Generally, lowering costs is always a benefit and key objective for any manager whether their focus is accounting or operations. .
Purchasing costs are the costs of goods acquired from suppliers including freight or transportation costs. They usually comprise of the largest single cost category of goods for sale. Purchasing costs are affected by discounts for various purchase-order sizes and supplier credit terms.
Ordering costs are the costs of preparing, issuing, and paying purchase orders, along with receiving and inspecting the items included in the orders themselves. Both purchase approval and special processing costs are related to the number of purchase orders processed.
Carrying costs are costs that a company incurs when they hold an inventory for an amount of time before sale. Mainly, these costs consist of those linked to storage, space rental, spoilage, insurance, and obsolescence. Other costs that can be considered carrying costs are the opportunity costs of investment tied up in inventory.
Stockout costs are those costs stemming from excess demand. When there is customer demand for a product that a company has run out of, stockout costs occur. A stockout can be resolved by expediting an order form a supplier. Expediting costs of a stockout include the additional ordering costs and any related transportation costs. Opportunity cost must also be considered. These can include the lost contribution margin on the sale not made due to the item being unavailable and any contribution margin lost on future sales impaired by ill-will of the customer. Another solution to stockouts is the concept of safety stock, which will be discussed in a later section.
Lastly, quality costs of adhering to set product standards must be considered. Quality is always important to any company because it directly relates to customer loyalty and reputation. These costs can be subdivided into prevention costs, appraisal costs, internal failure costs, and external failure costs.
