Ordering Cost

Ordering cost is the cost of ordering the raw materials required in the production. This is a broad term but in short we can define it by saying it involves all the cost from the creation of the requisition of the purchase order up to the payment to the supplier. During this, there will be cost of employees engaged in the creation of purchase requisition, purchase orders, transportation cost, inspection cost, cost of putting the received stock/ inventory into the warehouse etc.

As you can see, the more order the entity places, the more ordering cost it will be incurring. So, where stock consumption is high and quick, the entity will prefer to place large and bulk orders to reduce the ordering cost. But this could give rise in the holding cost or carrying cost. So, in order to keep both costs in optimal level, the applicatio0n of EOQ model is very important.