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 Reserve

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

    This is the cost a business incurs over a certain period of time, ...
  3. Inventory

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

    An economic principle that describes a consumer's desire and ...
  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 ...
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Fundamental Analysis

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  3. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  4. Economics

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  5. Economics

    Understanding Bad Debt

    Bad debt is money a company or lender is owed, but is unable to collect.
  6. Economics

    Explaining Synergy

    Synergy is the concept of combining two or more entities to create something greater than either entity on its own.
  7. Economics

    What Does Short Run Mean?

    Short run is the concept that for a business, at least one factor of production is fixed while others are variable.
  8. Economics

    What's Involved in Quality Management?

    Essentially, quality management entails overseeing all activities and tasks needed to maintain excellence.
  9. Investing Basics

    How Do Internal Controls Work?

    Essentially, internal controls limit fraud and other illegal activities.
  10. Economics

    Explaining Industry

    The term industry refers to a classification of companies that share similar business activities.
  1. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Full Answer >>
  2. Does working capital include inventory?

    A company's working capital includes inventory, and increases in inventory make working capital increase. Working capital ... Read Full Answer >>
  3. How can I calculate funds from operation in Excel?

    In general, the terms "work in progress" and "work in process" are used interchangeably to refer to products midway through ... Read Full Answer >>
  4. When does Q4 start and finish?

    Most companies such as Facebook have financial years that end on December 31st. For these companies, the fourth quarter begins ... Read Full Answer >>
  5. When is it useful to look at a company's fixed asset turnover ratio?

    It is useful to look at a company's fixed asset turnover ratio when an outside observer, such as an investor, wants to know ... Read Full Answer >>
  6. What is the difference between perfect and imperfect competition?

    Perfect competition is a microeconomics concept that describes a market structure controlled entirely by market forces. In ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!