Reference
Example
Order Number of orders Ordering cost Inventory
size
carrying cost
Total inventory
cost
2
20,000÷(2×500)
=20
20×6,000
=120,000
2×15,000
=30,000
120,000+30,000
=150,000
3
20,000÷(3×500)
=14
14×6,000
=84,000
3×15,000
=45,000
84,000+45,000
=129,000
4
20,000÷(4×500)
=10
10×6,000
=60,000
4×15,000
=60,000
60,000+60,000
=120,000
20,000÷(5×500)
8×6,000
=48,000
5×15,000
=75,000
48,000+75,000
=123,000
5
=8
Corporate and legal affairs
The procedure for calculating the order volume (number of lots) that will
minimize total inventory costs is summarized below.
① Figure the number of orders
Quantity used ÷ (quantity ordered × pieces per lot) — round up fractions
② Figure the total ordering cost
Number of orders placed × ordering cost
③ Figure the inventory carrying cost
Order size × carrying cost per lot
④ Figure total inventory cost
Total ordering cost + inventory carrying cost
A “lot” is a unit of quantity used in production and shipping.
It refers to a grouping of the same product.
Chapter 1
Obtain the ordering quantity that minimizes total inventory costs
under the following conditions
[Conditions]
(1) Orders are by lots, where one lot consists of 500 pieces.
(2) Inven tory carrying costs are proportionate to volume per order, where one lot costs ¥15,000.
(3) Ordering costs are 6,000 yen per order.
(4) The volume that will be used during the period is 20,000 pieces.
Lot
Therefore, the order size that results in the lowest overall costs is 4 lots.
●Inventory valuing method
An “inventory valuing method” is a method for valuing inventory—resources on hand—as assets by replacing them with their cash equivalent.
The typical valuation methods are summarized below.
Category
Description
First-in first-out
method
Considers oldest products to be sold and calculates inventory value
of products in stock at end of period (new products in inventory).
Last-in first-out
method
Considers newest products to be sold and calculates inventory value of products in stock at end of period (old products in inventory).
Av e r a g e c o s t
method
Calculates inventory value at end of period based on average
cost of goods on hand.
Specific identification method
Calculates inventory value at end of period based on actual costs
for each particular item.
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