Question

How do you work out ordering cost, carrying cost and purchases cost. Show and give an example of how it is worked out

Answer 1

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Ans:

# Ordering Cost: These are the cost (expenses) incurred by a company starting from the requisition made by the user department ending up with the payment made to the supplier.

Example: Cost of -

• Preparing purchase requisition (after user department propose for a material requirement)
• Preparing purchase order (after purchase requisition created)
• Inspection done by worker (after material received from the supplier)
• Processing of supplier invoice. (material received entry and verification of invoice)
• Processing of invoice for payment to the supplier. (Finance expense).

# Carrying Cost: Carrying cost also known as storage cost. These cost are incurred to store the material for use in production. There a whole lot of storing cost incurred by the company, that's why some companies are treats carrying cost as a liability. These costs can grossing upto approximately 20% to 25% of total inventory cost.

Example:

• Oppertunity cost forgone due to the fund invested in inventory.
• Inventory pilferage cost.
• Inventory obsolete cost.
• Inventory damage cost.
• Inventory stolen cost.
• Ware house maintenance cost.
• Ware house depreciation cost.
• Inventory management cost.
• Inventory insurance cost. Etc.

# Purchases Cost: These costs are incurred starting from the price charged by the supplier and ending up with the material received at the company's ware house. These costs are important for a company. Companies are maintains separate department to calculate these cost.

Example:

• Material price charged by the supplier net of discounts, allowance and return.
• Freight charge from the suppliers place of supply to the place of unloading at companys warehouse.
• All non refundable taxes (sales tax, road tax, state tax etc.)
• Toll charges.
• Overloading penalty.
• Material loading and unloading charges.
• Material price hike due to emergency requirements. Etc.

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