If the inventory is a material or good acquired from an outside source, then these
inventory-acquisition costs are known as ordering costs. Ordering costs are the costs of placing
and receiving an order. Examples include the costs of processing an order (clerical costs
and documents), insurance for shipment, and unloading costs. If the material or good is
produced internally, then the acquisition costs are called setup costs. Setup costs are the costs
of preparing equipment and facilities so they can be used to produce a particular product
or component. Examples are wages of idled production workers, the cost of idled production
facilities (lost income), and the costs of test runs (labor, materials, and overhead). Ordering
costs and setup costs are similar in nature—both represent costs that must be incurred
to acquire inventory. They differ only in the nature of the prerequisite activity (filling out
and placing an order versus configuring equipment and facilities). Thus, in the discussion
that follows, any reference to ordering costs can be viewed as a reference to setup costs