# Ordering Cost and Carrying Cost
When the firm orders material in lots, two opposing types of cost arise. Understanding both is the foundation for EOQ.
## Re-Order Quantity (ROQ)
ROQ is the fixed quantity of material the company orders each time. It remains the same for every order placed during the year.
## 1. Ordering Cost
Cost associated with the act of placing an order. It includes:
- Cost to invite quotations
- Material checking & inspection
- Paperwork cost
- Employee cost directly related to ordering
- Transportation
### Formula
$$\text{Total Ordering Cost} = \frac{\text{Annual Consumption}}{\text{Re-order Qty}} \times \text{Ordering Cost per Order}$$
or equivalently,
$$\text{Total Ordering Cost} = \text{No. of Orders} \times \text{Ordering Cost per Order}$$
## 2. Carrying Cost
Cost of holding or storing material in the stores or godown. It includes:
- Insurance cost
- Storage cost (rent, lighting, etc.)
- Interest on money invested in raw material
- Obsolescence
### Formula
$$\text{Total Carrying Cost} = \frac{1}{2} \times \text{Re-order Qty} \times \text{Carrying Cost per Unit p.a.}$$
The ½ appears because on average, the firm holds half a lot at any point in time — stock falls linearly from ROQ to zero between deliveries.
## Behaviour of the Two Costs
| If Re-Order Quantity ↑ | Then |
|---|---|
| Number of orders ↓ | Total Ordering Cost ↓ |
| Average stock held ↑ | Total Carrying Cost ↑ |
The two costs move in opposite directions as ROQ changes — setting the stage for EOQ as the optimum.