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Economic Order Quantity inventory model helps in finding the quantity or order size that results in least costs in terms of ordering and holding costs. There are three cost components in the EOQ model namely,
1. Total inventory costs : these are the total costs that are incurred and it also includes the other two costs I.e. Ordering costs and holding costs.
2. Ordering costs : costs that are incurred while placing an order falls under this category. For instance : cost of preparation of purchase order.
3. Holding costs : costs that are incurred while the unsold goods are stored and kept. For instance : warehousing costs.. It also includes insurance costs, costs of good damaged and spoiled etc.
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