Ordering cost

Ordering cost
See also
Optimization of the production run-length Cycle stock Fill rate ABC method Differential costing Economic batch size Variable overhead efficiency variance Batch cost Purchase price variance

Ordering cost is the type of cost that represents the expenses which are incurred for the supplier in the aim to make and adapt an order. Ordering costs are taken into account when determining the amount of an economic order for a warehouse element. Along with the amount of orders ordered the total ordering costs also are going to rise. This total cost can be toned down when we put the huge colevtive orders for long intervals, the next step is to put out an order for the collective orders.

The unit is able to accept the high total ordering cost unless the effect is an increase concerns the total cost of transporting stocks. It happens if the company places orders such as raw materials and goods only when required. In order to place more orders in a situation where there are not so many stocks within easy reach. To correctly equalize the volume of orders and thus minimalize overall costs the company is obligated to oversee the ordering costs and costs of running a warehouse incurred by the company.

"Examples of ordering costs are (S. Bragg, 2018):

• Cost to prepare a purchase requisition
• Cost to prepare a purchase order
• Cost of the labor required to inspect goods when they are received
• Cost to putaway goods once they have been received
• Cost to process the supplier invoice related to an order
• Cost to prepare and issue a payment to the supplier"

Economic order quantity(EOQ) inventory model

The EOQ model made his debute st the beginning of the 21st century and normally accepted in many trades so far. Many earlier deterministic inventory models are being prepared foreseeing demand being constant or depending on the inventory in the case of inferior items (M.Pattnaik 2013, p.58). "Economic order quantity (EOQ) is a decision tool used in cost accounting. It’s a formula that allows you to calculate the ideal quantity of inventory to order for a given product."(K. Boyd 2018). The aim of the calculations is to reduce orders and costs of carrying.

$Q={\sqrt {\frac {2DS}{H}}}$

where:

• Q represents EOQ
• D - demand
• S - ordering cost
• H - cost of carrying (per unit)

Moreover, the ordering costs are presented per order.

References

• Boyd K. (2018). Cost Accounting: The Economic Order Quantity Formula, "Dummies"
• Bragg S. (2018). Ordering costs, "Accounting Tools"
• Gholami A., Mirzazadeh A. (2018). An inventory model with controllable lead time and ordering cost, log-normal-distributed demand, and gamma-distributed available capacity, "Cogent Business and Management", Vol. 5
• Goyal A. K., Chauhan A., Singh S. R. (2015). An EOQ inventory model with stock and selling price dependent demand rate, partial backlogging and variable ordering cost, "Int. J. Agricult. Stat. Sci.", Vol. 11, No. 2, pp. 441-447
• Pattnaik M. (2013). Optimization in an instantaneous economic order quantity (EOQ) model incorporated with promotional effort cost, variable ordering cost and units lost due to deterioration, "Growing Science", Vol. 1, pp. 57-66
• Rad R. H., Razmi J., Sangari M. S., Ebrahimi Z. F. (2014). Optimizing an integrated vendor-managed inventory system for a single-vendor two-buyer supply chain with determining weighting factor for vendor׳s ordering cost, "ScienceDirect", Vol. 153, pp. 295-308

Author: Karolina Korbut