Inventory Cost

Inventory cost is the cost of holding goods in stock. It is expressed as percentage of the inventory value. The inventory cost includes the capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs. Inventory is merchandise that is purchased by the merchandisers to be sold to the customers. The cost of the inventory that is bought but not yet sold is reported in the account inventory or Merchandise Inventory. Inventory costs are costs associated with the producing of a product that are capitalized in the inventory. They become assets until they are sold.

The inventory cost calculations include a lot of things. The normal price one would expect to pay for the item versus what is actually paid for the item. The price that is expected to pay is stored in the main inventory record. In addition to the raw inventory cost, the freight, duty or other charges such as insurance can also be added.

There are two types of inventory costs. They are the holding or the carrying costs and the other one is set up or ordering costs. The holding or the carrying costs is the cost of cost of maintaining, and holding inventory. Warehouse, pilferage, insurance costs, financing costs, obsolescence, and spoilage are other costs. The carrying costs can be entered as a non-capital on scenario cash flow statements. The holding cost or carrying cost is calculated as

Annual holding cost = average inventory level x holding cost per unit per year = order quantity/2 x holding cost per unit per year

The set up costs or ordering costs includes all the cost that is incurred while placing an order and receiving the order, it does not include the actual cost of the goods. These cost include the costs cost of preparing the order or the invoice, the stationery used, salary of the clerks, telephone costs etc. the ordering cost is calculated as

Annual ordering cost = no. of orders placed in a year x cost per order = annual demand/order quantity x cost per order

Questions

• What is inventory cost?
• What are the types of inventory costs?