Components and Considerations of Inventory Carrying Costs

Inventory carrying costs are described as the rate of the business’s inventory value relevant to the storage (storage inventory templates) and maintenance of inventory over a span of time. Those inventory values are referred as average inventory for retailers that can be also called as the estimate retail inventory, which has the list of bought goods in a year.

Inventory carrying costs are very significant in terms of determining how much profit a business can gain within the year, with that matter business individuals like you would be able to evaluate and monitor your business cash flows.

 

Components of Inventory Carrying Costs

When you go through the inventory of the carrying costs in your business, it is very important to be able to know what are the things it comprises for you to be familiar with what you’re doing. If you would try to look at our sample inventory provided, you will find out the same components as follows:

  • Capital Cost – this cost is considered to be the largest component in a business carrying inventories. This is expressed as the percentage of the dollar value in the business capital being held by the company.
  • Service Cost – inventory service cost consists of taxes, insurance payments. Take note that an insurance payment will vary mainly on the kinds of goods stored in the warehouse thus the level of inventory.
  • Risk Cost – every inventory has a corresponding degree of risk and is still considered a component in costs carrying inventory where stocks of the company are being stored in the warehouse and may incur and result certain damages which would then fall to risks. The value of the items being stored in a specific period of time is then being monitored.
  • Storage Space Cost – refers to the warehouse mortgage, lighting, air conditioning services and handling costs where the materials are being moved in and out of the storage warehouse.

Inventory: Classifications and Stocks

Inventories have long been portraying a very useful role in the process of good business functions. With regards to the carrying costs of an inventory (inventory templates), there have been few elements that make up one.

Classifications of Inventory

  • Raw Materials – usually used in the process of creating the final product.
  • Finished Goods – refers to the customer and market-ready products.
  • Work in Progress – refers to the components that are currently in the process of transforming them into finish product.
  • Resale Goods – refers to those products that have been returned and still good for reselling.

 

Types of Stocks

  • Safety Stock – items that are kept to prevent incurring damages from machinery failures.
  • Buffer Stock – serves as insurance stock for the purpose of alternative in case of product unavailability due to some delays.
  • Lot-Delay Stock – a part of manufacturing process where each item has to wait for the whole lot to be processed before moving on to the next phase.
  • Demand-Fluctuation Stock – retained goods when the production capacity is having a hard time changing with the demand.
  • Line Balance Stock – refers to items being stored when subprocesses work at different rates.
  • Changeover Stock – a stock used when there is long setup time for some stocks to take place.
  • Overproduction – stocks that exist due to some mismatch in sale forecasts and the actual ones.

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