ACCA Financial Management (F9) Certification Practice Exam

What formula represents the ordering costs in inventory management?

1. Co x D/Q

2. Ch x (Q/2)

3. Q x Ch

4. Annual demand + ordering cost

The correct answer is: Co x D/Q

The formula that represents ordering costs in inventory management is derived from the relationship between the total number of orders placed and the cost associated with each order. The correct formula, Co x D/Q, illustrates this clearly. In this formula, Co signifies the cost per order, D represents the total annual demand for the inventory item, and Q is the order quantity. By multiplying the cost per order (Co) by the total number of orders needed to meet the annual demand (D/Q), you calculate the total ordering costs for the inventory management period. Specifically, the number of orders required is determined by dividing the annual demand (D) by the quantity ordered each time (Q). Thus, this method effectively captures the total expenses incurred in ordering inventory over a given period. Understanding this formula is crucial for optimizing inventory management, as controlling ordering costs can lead to more efficient financial performance. In contrast, the other provided options focus on different aspects of inventory costs or do not accurately represent the calculation of ordering costs.