INVENTORY CARRYING COST

Inventory Carrying cost (or) stock holding cost

They arise on account of maintaining the stocks and the interest paid on the capital tied up with the stocks.  They vary directly with the size of the inventory as well as the time the item is held in stock.  Various components of the stockholding cost are:

·         Cost of Storage Space –This consists of rent for the space occupied by the inventory.  Besides space expenses, this will also include heating, lighting and other atmospheric control expenses.

·         Depreciation and deterioration –They are especially important for fashion items or items undergoing chemical changes during storage.  Fragile items such as crockery which are liable to damage, breakage, etc.

·         Pilferage Cost – It depends upon the nature of the item in stock.  Valuable items may ne mote tempting.  While there is hardly any possibility of heavy casing or forging being stolen.

·         Obsolescence Cost – It depends upon the nature of the item in stock.  Electronic and computer components are likely to be fast outdated.  Changes in design also led to obsolescence.

·         Handling Cost – These include all costs associated with movement of stock, such as cost of labor, overhead cranes, gantries and other machinery used for this purpose.

·         Procurement Cost or Setup Cost:

They include the fixed and variable costs associated with placing of an order.  In case of purchase models it is known as ordering Cost.  In case of manufacturing model, it is known Setup Cost.

To place an order certain paper work is to be done.  The cost of this paper work is taken as cost of ordering.  In case of manufacturing, before starting production, the machine is to be set up.  Only on setting of machine, the material is loaded and production is started.  The ordering cost is distributed over the items purchased in that order.  Similarly, the setup cost is distributed equally over the products manufactured in that setup.  This cost is also known as replenishment cost.

Shortage Cost or Stock Cost

These costs are associated with either a delay in meeting demands or the inability to meet it at all.  Therefore, shortage costs are usually interpreted in two ways.  In case the unfilled demand can be filled at a later stage (backlog case), these costs are proportional to quantify that is short as well as the delay time.  They represent loss of goodwill and cost of idle equipment.  In case the unfilled demand is lost (no backlog case), these costs become proportional to only the quantity that is short.  These results in cancelled orders, lost sales, profit and even the business itself.