Meaning and example
Total inventory management costs are the sum of selected cost components for a comparable replenishment plan: for example, ordering, holding, shortage and purchasing costs when the last of these differs between alternatives. Set the perimeter before optimization. In an illustrative model, ordering costs of 400 and holding costs of 600 give 1000, but that total excludes an unknown cost of production disruption. Minimizing an incomplete cost function does not prove that the real decision is best. Every component must refer to the same period, consumption volume and set of constraints.
How to avoid a mistake
In the basic EOQ model, variable costs are written as D/Q × S + Q/2 × H: ordering plus holding the average cycle inventory. Purchase cost may be excluded from the comparison only when price and volume are the same. Discounts or shortage risk require the corresponding components to be included again.
For more on the relationship between cost and write-downs: [the educational analysis](/guides/inventory-cost-nrv/).
Sources and review boundaries
Support: **gl-mit-inventory**. The example is editorial. Sources verify the concept, but do not confirm the reliability of anyone’s financial statements or the suitability of a decision for a particular investor.