Purchasing Cost
Purchasing cost is one of the most important parts of business. It refers to the money that is spent on materials, services, and financing costs associated with purchasing items for organization. It includes the cost for ordering and handling the material, receiving and inspection fees, transportation and storage, financing costs, and other general and administrative expenses.
Purchasing cost is essential for a business, as it forms a significant portion of the overall cost structure. The purchasing cost also affects the cash flow of a business, since cash outlay will occur when a purchase is done. In addition, higher purchasing cost can affect the selling price of a product, as the selling price must cover all costs incurred with the product including the purchasing cost.
Purchasing cost can be divided into two main categories: direct and indirect costs. Direct cost refers to those costs which are incurred directly with the purchase of a certain item, while indirect cost refers to costs that are incurred in order to support the purchase of a certain item, such as wages and administrative expenses.
One common way of managing purchasing cost is through cost analysis. By using analysis, a company can identify which costs are necessary and where cost savings can be found. This can be done through various techniques, such as cost comparison, inventory analysis, and cost prediction.
Inventory analysis helps business owners to review the materials they already have in-stock, and whether or not purchasing additional materials will be economically beneficial for the business. Business owners can also use cost prediction when making purchase decisions to determine whether or not a purchase will be cost-effective.
Businesses should also strive to reduce their purchasing cost through things like vendor negotiations, proper supplier selection and evaluation, and effective purchasing techniques. Negotiations can involve things like seeking better discounts, or reducing transportation costs. Selection and evaluation require that companies review supplier information and track their past performance in terms of delivery and quality standards. Proper purchasing techniques involve things like proper inventory management and ordering in bulk.
Ultimately, businesses should strive to manage their purchasing cost to achieve the most cost-effective result. An effective purchasing strategy can provide a business with a competitive advantage, reduce costs, and increase profitability. Purchasing cost forms a major part of the overall cost structure of any organization, and proper purchasing cost management is a must for any business.
