Economic Order Quantity in Working Capital Management

Updated: Aug 19, 2019


In ACCA MA (was F2) and FM (was F9) Exam, a formulae sheet is provided with the question book. Students are encouraged to fully familarize of all these equations before going into the exam hall. We are here to share what are they to help you prepare for the exam.


Economic Order Quantity (EOQ)


Where

D = Demand per annum

C0 = Cost per order

Ch = Holding cost per unit per annum

Q: Which area of EOQ relevant?

A: EOQ is relevant under working capital management. It is the model to find the optimal point of lowest costs in holding inventory.

Q: What is EOQ?

A: The EOQ is a model created to determine the order quantity to be placed on each purchase so as to minimise total costs with regards to inventories.

Q: What does total costs include? Does EOQ consider all of them?

A: Total costs include ordering costs, the cost of materials itself (purchase costs) and inventory holding costs. EOQ assumes no change in purchase costs no matter there is bulk purchase or not, it only considers ordering costs and inventory holding costs.

Q: When does EOQ achieve at its optimum?

A: EOQ occurs when ordering costs equal to inventory holding costs.

Q: Is it any extension of EOQ?

A: Yes, Baumol’s model under treasury model follows the similar logic of EOQ but it’s application is under treasury management.

For other equations in formulae sheet, more articles will come to cover all of them. Stay tuned!

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