1. Part Six:
The application of quantitative methods to management accounting
Chapter Twenty-four: Quantitative models for the planning and control of inventories

2. PLANNING AND CONTROL OF STOCKS
24.1
PLANNING AND CONTROL OF STOCKS
1. Reasons for holding stocks
• Transaction motive
• Precautionary motive
• Speculative motive
2. Relevant costs required for determining EOQ
• Holding costs
• Ordering costs
3. Holding costs
• Opportunity cost of investment in stocks
• Incremental insurance costs
• Incremental warehouse and storage costs
• Incremental material handling costs
• Costs of deterioration and obsolete stocks
4. Ordering costs
• Incremental clerical costs of preparing a purchase order,
receiving deliveries and paying invoices.

3. 24.2
Determining the EOQ

4. 24.3
Economic order quantity graph

5. 24.4a
EOQ formula

6. 24.4b
Determining the optimum quantity of a production run

7. 24.5
Quantity discounts

8. Determining when to place the order
Assume: EOQ = 600 units; Lead time = 2 wks; Usage per wk = 120 units
Re-order point = 2 weeks × 120 units = 240 units.
With an EOQ of 600 units orders will be placed at five-weekly intervals.

9. 24.6b
Uncertain demand
If weekly demand exceeds 120 units there will be a stockout.
Therefore safety stocks are maintained and re-order point is: (Average usage during average lead time) + (Safety stocks)

10. 24.6c
Uncertain demand contd