Economic Order

Quantity (EOQ)
Ref: Drury, C. 2020. Management and Cost Accounting. 11th ed. UK: Cengage Learning.
ISBN: 978-1-4737-7361-5
What is the Economic Order Quantity
(EOQ)?
Inventory management is of vital importance for manufacturing and merchandising organizations. The
EOQ is one of the tools used to manage inventory.
The economic order quantity is the optimum order size where holding and ordering costs are at a
minimum.
Holding costs
 Incremental insurance costs
 Incremental storage and warehouse costs
 Incremental material handling costs
 Cost of obsolescence and deterioration of inventories
Ordering costs
 Preparation of purchase orders
 Receiving deliveries
 Paying invoices
How do we determine the EOQ?
Formula:

2 A constant
D Total demand for the period
O Cost per order
H Holding cost per unit (for the period)
Assumptions of the EOQ formula
Holding costs per unit will be constant
The average balance in inventory is equal to one-half of the order quantity (even
usage per day over time)