TL;DR: Economic Order Quantity (EOQ) helps businesses optimize inventory costs by calculating the ideal order quantity, balancing ordering and holding costs.

What Is Economic Order Quantity (EOQ) and Its Formula?

Economic Order Quantity refers to the optimum quantity of inventory items companies must purchase at any time. EOQ is the ideal quantity of inventory that minimizes costs, including shipping and storage.

EOQ Formula:

The formula for EOQ is:

Where:

• D = Annual demand for an inventory item

• S = Ordering cost for each purchase order

• H = Annual holding cost for each unit

For example, if a company sells 10,000 T-shirts per year with an ordering cost of ₹500 and a holding cost of ₹200 per unit, the EOQ is:

This means the company should order 224 T-shirts per order to minimize costs.

Why Is EOQ Important?

EOQ helps small manufacturers reduce both ordering and holding costs. By finding the optimal order size, it avoids overstocking and understocking, leading to efficient inventory management and improved cash flow.

EOQ in Inventory Control

EOQ helps determine the best order size to keep inventory costs under control. This is particularly useful for raw materials or finished goods. Proper inventory management ensures that businesses do not over-order or run out of stock, which can impact profits.

What Is EOQ in Cost Accounting?

EOQ helps businesses avoid both overstocking and understocking. Overstocking leads to higher storage costs, while understocking can cause missed sales. In cost accounting, EOQ is essential to calculate the total cost of ordering and holding inventory.

Ordering Cost

Ordering cost is the fixed cost incurred per order, regardless of the order size. The annual ordering cost is:

Holding Cost

The holding cost per unit is the cost of storing inventory. The annual holding cost is:

Challenges of EOQ

EOQ assumes constant demand and inventory costs, which may not always be true. Small businesses face challenges like:

• Manual data systems

• Changing seasonal demands

• Outdated inventory systems

Simplify EOQ Calculation With TranZact

TranZact's automated inventory management system can help businesses calculate accurate EOQ by providing real-time data, reducing errors in the EOQ calculation and improving inventory control.

FAQs on EOQ

1. What is Economic Order Quantity (EOQ)?

EOQ is a calculation used to determine the ideal order quantity that minimizes overall inventory costs.

2. Why is EOQ important in inventory management?

EOQ helps optimize inventory levels, minimizing both ordering and holding costs, which improves cash flow.

3. How is holding cost calculated in EOQ?

Holding cost is calculated by multiplying the holding cost per unit by the EOQ quantity and dividing by 2.

4. What is the EOQ model?

The EOQ model helps determine the optimal order quantity by balancing ordering and holding costs.

5. What is the formula for EBQ?

The formula for Economic Batch Quantity (EBQ) helps determine the optimal batch size for production, balancing production and inventory costs.

6. What are the 3 components of EOQ?

The components of EOQ are demand rate, ordering cost per order, and holding cost per unit.

7. How does EOQ work?

EOQ helps determine the optimal order size by analyzing annual demand and costs.

8. How is EOQ calculated?

EOQ is calculated using the square root of the product of twice the demand and ordering costs divided by the holding costs.

9. What is the main objective of EOQ?

The main objective of EOQ is to minimize total inventory costs by finding the optimal order quantity.