18 November 2008
In determining the “Standard Order quantity', 'Economic Lot size' or “Economical Ordering quantity' the ordering costs and carrying costs are taken into consideration. Ordering costs or basically the cost of getting an item of inventory and it includes cost of placing an order. Carrying cost includes costs of storage facilities, property insurance, loss of value thought physical deterioration, cost of obsolescence. Either of the costs affects the profits of the firm adversely and management tries to balance these two costs. The balancing or reconciliation point is known as Economic order quantity.
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