accounting for material cost

Accounting for material cost

Term material related to all commodities supplied to undertaking it can be direct or indirect


Effective control in costly items

Save time for non important items

Optimum investment is possible

Minimum total cost

High inventory turn over

Re order quantity or economic order quantity:

No of units ordered is treated as a reorder quantity

if quantity is ordered in such a way that total cost will be minimized such re order quantity will be EOQ

At EOQ level total of ordering and carrying cost is minimum as well as both are equal.

Ordering cost:

Above  cost is incurred for acquiring the input.

Placing an order, transportation, inspection etc.

There is a inverse relationship between cost and size of order. If size of order are increased, no of order reduced hence ordering cost reduced or vice versa

Carrying cost

Cost incurred in maintaining a given level of inventory.

Storage space, insurance and salary of staff etc.

Relationship between the size and carrying cost is positive if order size is larger, carrying cost is higher and vice versa.


EOQ =2AO/C under root

A = annual consumption

O = ordering cost per order

C = carrying cost per unit per annum

Above formula only can be used if there is a prior knowledge of annual consumption, constant rate of usage, constant order size, carrying cost, delivery period etc.




Methods of calculation EOQ

Graphical method :-

Tabular or trial and error method:
under this method, at different level total cost will be calculated

Format is given below            order size

particulars   I   II  III
 A annual consumption
 B order size
C  no of orders = A/B
D cost of per order
E  total ordering    cost=C*D
F Avg inventory    =

order size/2

G carrying cost per unit
H total carrying cost=



I total cost =  E+H



At different level of order total cost will be calculated and order size which gives lowest cost should be accepted when discount will be granted by supplier at different order size only above method can be used for considering total cost.

Material cost is also required to be added in above.








order size

particulars   EOQ  month No dis Month 4%dis
 A annual consumption 24000 24000 24000
 B order size   1200   2000   2000
C  no of orders = A/B   20     12    12
D cost of per order   90    90     90
E  total ordering    cost=C*D 1800 1080 1080
F Avg inventory    =

order size/2

600 1000 1000
G carrying cost per unit    3     3   2.88
H total carrying cost=


1800 3000 2880
I purchase cost 600000 600000 576000
J total cost =  E+H+I 603600 604080 579960

EOQ level will be best if no discount.

But if discount is given monthly order with 4% discount is better.


Stock level:

To avoid the under stocking or over stocking of various level of stock should be considered.

Maximum stock level:

It is a level of the stock normally beyond which not to allow  to exceed this level.

Maximum level = Re order level + Re order quantity – (minimum consumption * minimum reorder period)

Minimum stock level

It is the lowest quantity level beyond which  not allowed to fall

Minimum level = re order level – (normal consumption * normal re – order period)

Re order level

It is a level at which fresh order should be placed

Re order level = maximum consumption *maximum re order period


Minimum level +