In cost Accounting there are lot of methods followed to have better control to reduce the the cost without of hampering the quality of product/service.
In material management, functions like setting various level of stock , determine the pricing method of material to be issued and received and fixation of accounting policy for recording of data etc etc are performed.
While setting the various level of stock , Cost Accountant or Finance Manager come across a situation to fix safety level of the stock also. safety Stock is the extra stock of material which is maintained when there is no certainty in demand of product or lead time of supply of material is very uncertain so that risk of STOCK-OUT can be reduced. Because Stock-out is a situation where a firm may incur visible and invisible losses both. For example :- suppose a customer is coming to buy a white shirt and same is not available in your shop because it is out of stock.Now see impact in your business There may be situation that:-
(i) he may wait for two or three days if you promise to make it available thus you may make sale but at the higher cost because you will have to purchase white shirt in small order just to retain your customer thus reduction in profit margin.
(ii) If it is not so, you may lose customer for future and profit margin both because there is chance that customer would not like to come again in future where he does not get item of his choice.
thus in case of stock out there are two type of opportunity costs involved one reduction of profit (situation Ist above) or loss of customer & profit in future (situation IInd above)
In material management, functions like setting various level of stock , determine the pricing method of material to be issued and received and fixation of accounting policy for recording of data etc etc are performed.
While setting the various level of stock , Cost Accountant or Finance Manager come across a situation to fix safety level of the stock also. safety Stock is the extra stock of material which is maintained when there is no certainty in demand of product or lead time of supply of material is very uncertain so that risk of STOCK-OUT can be reduced. Because Stock-out is a situation where a firm may incur visible and invisible losses both. For example :- suppose a customer is coming to buy a white shirt and same is not available in your shop because it is out of stock.Now see impact in your business There may be situation that:-
(i) he may wait for two or three days if you promise to make it available thus you may make sale but at the higher cost because you will have to purchase white shirt in small order just to retain your customer thus reduction in profit margin.
(ii) If it is not so, you may lose customer for future and profit margin both because there is chance that customer would not like to come again in future where he does not get item of his choice.
thus in case of stock out there are two type of opportunity costs involved one reduction of profit (situation Ist above) or loss of customer & profit in future (situation IInd above)
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