Inventory management policies have cost implications. Decisions about how much inventory to hold affect item costs, holding costs, ordering costs, and stockout (shortage) costs.
The item costs of a purchased item include the price paid for the item and any other direct costs for getting the item to the plant, such as inbound transportation, insurance, duty, or taxes. For an item built by the manufacturing company, the item costs include direct labor, direct materials, and factory overhead.
Includes price paid for the item plus other direct costs associated with the purchase.
Holding costs include the variable expenses incurred by the firm for the volume of inventory held. As inventory increases, so do the holding costs. We can determine unit holding costs by examining three cost components: capital costs, storage costs, and risk costs. Annual holding costs are typically stated in either dollars per unit ($3.50 per unit per year) or as a percentage of the item value (25 percent of the unit value).
Include the variable expenses incurred by the plant related to the volume of inventory held.
The higher ...