CMA Intermediate · Cost Accounting · Material Costs
At the EOQ, which relationship holds between the annual costs of a basic EOQ model with no stock-outs?
At the EOQ, annual ordering cost equals annual carrying cost, and total of the two is at its minimum. This is where the ordering cost curve intersects the carrying cost curve in the basic model without stock-outs.
- AAnnual ordering cost equals annual carrying costCorrect
- BAnnual ordering cost is twice annual carrying cost
- CAnnual carrying cost is twice annual ordering cost
- DTotal cost is at its highest
Explanation
Total cost is minimised where the falling ordering cost curve meets the rising carrying cost curve. At that point ordering cost equals carrying cost. The other options misstate this relationship, and total cost is at its minimum, not its maximum.
Did you get it right without looking?
One question tells you little. A timed set on Material Costs shows your real accuracy, how long you take and where you lose marks.
More Material Costs questions
- Under the perpetual inventory system, what is meant by continuous stock verification?
- Sharma Components Ltd. purchased 400 units at Rs 50 per unit on 1 March and 600 units at Rs 60 per unit on 10 March. On 15 March it issued 5…
- Which statement about the classification of materials is correct?
- If annual demand and ordering cost per order remain unchanged but carrying cost per unit becomes four times, what happens to the EOQ?
- Annual demand for a component is 4,800 units, ordering cost is Rs 150 per order and carrying cost is Rs 6 per unit per year. What is the Eco…
- Under CAS-6 (Material Cost), which of the following is excluded from the cost of materials purchased?