Nntypes of inventory costs pdf

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 must be viewed as a positive contributor to corporate profitability. In this article, i want to just show the savings that can occur from a focus just on the inbound side, and give supply chain practitioners a little. Historical cost it refers to the actual cost of acquiring an asset or producing a product or service. A retail appliance store sells 2500 tv sets per year.

Normal cost it is a cost which normally incurred in achieving a certain level of output under certain conditions. Minimizing inventory costs chandlergilbert community. Pdf comparison of inventory models for minimizing total. Total annual inventory costs for last three years are calculated considering different periods i.

This cost represents the costs of capital tied up, warehouse space, insurance, taxes, and so on. Pdf inventory management is a challenging problem area in supply chain management. Pdf a study of inventory management system case study. 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 are basically categorized into three headings ordering costs, carrying costs and shortage or stock out cost and cost of replenishment. Discuss types of inventory cost within the materials management forums, part of the publish upload project or download reference project category. In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of. A comparison of current years inventory ratio with those of previous years will unfold the following points relating to inventories. Understanding and managing inventorydriven costs can have a significant impact on margins.

Inventory costs ordering cost, carrying cost and stock. Methodology of calculating inventory carrying costs pdf. Inventory needs to be insured against theft and fire. Inventory management is the basis of a wellfunctioning retail business. 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.

The shortage costis the cost of not having a bicycle on hand when needed. To that end, management must determine when various items. A sensitivity analysis is conducted to investigate the impact of parameters on the optimal inventory policy. Lifo and fifo are methods to determine the cost of inventory. Inventory costs ordering cost, carrying cost and stock out cost. 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. Download a pdf version for easier offline reading and sharing with coworkers. Inventory costs are basically categorized into three headings. Inventory procurement, storage and management is associated with huge costs associated with each these functions. Cost of good consumed or sold during the yearaverage inventory during the year. Inventory affects costs in more ways than you may realize. Cost of loss, pilferage, shrinkage and obsolescence etc.