Inventory costs ordering cost, carrying cost and stock out cost. Lifo and fifo are methods to determine the cost of inventory. Cost of loss, pilferage, shrinkage and obsolescence etc. The shortage costis the cost of not having a bicycle on hand when needed. Methodology of calculating inventory carrying costs pdf. Inventory needs to be insured against theft and fire. Pdf inventory management is a challenging problem area in supply chain management. Insurance cost is not proportional to the level of inventory since it is incurred to cover a certain value of product for a specified time. In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of. To that end, management must determine when various items. Discuss types of inventory cost within the materials management forums, part of the publish upload project or download reference project category.
A retail appliance store sells 2500 tv sets per year. The three types of inventories are direct material inventory, work in progress inventory and the finished goods inventory where the direct material inventory includes the stock of raw material which the company has purchased for its use in production. Inventory costs ordering cost, carrying cost and stock. Understanding and managing inventorydriven costs can have a significant impact on margins. Inventory affects costs in more ways than you may realize. Pdf a study of inventory management system case study. Inventory must be viewed as a positive contributor to corporate profitability. Inventory costs are basically categorized into three headings ordering costs, carrying costs and shortage or stock out cost and cost of replenishment. In the case of work in process wip and finished inventory, you need to add other costs, such as labor and indirect costs, to the cost of raw materials. This cost represents the costs of capital tied up, warehouse space, insurance, taxes, and so on. A comparison of current years inventory ratio with those of previous years will unfold the following points relating to inventories. Cost of good consumed or sold during the yearaverage inventory during the year.
This also means that such items of inventory enjoy high demand. Total annual inventory costs for last three years are calculated considering different periods i. Inventory costs holding cost costs that vary with the amount of inventory held typically described as a % of inventory value also called carrying cost ordering cost costs involved in placing an order sometimes called setup cost inversely related to holding cost shortage cost occur when we run out of stock 98. Inventory costs are basically categorized into three headings. Inventory procurement, storage and management is associated with huge costs associated with each these functions. Pdf comparison of inventory models for minimizing total. Normal cost it is a cost which normally incurred in achieving a certain level of output under certain conditions. Inventory management is the basis of a wellfunctioning retail business. Download a pdf version for easier offline reading and sharing with coworkers. Minimizing inventory costs chandlergilbert community. A sensitivity analysis is conducted to investigate the impact of parameters on the optimal inventory policy.