Define and give examples of inventory ordering, holding, and shortage costs.
Explain the meaning of the inventory ordering, holding and shortage costs and give examples.
Explanation of Solution
Merchandise Inventory: Merchandise is the stock of goods bought by a wholesaler, or a retailer, or a trader, to be sold within a year. Merchandise Inventory is a current asset account which includes all the costs incurred to acquire merchandise, and process it further for sale.
Explain the meaning of the inventory ordering, holding and shortage costs and give examples as follows
Ordering costs: The cost of preparing, placing and receiving a purchase order is called as ordering costs. Examples: Clerical costs of preparing purchase orders, time spent to find the suppliers and transportation costs.
Holding costs: Holding cost is a manufacturing cost that is incurred while the inventory is kept on hand for some period of time. Examples: Warehouse expense, security cost, insurance expense, deterioration and theft costs.
Shortage costs: Shortage cost is a manufacturing cost that is incurred when the organization does not have material or finished goods on hand for the production process. Examples: Costs caused by disrupted production, lost sales, and loss on quantity discounts on purchases.
Want to see more full solutions like this?
Chapter III Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
- Explain the difference between the flow of cost and the flow of goods as it relates to inventory.arrow_forwardWhich of the following describes the economic order quantity (EOQ)? a. It is associated with a pull inventory system. b. It is the heart of a JIT purchasing system. c. It minimizes total ordering and carrying costs. d. It minimizes stock-out costs.arrow_forwardWrite out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model.arrow_forward
- Considering the following information, and applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory?arrow_forwardWhy must support service costs be assigned to products for purposes of inventory valuation?arrow_forwardExplain why, in the traditional view of inventory, carrying costs increase as ordering costs decrease.arrow_forward
- Why do consignment arrangements present a challenge in inventory management? Explain.arrow_forwardWhen inventory items are highly specialized, the best inventory costing method is ________. A. specific identification B. first-in, first-out C. last-in, first-out D. weighted averagearrow_forwardWhy do companies adopt the LIFO method of inventory costing? Your discussion should include the effects on the income statement and balance sheet.arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning