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

In inventory management, the cost of placing an order (ordering cost) is best described as a cost that:

Ordering cost is incurred every time an order is placed and does not vary with the quantity ordered, covering requisition, processing and follow-up. Total ordering cost rises with the number of orders, whereas costs that rise with average stock held are carrying costs.

  1. ARises as the average stock held in the warehouse rises
  2. BIs incurred each time an order is placed and does not depend on the order quantityCorrect
  3. CIs incurred only when a stock-out occurs
  4. DFalls as the number of orders placed in the year increases

Explanation

Ordering cost covers items like requisition, processing, and follow-up for each order, and is the same per order irrespective of quantity. It rises with the number of orders, so option 'falls as the number of orders increases' is wrong. Costs rising with average stock are carrying costs.

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