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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

In inventory management, the cost of placing orders (such as processing, transport arrangement and inspection per order) is classified as which of the following with respect to the size of each order?

Costs of placing orders are ordering costs. They are incurred per order, so with larger order sizes fewer orders are placed and total annual ordering cost falls. Carrying costs move the opposite way, and EOQ balances the two.

  1. AOrdering cost, which tends to remain fixed per order and so falls in total as order size risesCorrect
  2. BCarrying cost, which rises as order size rises
  3. CStock-out cost, which is incurred when stock is exhausted
  4. DOrdering cost, which rises in total as the order size rises

Explanation

Ordering cost is incurred per order. Larger orders mean fewer orders per year, so total ordering cost falls as order size rises. Carrying cost rises with order size, which is why the two are traded off in EOQ. Option D states the opposite of the true relationship.

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