Select EOQ, Annual ordering cost, or Reorder point, then enter the required quantities. Demand can be entered per year, month, week, or day. Optional costs and the default 365-day calendar can be adjusted. EOQ assumes steady demand, fixed costs, immediate replenishment, and no shortages or quantity discounts.

Changing the period reinterprets the demand number.

Purchase cost and calendar

Blank omits purchase costs.

Default: 365 calendar days; use operating days if demand and lead time use that calendar.

EOQ and Annual Ordering Cost Formulas

The EOQ formula calculates the optimal order quantity. Once an order quantity Q is chosen (for example, using EOQ), the annual ordering cost can be calculated.

Q ร— & = โˆš((2 ร— AD ร— CPO) / (CC))\ AOC & = (AD) / (Q) ร— CPO
  • Where Q* is the Economic Order Quantity (EOQ) (units per order)
  • AOC is the annual ordering cost ($ per year)
  • AD is the annual demand (units per year)
  • Q is the order quantity (units per order)
  • CPO is the cost per order ($ per order)
  • CC is the holding/carrying cost per unit per year ($ per unit per year)

To calculate annual ordering cost, divide annual demand by the order quantity to get the number of orders per year, then multiply by the cost per order. If you want the cost at the optimal order size, first compute Q* using the EOQ formula and then use that value as Q in the annual ordering cost formula.

How to Calculate Ordering Cost?

The following example problems outline how to calculate annual ordering cost.

Example Problem #1

  1. First, determine the annual demand. The annual demand is given as 500 units per year.
  2. Next, determine the cost per order ($). The cost per order ($) is given as 20.
  3. Next, determine the holding/carrying cost per unit per year ($). The holding/carrying cost per unit per year ($) is found to be 4.
  4. Calculate the EOQ (Q*) using the EOQ formula.
  5. Finally, calculate the annual ordering cost using AOC = (AD / Q) ร— CPO (using Q = Q* if you want the optimal value).

Q* = โˆš((2 ร— AD ร— CPO) / CC) and AOC = (AD / Q) ร— CPO

Inserting the values from above yields: 

Q* = โˆš((2 ร— 500 ร— 20) / 4) โ‰ˆ 70.71 units per order. Using the unrounded EOQ, annual ordering cost is AOC โ‰ˆ $141.42 per year. For indivisible units, compare feasible neighboring order quantities.

FAQ

What factors can affect the carrying cost per unit?

Carrying cost per unit can be affected by several factors including storage costs, insurance, depreciation, spoilage, and opportunity costs of the capital tied up in inventory. These costs vary significantly depending on the type of goods stored, the storage methods, and the length of time the items are stored.

How can businesses reduce their ordering costs?

Businesses can reduce their ordering costs by optimizing their order quantities, negotiating better terms with suppliers, consolidating orders to achieve economies of scale, implementing efficient inventory management systems, and reducing the number of emergency orders through better forecasting and planning.

Why is it important to calculate the ordering cost accurately?

Accurately calculating the ordering cost is crucial for businesses to determine the most cost-effective order quantities (Economic Order Quantity – EOQ), maintain optimal inventory levels, minimize storage and handling costs, and ultimately improve profitability. It helps in making informed purchasing decisions and in strategic financial planning.