The Importance Of Inventory Cost

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 that hold by a company,

Storage space cost is kind of cost that included in handling cost such as facility maintenance and the cost of moving the goods in or out of inventory. 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

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