Inventory Management - Part II

In the last session we had learnt about Inventory related cost. In the internet a user has posted a query on the Inventory related cost. The site details are given below. http://in.answers.yahoo.com/question/index?qid=20091112221901AAPo4k6

Now let us solve the query to understand the Inventory related cost working.

Q. How to Calculate ordering cost and inventory carrying cost in this example given below:

Purchasing department expenses Rs 200,000

Stores Personnel expenses Rs 200,000
Obsolescence Rs 60,000
Hire charges of warehouse Rs 140,000
Material handling in stores Rs 160,000
Cost of Bill Payment Rs 100,000
Insurance Charges 1%
Interest Charges 18%
Order Placed per year 5000
Average total inventory Rs. 200 lakhs
 

Inventory Carrying Cost

 

Stores Personnel expenses	200000
Obsolescence	60000
Hire charges of warehouse	140000
Material Handling in stores	160000
Cost of Bill Payment	100000
Total	660000

Inventory carrying rate = Total / Average total Inventory value

Ie Inventory carrying Rate = (6,60,000 / 200,00,000)*100 = 3.3%

Add

Inventory carrying rate worked out = 3.3%

Insurance Charges                               = 1.0%
Interest charges                                   = 18.0%

Total Inventory carrying rate             = 22.3%

Inventory Carrying Cost = Total Inventory carrying rate (%) X Average Total Inventory Value

       = 22.3% X 20000000
       = (22.3/100)X20000000
       = Rs. 44,60,000
 

Ordering Cost

Purchase Department expenses = Rs. 200000

Order Placed per year = 5000 Nos

Ordering cost (in terms of one order) = Purchase Department expenses / No of order placed per year

     = 200000/5000
     = Rs.40

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