Thursday, July 24, 2008


1. Purchase cost
2. Order/setup cost
3. Holding Cost
4. Stockout cost
In the inventory analysis relevant costs are considered
Purchase Cost
· Unit purchase price - from an external source
· Unit production cost – produced internally
· Unit production cost includes direct labour, direct material and factory overhead
Order/Setup Cost
· Expense of issuing a purchase order to an outside supplier or from internal
production setup costs
· Vary directly with number of orders or setups
· Order cost includes transportation cost, and cost for requisition, analysing
vendors, writing purchase orders, transportation cost to transport the order,
receiving materials, inspecting materials, following up orders and doing the
process necessary to complete the transaction
Holding Cost or Carrying Cost
· Cost associated with investing in inventory and maintaining the physical
investment in storage
· Contains capital costs, taxes, insurance, handling, storage, shrinkage,
obsolescence, and deterioration
Stockout Costs
· Economic consequence of an external or an internal shortage
· External shortage – when customer’s order is not filled
· Internal Shortage – When an order of a group or department is not filled
· External shortages can incur backorder cost, present profit loss and future profit
· Internal shortage can result in lost production and delay in completion date

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