{"id":10743,"date":"2021-11-05T17:40:56","date_gmt":"2021-11-05T12:10:56","guid":{"rendered":"https:\/\/scholarsclasses.com\/blog\/?p=10743"},"modified":"2025-10-09T16:37:27","modified_gmt":"2025-10-09T11:07:27","slug":"formula-of-eoq","status":"publish","type":"post","link":"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/","title":{"rendered":"Formula of EOQ &#8211; Economic Order Quantity Meaning | Free Cost Accounting Articles"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69e40655795bc\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69e40655795bc\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Formula_of_EOQ\" >Formula of EOQ<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#ECONOMIC_ORDER_QUANTITY\" >ECONOMIC ORDER QUANTITY<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#1_Ordering_Cost\" >1) Ordering Cost<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#2_Inventory_Carrying_Cost\" >2) Inventory Carrying Cost<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Assumptions_of_Economic_Order_Quantity_EOQ\" >Assumptions of Economic Order Quantity (EOQ)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Precautions_in_Applying_EOQ\" >Precautions in Applying EOQ<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#1_Simplification_of_Routine\" >1) Simplification of Routine<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#2_Ordering_in_Package_Sizes\" >2) Ordering in Package Sizes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#3_Economical_Freight_Rates\" >3) Economical Freight Rates<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#4_Perishable_Articles\" >4) Perishable Articles<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#5_Seasonal_Articles\" >5) Seasonal Articles<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#6_Bulk_Purchases\" >6) Bulk Purchases<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#7_Import_of_Materials\" >7) Import of Materials<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Importance_of_Economic_Order_Quantity_EOQ\" >Importance of Economic Order Quantity (EOQ)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Limitations_of_Economic_Order_Quantity_EOQ\" >Limitations of Economic Order Quantity (EOQ)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#Formula_of_EOQ-2\" >Formula of EOQ<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/scholarsclasses.com\/blog\/formula-of-eoq\/#What_is_Cost_Accounting_Meaning_of_Cost_Meaning_of_Costing_Meaning_of_Cost_Accounting\" >What is Cost Accounting? Meaning of Cost. Meaning of Costing Meaning of Cost Accounting<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"Formula_of_EOQ\"><\/span><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-black-color\">Formula of EOQ<\/mark><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img decoding=\"async\" width=\"1024\" height=\"576\" data-src=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-1024x576.jpg\" alt=\"Formula of EOQ\" class=\"wp-image-10763 lazyload\" title=\"\" data-srcset=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-1024x576.jpg 1024w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-300x169.jpg 300w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-768x432.jpg 768w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-1536x864.jpg 1536w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ-640x360.jpg 640w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/11\/Formula-of-EOQ.jpg 1920w\" data-sizes=\"(max-width: 1024px) 100vw, 1024px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1024px; --smush-placeholder-aspect-ratio: 1024\/576;\" \/><figcaption class=\"wp-element-caption\">Formula of EOQ<\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"ECONOMIC_ORDER_QUANTITY\"><\/span>ECONOMIC ORDER QUANTITY<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The Economic Order Quantity (also known as re-order quantity) refers to the size of the order which gives the maximum economy in purchasing any material. It is an optimum or standard order size. When the stock reaches the recorder level, the company should give a fresh order of optimum size. <\/p>\n\n\n\n<p>This quantity is also called &#8220;<strong>Economic Purchase Quantity, or Economic lot size, or optimum lot size or Minimum Cost Inventory.&#8221;<\/strong><\/p>\n\n\n\n<p>In fixing the economic order quantity, the following costs are considered:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1_Ordering_Cost\"><\/span>1) Ordering Cost <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>This is the cost of placing an order with the supplier and includes the cost of stationery, salary of those who are engaged in placing an order and in receiving and inspecting the materials. It is a fixed cost and therefore cost of placing an order varies from time to time depending upon the number of orders placed and the quantity of items ordered. The number of orders increases, the ordering cost goes up and vice-versa.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2_Inventory_Carrying_Cost\"><\/span>2) Inventory Carrying Cost <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>It is the cost of holding the stock in storage and includes interest on investment, obsolescence losses, storekeeping cost, such as rent of warehouse, the salary of the storekeeper, stationery used in maintaining records of stores, etc, insurance cost, deterioration and wastage of material. The larger the volume of inventory, the great will the inventory carrying cost and vice-versa.<\/p>\n\n\n\n<p>The above two costs are of opposite nature. If for example, an attempt is made to reduce inventory carrying cost by holding the stores as low as possible, the number of orders will increase and consequently, the ordering cost will go up. On the other hand, if orders are placed for a larger quantity, the inventory carrying cost will increase and ordering cost, the economic order quantity (EOQ) is fixed to keep the aggregate cost to the minimum.<\/p>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-left\"><span class=\"ez-toc-section\" id=\"Assumptions_of_Economic_Order_Quantity_EOQ\"><\/span>Assumptions of Economic Order Quantity (<a href=\"https:\/\/youtu.be\/_XS_9J4Ah1Q\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/youtu.be\/_XS_9J4Ah1Q\" rel=\"noreferrer noopener\">EOQ<\/a>)<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The EOQ model is based on the following assumptions:<br>(i) There is only one product involved<br>(ii) Annual usage (demand) requirements are known<br>(iii) Usage is spread evenly throughout the year so that the usage rate is reasonably constant<br>(iv) Lead time does not vary <br>(v) Each order is received in a single delivery and <br>(vi) There are no quantity discounts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Precautions_in_Applying_EOQ\"><\/span>Precautions in Applying EOQ<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The following precautions are necessary for applying E.O.Q.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1_Simplification_of_Routine\"><\/span>1) Simplification of Routine<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If the E.O.Q. formula tells us that 13 orders have to be placed in a year, we may place 12 orders, i.e. once a month.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2_Ordering_in_Package_Sizes\"><\/span>2) Ordering in Package Sizes<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Many goods are packed in units of one gross. If the figure shows a quantity of 11 dozens, it should be changed to 12 dozens.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"3_Economical_Freight_Rates\"><\/span>3) Economical Freight Rates<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If the mathematical figure gives 9\/10th of a lorry or rail wagon load, it is better to increase the quantity to have one full lorry load or one full wagon load. This would be cheaper because the full wagon load rates would be lower than transporting the material as small.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"4_Perishable_Articles\"><\/span>4) Perishable Articles <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>For perishable articles whose shelf-life is very low, E.O.Q. should be much less than the theoretical figure and should be based on practical considerations.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"5_Seasonal_Articles\"><\/span>5) Seasonal Articles<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>For articles of a seasonal nature, e.g., cotton, groundnuts or oilseeds, bulk purchases during the season will be cheaper than purchases based on E.O.Q.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"6_Bulk_Purchases\"><\/span>6) Bulk Purchases <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>In certain cases, considerable discounts would be available for bulk purchases. This should be compared to the savings as a result of the application of E.O.Q. formula and a decision should be taken based on which is creeper.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"7_Import_of_Materials\"><\/span>7) Import of Materials <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>E.O.Q. cannot be successfully applied in the case of imports of materials which is based on import licenses.<\/p>\n\n\n\n<h3 class=\"wp-block-heading has-text-align-left\"><span class=\"ez-toc-section\" id=\"Importance_of_Economic_Order_Quantity_EOQ\"><\/span>Importance of Economic Order Quantity (EOQ)<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>If re-order quantity is determined in advance and adjusted it ensures the following advantages :<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>The cost of storage can be kept at a minimum.<\/li>\n\n\n\n<li>Purchase orders can be easily prepared at intervals.<\/li>\n\n\n\n<li>The advantages of placing large orders can be derived as far as possible.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Limitations_of_Economic_Order_Quantity_EOQ\"><\/span>Limitations of Economic Order Quantity (EOQ)<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The following are the limitations of EOQ:<br>(a) Where the rate of consumption fluctuates very often ordering a fixed quantity may lead to over or understocking.<br>(b) Very often, consumption rate cannot be anticipated because of certain unavoidable reasons such as power failure, slackening of customers\u2019 demand etc.<br>(c) Sometimes, estimating of carrying cost and ordering cost in advance is not easy.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Formula_of_EOQ-2\"><\/span><strong>Formula of EOQ<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Economic order Quantity= <strong>\u221a<\/strong>2 x AO\/C<\/p>\n\n\n\n<p>Where,<br>A=Annual unit consumed\/used<br>O=Ordering cost per order<br>C=Annual carrying cost of one unit i.e. Carrying cost percentage p.a X cost per unit<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Cost_Accounting_Meaning_of_Cost_Meaning_of_Costing_Meaning_of_Cost_Accounting\"><\/span><a href=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/introduction-to-cost-accounting\/\" rel=\"noreferrer noopener\">What is Cost Accounting?<br>Meaning of Cost.<br>Meaning of Costing<br>Meaning of Cost Accounting<\/a><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":10763,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[7,1],"tags":[3629],"class_list":["post-10743","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-degree-college","category-misc","tag-formula-of-eoq"],"_links":{"self":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/10743","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/comments?post=10743"}],"version-history":[{"count":9,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/10743\/revisions"}],"predecessor-version":[{"id":39726,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/10743\/revisions\/39726"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media\/10763"}],"wp:attachment":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media?parent=10743"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/categories?post=10743"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/tags?post=10743"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}