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.

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RELATED FAQS
  1. How is the economic order quantity model used in inventory management?

    Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
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  3. How does economic order quantity assist a company with maximizing profits?

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