Write something on Costs Associated with Inventory.

Costs Associated with Inventory:

1. Purchase (or production) cost. 2. Capital cost. 3. Ordering cost. 4. Inventory carrying cost (holding costs). 5. Shortage cost.

Purchase (or production) cost:

The cost of producing one unit of a thing is its value. As soon as the price discounts are used, this cost increases significantly. The price is given as Rs. per unit.


Capital cost:

Capital invested in an item (capital cost) is money that can’t be used to make other purchases. If the money were invested elsewhere, a return on the investment is expected. For this unreceived return, inventory expenses are charged. The amount of the charge reflects the percentage return expected from other investments.


Ordering cost:

It is also known as procurement cost, replenishment cost, or acquisition cost. The cost of an order is the amount of money expended to get an item into inventory. This includes all expenses incurred from calling for quotes to the time the items are added to stock.


Fixed costs and Variable costs are the two categories into which costs can be separated.

Fixed costs are independent of the volume of orders, but variable costs vary according to the volume of orders. The salaries and wages of permanent employees involved in the purchase function and control of inventory, purchasing,.....


Inventory carrying cost (holding costs):

These are the costs associated with having a given level of inventory on hand and these costs vary in direct proportion to the amount of holding and period of having the stock in stores. The holding costs include: