Accounting Economic Order Quantity (Annual) Calculator
Calculate the annual economic order quantity, optimal order frequency, average inventory, and relevant inventory costs.
Overview
Use this annual EOQ calculator to estimate the most cost-efficient quantity to order for an inventory item. Enter annual demand, the cost of placing each order, and the annual cost of holding one unit in stock.
How it works
Economic order quantity uses the square root of twice annual demand multiplied by cost per order, divided by annual holding cost per unit. Ordering larger quantities reduces the number of orders but increases average inventory. Ordering smaller quantities reduces inventory but increases ordering activity. EOQ identifies the point where these two relevant annual costs are balanced.
How to use this calculator
- 1Enter the expected annual demand in units.
- 2Add the total cost incurred each time you place an order.
- 3Enter the annual holding cost for one unit of inventory.
- 4Review the economic order quantity and estimated order frequency.
- 5Compare the result with supplier minimums, lead times, and available storage capacity.
Example Calculation
Annual demand
10000
Cost per order
$50
Annual holding cost per unit
$2
Economic order quantity
707 units per order
For annual demand of 10,000 units, a $50 ordering cost, and a $2 annual holding cost per unit, the EOQ is about 707 units. This means placing about 14.14 orders per year, with relevant annual ordering and holding costs of about $1,414.21.
Frequently asked questions
What is economic order quantity?
Economic order quantity, or EOQ, is the order size that aims to minimize the combined annual cost of ordering inventory and holding it in stock.
What costs are included in the cost per order?
The cost per order can include purchasing administration, supplier communication, delivery processing, receiving, inspection, invoice handling, and similar costs that occur for each order.
What should be included in annual holding cost per unit?
Annual holding cost may include warehousing, insurance, handling, deterioration, shrinkage, and the financing cost of money tied up in inventory.
Does EOQ include the purchase price of inventory?
This standard EOQ calculation excludes purchase price because it is usually unchanged by order size. If suppliers offer quantity discounts, compare the total cost at each price break separately.
Why is average inventory half of EOQ?
Under the basic EOQ model, stock falls evenly from the full order quantity to zero before the next delivery. The average cycle stock is therefore one-half of the order quantity.
Can I use EOQ when demand changes during the year?
EOQ is most useful when demand is reasonably stable. If demand is seasonal or uncertain, use it as a starting point and consider safety stock, forecast changes, and supplier lead times.
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Assumptions and warnings
Assumptions
- Annual demand is known, steady, and spread evenly throughout the year.
- Each order is received in full when needed, with no planned stockouts or lead-time variation.
- The cost per order and annual holding cost per unit remain constant.
- The calculation excludes purchase cost, safety stock, quantity discounts, taxes, and costs of stock shortages.
- Results are estimates based on the values entered.
Warnings
- This calculator provides an inventory planning estimate only and should be used alongside current supplier terms, lead times, and operational requirements.