hello friends...
can anyone tell me the concept behind the formula of carrying cost. i.e. Q/2 * C.
Suppose Q = 800 units and carrying cost is Rs.5
Total carrying cost should be on total units of EOQ. i.e on all 800 units.
So total carrying cost should be Q * C = 800 * 5 = 4000
But formula is Q / 2 *C = 400 * 5 = 2000. Hence we are taking half of Q units. i.e carrying cost is incurred only on 400 units instead of 800. Why is so??
these formula shows at a particular time what amount of fixed cost is blocked dats y we take average
a general assumption is tack as the purchases are evenly in the year so total purchases are devided by 2
that means the all purchases are not doan in any month.
EOQ model is based on certain assumption and one of which is that its assume that half of Qty that is order is kept in inventory.on that basis its calculate storage cost for half inventory.
Carrying cost is calculated on stock held in a particular period. That is it is the average of opening stock and closing stock. Here we assume there is no closing stock after using EOQ units. Thats whil we take Q/2 istread Q. I think you got it.
For more clarifirly, Carrying Cost is calculated on average stock. ie. Average of opening stock and closing stock not on EOQ units.
CAclubindia
