1. MANAGEMENT AND COST ACCOUNTING
SIXTH EDITION
COLIN DRURY

2. The application of quantitative methods to management accounting
Part Six:
The application of quantitative methods to management accounting
Chapter Twenty-five: Quantitative models for the planning and control of stocks
© 2000 Colin Drury

3. PLANNING AND CONTROL OF STOCKS
25.1
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
• I ncremental 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.
© 2000 Colin Drury

4. 25.2
Determining the EOQ
© 2000 Colin Drury

5. Economic order quantity graph
25.3
Economic order quantity graph
© 2000 Colin Drury

6. 25.4a
EOQ formula
© 2000 Colin Drury

7. Determining the length of a production run
25.4b
Determining the length of a production run
© 2000 Colin Drury

8. 25.5
Quantity discounts
© 2000 Colin Drury

9. 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.
© 2000 Colin Drury

10. 25.6b
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)
© 2000 Colin Drury

11. 25.6c
Uncertain demand contd.
© 2000 Colin Drury