When to reorder, how much to order (EOQ, explained simply), and the weighted average cost of stock bought at different prices.
By Manoj Sahukar· October 2026 · 13 min read
How numbers are rounded on these pages. Calculations are done at full precision and rounded only at the end, half up. Rupee amounts are rounded to the nearest rupee unless shown with paise, in which case to the nearest paisa. Percentages are shown to two decimal places, and days to one decimal place. Break-even quantities and reorder levels are rounded up to the next whole unit, because rounding down would leave you short. Economic order quantity is rounded to the nearest whole unit. Interest for a number of days uses a 365-day year. All examples and quiz questions are Hypothetical: they show the method, not real prices or rates.
Reorder level and order quantity
Two questions decide how you buy stock: when to order, and how much.
When: place the next order when stock falls to the reorder level. That is enough to cover sales while you wait for the new stock to arrive (the lead time), plus a cushion called safety stock for late deliveries or a sudden rush.
How much: ordering often in small lots means many order costs (phone calls, paperwork, a fixed delivery charge, receiving and checking). Ordering rarely in big lots means more money tied up in stock and more holding cost. The economic order quantity (EOQ) is the standard formula for the order size where these two yearly costs balance and their total is lowest. It assumes steady demand, a fixed price with no bulk discount, and a known lead time, so treat it as a guide and adjust for real life.
The standard formulas
Reorder levelReorder level = Daily usage × Lead time (days) + Safety stock
One common way to set safety stockSafety stock = (Maximum daily usage × Maximum lead time) − (Average daily usage × Average lead time)
Economic order quantityEOQ = √2 × D × SH
The two costs EOQ balancesYearly ordering cost = DQ × SYearly holding cost = Q2 × H
Terms used
Daily usage
Units sold or used per day, on average.
Lead time
Days between placing an order and having the stock ready to sell.
Safety stock
Extra stock kept to protect against delays or higher-than-usual demand.
D
Annual demand in units.
S
Cost of placing and receiving one order, in rupees, whatever its size.
H
Holding cost per unit per year, in rupees (often unit cost × holding cost rate).
Q
Order quantity in units. Average stock is about Q ÷ 2 (plus any safety stock).
Worked examples
HypotheticalBasicWhen to reorder cases of biscuits
A distributor sells 40 cases a day. The supplier takes 5 days to deliver. He keeps a safety stock of 60 cases.
Reorder level = 40 × 5 + 60 = 260 cases
When stock falls to that level, place the next order.
HypotheticalIntermediateEconomic order quantity
Annual demand is 7,200 cases. Each order costs ₹500 to place and receive. Holding one case for a year costs ₹20.
This covers the worst case of busy days and a late delivery together. More safety stock means fewer stock-outs but more holding cost.
Weighted average cost
When you buy the same item at different prices, what does one unit in your godown really cost? The answer is the weighted average cost: total cost of all units divided by the number of units. Bigger lots count for more, which is what “weighted” means. Simply averaging the prices is wrong whenever the quantities differ.
Many traders keep a moving weighted average: after every purchase, work out the new average cost; every sale is costed at the current average until the next purchase. This is one of the standard methods for valuing stock in accounts. Use landed cost (including freight and handling), excluding GST if you claim input tax credit.
The standard formulas
Weighted average cost per unit = Total cost of all unitsTotal number of units
Moving weighted averageNew average after a purchase = (Units in stock × Current average) + (Units bought × Purchase cost)Units in stock + Units bought
Cost of goods sold = Units sold × Average cost at the time of sale
Terms used
Landed cost
Purchase price plus freight, loading and other costs to bring the goods to your shop or godown.
Weighted average
An average where each price counts in proportion to the quantity bought at that price.
Moving (perpetual) weighted average
Recalculating the average cost after each purchase.
Worked examples
HypotheticalBasicTwo lots of rice bags
A trader buys 100 bags at ₹1,200 and later 50 bags at ₹1,260.
Total cost = ₹1,20,000 + ₹63,000 = ₹1,83,000 for 150 bags
Weighted average = ₹1,83,000 ÷ 150 = ₹1,220 per bag
Mistake: the simple average of the two prices is ₹1,230, which overstates the cost because the cheaper lot was bigger.
HypotheticalIntermediateMoving average with sales in between
Opening stock: 200 units at ₹50. He sells 120, then buys 300 at ₹54, then sells 250.
After the first sale: 80 units at ₹50 = ₹4,000
After buying: ₹4,000 + ₹16,200 = ₹20,200 for 380 units; new average = ₹53.16 per unit
Cost of the 250 units sold = 250 × ₹53.16 = ₹13,289.47
Closing stock: 130 units worth ₹6,910.53
The average is carried at full precision; the figures shown are rounded to paise.
HypotheticalAdvancedLanded cost across two lots, then a price
Lot A: 400 kg at ₹80/kg plus ₹1,600 freight. Lot B: 600 kg at ₹76/kg plus ₹3,000 freight. He wants an 8% margin.
Landed cost: A = ₹33,600 (₹84/kg); B = ₹48,600 (₹81/kg)
Weighted average landed cost = (₹33,600 + ₹48,600) ÷ 1,000 kg = ₹82.20/kg
Price for an 8% margin = ₹82.20 ÷ 0.92 = ₹89.35/kg
Quiz: reorder level, order quantity and average cost
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