ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Cost accounting concepts: Economic order quantity

Updated on June 4, 2011

By definition, the Economic Order Quantity (EOQ) is the order quantity that minimizes inventory costs. This includes the costs of purchasing, shipping and holding inventory.

The EOQ is critical to maintaining adequate levels of inventory; it does this by ensuring that the right amount is ordered at the right time. This allows a business to balance the benefits of holding inventory against the cost.

The firm’s demand for inventory, its holding costs and ordering costs are used in determining the optimum order quantity. It is determined using a formula, table or graph. Using a graph, the optimum order quantity is where the holding costs line intersects the ordering cost curve. Using the formula, the EOQ is the square root of the quotient of [(2 x Ordering Cost of a consignment x Demand)/Holding Cost per unit).

Since ordering costs are fixed per order and holding costs are variable, smaller inventory levels yield higher total ordering costs and total holding costs rise as inventory levels rise. This is the reason for the ordering costs curve is a curve, while holding costs is a straight line.

Cost Accounting: Foundations and Evolutions (Available Titles CengageNOW)
Cost Accounting: Foundations and Evolutions (Available Titles CengageNOW)

The eighth edition of Kinney/Raiborn's COST ACCOUNTING: FOUNDATIONS AND EVOLUTIONS provides in-depth coverage of current cost management concepts and procedures in a straightforward and reader-friendly framework.

Graph showing the EOQ. Note that where the Holding Cost line intersects the Ordering curve, the Total Cost is the lowest.
Graph showing the EOQ. Note that where the Holding Cost line intersects the Ordering curve, the Total Cost is the lowest.

The EOQ optimizes the inherent trade-off between holding costs and ordering costs. With consistently low inventory, ordering costs would be substantial as the business would incur charges for carriage-in, would not benefit from discounts from large orders and would have to pay staff for additional work in receiving orders regularly.

On the other hand, too much inventory yields burdensome holding costs. This arises from the need to have more storage, staff and equipment to manage high inventory levels.

In the realm of inventory levels the reorder level is calculated as follows:

  • Maximum usage x Maximum lead time

The maximum level is calculated as follows:

  • Reorder level + Reorder quantity – (minimum usage x minimum lead time)

The Economic Order Quantity determines the optimum amount to order when inventory levels reach the reorder level. The EOQ would not take stock levels past the maximum level, however. This is because the maximum level is the level beyond which it is unsafe, uneconomic or impractical to hold inventory.


Submit a Comment
  • SpiffyD profile imageAUTHOR


    7 years ago from The Caribbean

    Thanks Stush.

  • Stush profile image


    7 years ago

    I personally find the theory behind accounting concepts difficult. Your article was well done and the theory of economic order quantity was explained nicely.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)