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CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management

A Pune-based manufacturer, Sahyadri Components, pays its supplier a fixed Rs 600 every time it places a purchase order, irrespective of the quantity ordered. In inventory management, this cost is best classified as:

The fixed Rs 600 paid on every purchase order is an ordering cost. It arises each time an order is placed and does not vary with quantity, whereas carrying costs relate to holding stock and stock-out costs arise from shortages.

  1. ACarrying cost
  2. BOrdering costCorrect
  3. CStock-out cost
  4. DOpportunity cost of capital

Explanation

A cost incurred each time an order is placed, and independent of order size, is an ordering cost. Carrying costs, such as storage, insurance and interest, depend on the stock held and not on the number of orders. Stock-out costs arise only when stock is unavailable.

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