Wednesday, November 30, 2011

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.

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
Hire charges of warehouse
Material Handling in stores
Cost of Bill Payment

Inventory carrying rate = Total / Average total Inventory value
Ie Inventory carrying Rate = (6,60,000 / 200,00,000)*100 = 3.3%


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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