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.

RELATED TERMS
  1. Backorder

    An order for a good or service that cannot be filled at the current ...
  2. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  3. Lower of Cost and Market Method

    A requirement of GAAP in the United States that inventory be ...
  4. Perpetual Inventory

    A method of accounting for inventory that records the sale or ...
  5. Applied Cost

    A term used in cost accounting to denote the cost assigned to ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's ...
Related Articles
  1. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  2. Investing

    Days Sales of Inventory

    Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ...
  3. Investing

    What is Involved in Inventory Management?

    Inventory management refers to the theories, functions and management skills involved in controlling an inventory.
  4. Investing

    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.
  5. Investing

    How to Calculate Average Inventory

    Average inventory is the median value of an inventory at a specific time period.
  6. Investing

    Understanding Periodic Vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  7. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  8. Markets

    What is the Cost of Funds?

    Cost of funds is the interest cost financial institutions pay to use the funds they deploy in their business.
  9. Investing

    Explaining Cost Control

    For a business, cost control entails managing and reducing expenses.
  10. Investing

    Understanding Economic Order Quantity

    Economic order quantity is an inventory-related equation that determines the optimum order quantity that a company should hold in its inventory.
RELATED FAQS
  1. How can a company control its holding costs?

    Learn about the specific costs that go into a company's overall inventory holding costs, and understand how a company can ... Read Answer >>
  2. How does economic order quantity assist a company with maximizing profits?

    Understand how economic order quantity minimizes overall inventory costs to maximize profits. Learn what specific types of ... Read Answer >>
  3. What are the differences between period costs and product costs?

    Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
  4. How is the marginal cost of production used to find an optimum production level?

    Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine ... Read Answer >>
  5. How do you analyze inventory on the balance sheet?

    Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
  6. Why should investors care about the Days Sales of Inventory (DSI)?

    Learn about days sales of inventory and what it measures; understand why an investor would want to know a company's days ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center