Material Cost Question:

Economic Order Quantity (EOQ) is the quantity which is fixed in such a way that the variable costs for managing the inventory can be minimized. This consists of two parts: Ordering Cost and Carrying Cost. Ordering cost consists of all the costs associated with the administrative efforts connected with preparation of purchase requisitions, enquiries, filing tenders, and comparative statements etc. which are incurred in ordering materials. Carrying cost consists of all the costs which are incurred in carrying or holding the inventory like godown rent, insurance handling expenses etc. There is a inverse relationship between ordering cost and ordering cost. An effort should be made to balance both the costs, which is possible at Economic Order Quantity where the total variable cost of managing the inventory is minimum.