Cost of inventory

In this lesson

1. 0:00 Understanding inventory costs and balance
2. 3:02 Ordering costs and holding costs explained
3. 5:08 Calculating total annual inventory costs
4. 8:57 Economic order quantity formula and calculation
5. 14:38 Economic order quantity worked example
6. 20:23 Bulk buy discounts and purchase cost considerations
7. 23:28 Economic batch quantity for internal production
8. 27:07 Economic batch quantity worked example

About this lesson

This lesson covers the three main components of inventory costs: purchase costs, ordering costs (admin and delivery), and holding costs (storage and insurance). You'll discover why businesses hold inventory and explore the critical trade-off between ordering frequently (high ordering costs, low holding costs) versus ordering in bulk (low ordering costs, high holding costs). The lesson walks you through practical calculations to find your optimal order quantity. You'll learn to calculate average inventory, annual holding costs, and annual ordering costs using straightforward formulas, then see how these costs change as order quantities vary. Working through a real example with Pink Co, you'll see how increasing order size reduces ordering costs but increases holding costs—and how to identify the sweet spot that minimises total costs. You'll also master the economic order quantity formula, which calculates the ideal order size automatically. The lesson shows you how to handle real-world scenarios like bulk purchase discounts and introduces the economic batch quantity formula for businesses that manufacture their own components internally. Throughout, you'll see how consistent time periods (annual, monthly) are essential for accurate calculations, and you'll work through multiple examples to build confidence in applying these techniques to exam questions.

Duration: 30m