Accounting Economic Order Quantity (Monthly) Calculator
Estimate the cost-efficient order quantity, ordering frequency, inventory costs and reorder point using monthly demand.
Overview
This monthly Economic Order Quantity calculator estimates a cost-efficient inventory order size using expected monthly demand, the cost of placing an order and the cost of holding stock. It also estimates order frequency, relevant inventory costs and a basic reorder point from your supplier lead time.
How it works
Economic Order Quantity, or EOQ, balances two opposing costs. Ordering smaller quantities more often can increase ordering costs, while ordering larger quantities can increase storage and capital costs. The calculator converts your annual holding rate into a monthly holding cost per unit, then applies the standard EOQ formula: the square root of twice monthly demand multiplied by order cost, divided by monthly holding cost per unit. The reorder point is average daily demand multiplied by lead time. It does not include a safety-stock allowance.
How to use this calculator
- 1Enter the average number of units needed each month.
- 2Add the total administrative and delivery cost of placing one order.
- 3Enter the unit cost and estimated annual holding cost rate.
- 4Provide the supplier lead time and operating days in a typical month.
- 5Review the recommended order quantity and reorder point.
- 6Adjust the figures as demand, supplier costs or storage costs change.
Example Calculation
Monthly demand
1000
Cost per order
$50
Unit purchase cost
$20
Annual holding cost rate
24%
Supplier lead time
5
Operating days per month
30
Recommended order quantity
500 units
For monthly demand of 1,000 units, a £50 order cost, a £20 unit cost and a 24% annual holding rate, the EOQ is 500 units. This means about two orders per month, with a reorder point of about 167 units before adding safety stock.
Frequently asked questions
What is Economic Order Quantity?
Economic Order Quantity is an inventory model that estimates the order size that minimizes the combined cost of ordering and holding stock.
What costs should be included in cost per order?
Include costs that occur each time you replenish stock, such as purchasing administration, delivery charges, receiving, inspection and processing time.
How do I estimate the annual holding cost rate?
Use the estimated annual cost of storing and financing one unit of stock as a percentage of its unit value. It may include storage, insurance, handling, deterioration and capital costs.
Does EOQ include the cost of buying inventory?
The standard EOQ result focuses on ordering and holding costs. The purchase cost is used here to estimate the holding cost when that cost is expressed as a percentage of unit value.
What is the difference between EOQ and the reorder point?
EOQ is how many units to order. The reorder point is the stock level that signals when to place the order so inventory can arrive during the supplier lead time.
Should I add safety stock to the reorder point?
If demand or delivery timing varies, businesses commonly add a safety-stock allowance to the basic reorder point to reduce the chance of running out of stock.
Explore Related Calculators
Assumptions and warnings
Assumptions
- Demand is steady and reasonably predictable throughout the month.
- The cost per order and unit holding cost remain constant over the period.
- Orders are received in full after a consistent supplier lead time.
- The calculation does not include safety stock, quantity discounts, stockouts or changing purchase prices.
- Results are planning estimates and should be reviewed against actual inventory records.
Warnings
- This calculator provides an inventory planning estimate only and is not accounting, financial or operational advice.
- Add suitable safety stock if demand or supplier lead times are uncertain.