Purchasing and Financing 2024

Students can explain the different cost elements that contribute to the Inventory
Carrying Costs and Order Costs.
The purchasing manager is expected to ensure a constant supply of the goods, while
keeping the cost to a minimum. To do this a thorough knowledge of the different cost
components associated with carrying inventory is required.
There are two different cost components involved with purchasing, namely the Inventory
Carrying Costs and the Order Costs.
The Inventory Carrying Cost involves all the following costs.
1. Cost related to the physical stock.
o Buying the stock itself
o Buying packaging for the stock
o Insuring the stock
2. Cost related to the storage facility.
o Buy or rent a warehouse.
o Pay property tax.
o Insure the facility.
3. Cost related to stock management.
o Pay those who work in the warehouse - Labour cost.
o Some old stock will be written of - Obsolescence Cost
o Some of the stock will get damaged - Damage Cost
o Some stock will be stolen - Theft Cost
The Order Cost involves all the following costs.
o The cost of putting the stock on board, rail or truck
o The cost of transporting the stock via sea, air, rail or road
o The cost of delivering and unloading the stock at your warehouse
o The cost of ensuring the stock while in transit
(Some of these costs could already be included in the cost price of the stock)
8