Importance Of Inventory Cost

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Inventory cost is the costs that involved when storing and holding the goods. Inventory costs included several costs such as inventory carrying cost, capital cost, storage space cost, inventory service cost, inventory risk cost, order and setup cost, expected stock-out cost, and in-transits inventory carrying costs. Basically, inventory carrying cost included capital cost, storage space cost, inventory service cost and inventory risk cost. Capital cost is the cost that a company pay to purchase the inventory. It plays an important role in inventory carrying cost as it expresses the percentage of the dollar value of the inventory that is holding by a company. Capital cost may be vary from the types of stock and the total quantities of stock…show more content…
Facility maintenance included rent of the storage, lighting and air conditioning. Storage space cost can be vary depends on the distance of the goods moving from a place to another place and the types of goods. If the goods are moving to a place that takes longer distance, the cost involves will be higher. Besides, if the type of good is raw material such as seafood where the goods have to be store in a cooling storage, the cost that involves will be higher also. Inventory service cost is cost that support inventories and protection to the inventory that hold by a company. Inventory service cost included taxes and insurances. Inventory service cost is a payment to ensure that any damage or loss of the goods that hold by a company can claim the insurance premium in order to minimize the loss of the company and as a protection to the goods. There are also some states that appoint taxes on inventory in different basis. Higher taxes are required in higher value of…show more content…
The first step is identify the value of the goods in the inventory and then value the goods with the accounting practices which is last in/last out basis (LIFO), first in/ first out (FIFO) basis and average cost. Cost of goods sold is one of the most relevant measures for inventory decision making. Last in/last out (LIFO) can be defined as selling the latest goods that are purchased lately first then only sell the goods that have been purchased before while first in/first out (FIFO) means that selling the goods that have been purchased first then only sell the goods that purchased lately. Order cost is the expenses that included when the company is placing the additional order for additional inventory. This cost included fixed and variable elements. Fixed elements that included are such as facilities and information system and there are also some variable elements that vary according to the quantities of goods that order by the
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