MANAGEMENT

Detailed explanation-1: -Just as carrying excess inventory results in high cost incurred by the seller, the flipside is the inventory shortage cost. When the supplier runs out of the particular product in demand occurring within a definite lead time, a stock-out of the product occurs and he /she has to incur penalty cost of lost sales.

Detailed explanation-2: -Shortage costs are those costs incurred by an organization when it has no inventory in stock. These costs include the loss of business from customers who go elsewhere to make purchases, the loss of the margin on sales that were not completed, and overnight shipping costs to acquire goods that are not in stock.

Detailed explanation-3: -Under both IFRS and US GAAP, the costs that are excluded from inventory include abnormal costs that are incurred as a result of material waste, labor or other production conversion inputs, storage costs (unless required as part of the production process), and all administrative overhead and selling costs.

Detailed explanation-4: -The cost of inventory includes the cost of purchased merchandise, less discounts that are taken, plus any duties and transportation costs paid by the purchaser.