Backorder Costs


DEFINITION of 'Backorder Costs'

A cost incurred by a business when it is unable to fill an order and must complete it later. A backorder cost can be discrete, as in the cost to replace a specific piece of inventory, or intangible, such as the effects of poor customer service. Backorder costs are usually computed and displayed on a per-unit basis.

BREAKING DOWN 'Backorder Costs'

Backorder costs are important for companies to track, as the relationship between holding costs of inventory and backorder costs will determine whether a company should over- or under-produce. If the carrying cost of inventory is less than backorder costs (this is true in most cases), the company should over-produce and keep an inventory.

  1. Inventory

    The raw materials, work-in-process goods and completely finished ...
  2. Demand

    An economic principle that describes a consumer's desire and ...
  3. Inventory Reserve

    An accounting entry that represents a deduction from earnings ...
  4. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  5. Liquidity

    The degree to which an asset or security can be quickly bought ...
  6. Operating Cost

    Expenses associated with the maintenance and administration of ...
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