Raw Materials Inventories with Cost Economics Theory

This paper proposes raw materials inventories based on cost economics theory. Raw materials inventories affect the company's transaction costs and the lower its storage related production and management costs. Historical cost does not generally reflect current market valuation. Alternative measurement bases to the historical cost measurement basis, which may be applied for some types of assets for which market values are readily available, require that the carrying value of an asset (or liability) be updated to the market price or some other estimate of value that better approximates the real value. Factors that affect these costs are the company's vulnerability to opportunism, whether the input becomes more or less costly to store and manage as it moves through the supply chain, payment terms and the company's power in relation to its supplier.