Managing inventory

In this lesson

1. 0:00 Introduction to inventory management
2. 0:35 Costs of inventory holding and ordering
3. 1:12 Trade-off between order sizes and costs
4. 2:59 Economic order quantity formula explained
5. 4:12 Component A calculation walkthrough
6. 6:00 Component B calculation with annual adjustments

About this lesson

You'll discover why inventory management matters for working capital, explore the three types of inventory costs (holding, ordering, and stockout), and work through the economic order quantity formula with step-by-step examples. This concept is essential for Performance Management and Financial Management papers, where you'll need to optimise inventory levels and make cost-effective ordering decisions for businesses. The economic order quantity formula helps you find the optimal order size that keeps total inventory costs as low as possible. The lesson walks you through a practical two-part example, showing how to apply the formula to different components with varying demand patterns and cost structures. A key skill here is converting all figures to consistent time periods—whether that's annual or monthly—before plugging numbers into the calculation. You'll also learn that while the formula is provided in the exam, understanding what each element represents and handling unit conversions accurately are what separate confident answers from costly mistakes. By mastering this technique, you'll be able to advise organisations on how much to order and how often, balancing the risk of holding too much inventory against the inefficiency of ordering too frequently. This directly supports real-world business decisions and exam success across management accounting and financial management qualifications.

Duration: 7m