to determine by use of the EOQ model the best quantity to obtain in each order. Farmerson has determined from past invoices that he has sold about chair during each of the past five years at a fairly uniform rate and he expects to continue at that rate. He has estimated that preparation of an order and other variable costs associated with each order are about 10 MU, and it costs him about 1.
His cost for the chair is 87 MU. How many layback chairs should be ordered each time? How many orders would there be? Determine the approximate lenght of a supply order in days? Calculate the minimum total inventory cost e. Show and verify that the annual holding cost is equal to the annual ordering cost due to rounding, show these costs are approximately equal Solution: a.
Leyla Tas has determined that the annual demand for 6 screws is screws. Leyla, estimates that it costs 10 MU every time when an order is placed. This cost includes wages, the cost of the forms used in placing the order and so on. Furthermore, she estimates that the cost of carrying are screw in inventory for a year is one-half of 0.
Economic Order Quantity (EOQ)
Assume that the demand is constant throughout the year. How many 6 screws should Leyla order at a time to minimize total inventory cost?
How many orders per year would be placed?Quantity discount is a reduction in price offered by seller on orders of large quantities. Quantity discounts exist in different forms and in certain scenarios they may not be obvious.
Different forms of quantity discounts provide different purchase incentives to buyers. For example, the one discussed above has a tentency to compel the buyer to purchase more than they need at the moment i. Another form of quantity discount which is based on the cumulative quantity purchased during a specific time period actually induces the buyer to continue purchasing from the current supplier and restricts switching to other suppliers.
When purchasers following Economic Order Quantity EOQ model for ordering inventory have the opportunity to avail a quantity discount on order sizes greaters than their EOQ, they need to base their decision, apart from qualitative factors, on the net effect of the decision on the their income. A typical quantity discount has the following three effects on the income of a purchaser:.
A decision to avail the quantity discount should be taken only if the net effect of the above components on the income is positive. The following problem tries to clarify decision making when there is an apportunity to obtain quantity discounts:. Please ignore opening and closing inventories, safety stock etc. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable.
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