Inventory costs

 There are Five types of inventory costs:

1) Holding (Carrying) costs:
 storage facilities, handling, insurance,
pilferage, Breakage, obsolescence,
depreciation, taxes, and the opportunity cost
of capital.
 Five major elements make-up these costs in
the following manner:
 Conti...
1. Opportunity cost of invested funds 12-20%
2. Insurance costs 2-4%
3. Property taxes 1-3%
4. Storage costs 1-3%
5. Obsolescence and deterioration 4-10%
Total carrying costs 20-40%
 Conti...
 Holding/carrying costs often are expressed in
terms of cost per unit on an annual basis.
 The annual inventory carrying costs that would
be generated by delivery quantities of various
sizes can be calculated as follows:
Annual carrying cost= (Average inventory
level) (Holding cost per unit per year)
 Conti...
2) Ordering costs
 This is the fixed cost associated with placing
an order in the inventory system.
 These factors all contribute to the cost of
generating, processing, transporting,
receiving an order, along with the related
paper work.
 Conti...
3) Shortage costs (stock out costs):
 Costs associated with insufficient inventory.
 when a customer demands a product and the
demand is not met on time, a stock out, or
shortage, is said to occur.
 Conti...
4) Unit Purchasing Cost:
 This cost is simply the variable cost
associated with purchasing a single unit.
 Typically, the unit purchasing cost includes
the variable labor cost, variable overhead
cost, and raw material cost.
5) Setup costs:
 Setup cost is the cost to prepare a machine
or process for manufacturing an order.
 This includes time & labor to clean and
change tools or holders.