Mathematical Formula in Material Cost Accounting and Control Essay

Mathematical Formula in Material Cost Accounting and Control - Essay Example Also, overstocking requires more storage space which, in turn, means an increase in insurance expenses, storage costs and deterioration in quality and depreciation in quantity. On the other hand, if materials are understocked, frequent orders have to be placed in small quantities and there is a chance of "stock outs" also. Hence, the tack of the manager is to find the most economic order which s very essential for cost management and control. The cost of carrying the inventory and the ordering cost is inversely proportional to each other. The costs of placing the order decreases as the size of the order increases, because with the bigger size of the order, the number of the orders will be lower. However, simultaneously the costs of carrying the inventory will go up because the purchases have been made in large quantities. It may be possible to have appointed which provides the lowest total cost and the point, which is the ideal size of the order is known as the Economic Order Quantity(EOQ). The EOQ is one where the cost of carrying inventory is equal or almost equal to the cost of not carrying inventory (cost of placing the order), i.e., at EOQ level, the total of inventory carrying cost and the ordering cost is minimum which can be determined mathematically s follows: The EOQ is 600 units, i.e., 10 orders per year are needed.