CA Intermediate · Financial Management and Strategic Management · Management of Inventory
In inventory management, the cost of placing an order and the cost of holding stock move in opposite directions as order size changes. Which of the following is correctly classified as an ordering cost rather than a carrying cost?
The cost of preparing and processing a purchase requisition and purchase order is an ordering cost, because it is incurred every time an order is placed. Insurance, obsolescence and interest on blocked funds depend on stock held, so they are carrying costs.
- AInsurance premium on stock held in the warehouse
- BCost of preparing and processing a purchase requisition and purchase orderCorrect
- CLoss due to obsolescence of stored items
- DInterest on funds blocked in inventory
Explanation
Ordering costs are incurred each time an order is placed, such as requisitioning, order preparation, follow-up and receiving. Insurance, obsolescence and interest on blocked funds all arise from holding stock, so they are carrying costs.
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