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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

In inventory management, the cost of placing an order and receiving goods, such as procurement staff salaries, transport of each consignment and inspection of each lot, is classified as:

These are ordering costs. They are incurred every time an order is placed and received, covering requisition, transport, inspection and handling of each lot. Carrying costs arise from holding stock, and stock-out costs arise from shortages, so neither describes per-order procurement expenses.

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

Explanation

Costs that are incurred each time an order is placed, including requisitioning, transport, inspection and receiving, are ordering costs. Carrying costs relate to holding stock, such as storage, insurance and interest on funds locked up. Stock-out costs arise only when stock is not available.

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