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Inventory Costs
When talking about inventory, we mainly talk about the physical products that the firms are holding. There are costs associated with all areas of business, and this holds true for the inventory sector. Among the factors that must be considered for inventory costs are: relevant costs, sunk costs, and opportunity costs. Any kinds of companies know that there is a certain amount of cost structure that goes into any kind of inventory used. There is always a “best case” scenario. The trick for the organizations is to figure out what is the maximum level of output while keeping the costs to a minimum. Minimizing inventory costs is one of the first steps to having a successful business cost structure.
Relevant costs can basically be defined as any cost that can be connected with a particular decision. In this case, any cost that can be put in the inventory cost equation. On the flip side, an irrelevant cost is one that will be incurred no matter what decision is made. Managers should have a detailed equation of the total relevant costs in connection with every possible decision that can be reached.
When you speak of relevant costs, you must also speak of irrelevant costs. These costs are also related to the cost of inventory; however, they have very little weight when it comes to decision-making. For example, the amount it costs to heat or air-condition an inventory warehouse may be a relevant cost, but it is not something that management will spend a long time on when they want to change an inventory method. Basically, irrelevant costs are all things that have to do with the overall inventory subject, but don’t have much to do with the decision making process.
Sunk costs are costs that have already existed and are not affected with additional inventory issues. An easy way to think of a sunk cost is “money already spent”. For example, if a machine breaks down, either buy a…