ACCA Financial Management (F9) Certification Practice Exam

What is the Economic Order Quantity (EOQ) designed to minimize?

1. Labor costs

2. Inventory holding costs

3. Shipping expenses

4. Production delays

The correct answer is: Inventory holding costs

The Economic Order Quantity (EOQ) is a crucial inventory management tool designed to minimize inventory holding costs. This model calculates the optimal order quantity that a company should purchase to reduce the costs associated with holding inventory over time. Inventory holding costs encompass a variety of expenses, including storage costs, insurance, depreciation, and opportunity costs associated with capital tied up in unsold goods. By determining the most cost-effective quantity of inventory to order, EOQ allows businesses to maintain enough stock to meet demand without incurring excessive holding costs. While labor costs, shipping expenses, and production delays are important factors in overall operational efficiency, they are not directly targeted by the EOQ model. The primary focus is on finding a balance between ordering costs (costs incurred when placing orders) and holding costs, thereby optimizing inventory management. This ensures that companies can meet customer demand while minimizing unnecessary expenses, ultimately leading to better cash flow and profitability.