Classification of inventory carrying cost
Inventory carrying costs of a company can be classified as follows;
- Opportunity Cost (Capital Cost): The opportunity cost of holding inventory. This should be based on the company’s cost of capital (mainly libor based (https://www.global-rates.com/interest-rates/libor/libor.aspx) using the following formula; Cost of Capital x Average Net Value of Inventory
- Storage and Handling Costs: Costs related with the physical environment and inventory handling.
- Shrinkage: The costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains to the loss of material through handling damage, theft, or neglect.
- Insurance and Taxes: The cost of insuring inventories and taxes associated with the holding of inventory.
- Total Obsolescence for Raw Material, WIP (Work in Progress), and Finished Goods Inventory: Inventory reserves have taken due to obsolescence and scrap and include products exceeding the shelf life, i.e., spoils and is no good for use in its original purpose.
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