Firstly, called as setup cost is one of the

Firstly, carrying costs, also known as holding costs, are central for a “static” point of view on inventory, in other words, when focusing on the effect of holding more or less inventory, independently of the inventory flow (, 2017). To be more specific, these costs can be divided into four components such as capital costs, which are the largest component among the carrying inventory costs, includes everything related to the investment. Inventory services costs, which include IT hardware and applications as same as physical handling with the human resources management, and inventory risk costs, which cover the venture that the items might devalue over the time they are stored, are part of the carrying costs. Additionally, a combination of the cost of building and facility maintenance, depreciation, property taxes and the handling costs of moving the materials in and out of the warehouse is called as storage space costs.Next, the ordering cost or called as setup cost is one of the costs of inventory, which incurred each time the order for inventory is placed. It can be divided into two portion, which are inbound logistics cost, a variable cost that is dependent of transportation and reception, and cost of procurement, which is unrelated to the amount of units ordered and thus be regarded as a fixed cost. (, 2017). Further, it is affected by the cost of ordering too little and the cost of ordering too much, which are moving in right-about to each other. In fact, ordering excess quantity will causes carrying cost of inventory become higher whereas ordering too less will leads to more orders required, and the costs is increased. Besides, costs of inventory also including stock-out-cost, also named shortages cost, which is arises due to the economic influences of not being capable to satisfy an internal or external wants from the present inventory. This cost be formed from internal costs (internal process-related) such as costs of urgent shipments and labour hours wastage along with external costs (sales-related) like loss of revenue margin and costs of losing a customer due to loss of goodwill  (Bragg, 2017).Lastly, purchase cost of the inventory is the most basic inventory cost. For instance, a retailer buy and pays for a goods, the amount paid is the purchase cost and also becomes the retailer’s cost basis to figure out the gain or loss when the goods is sold. In addition, the costs count in any sales charges or commissions paid for the goods, and weighted average cost is used for multiple purchases of the same security. After that, trade discount or price contracts offered by suppliers are helpful to save the purchase costs, thus, companies should develop long-term, mutually beneficial partnerships with reliable suppliers in order to get the reasonable level of purchase cost (, 2017).Therefore, the total inventory cost is the sum of total carrying cost, total ordering cost together with the purchase cost. The formulas of the total carrying cost, total ordering cost as well as the total inventory cost are shown in Figure 1.1, Figure 1.2 and Figure 1.3 respectively.