What Are The Costs Of Holding Stock?

(A) COSTS OF HOLDING STOCK

Also known as carrying costs which include the following:

· Interest on capital invested in the stocks;

· Storage charges ( rent, lighting, heating, refrigeration, air-conditioning and others);

· Warehouse manpower, equipment maintenance and running costs;

· Handling costs;

· Audit, stocktaking or perpetual inventory costs;

· Insurance, security and others;

· Deterioration and obsolescence and

· Pilferage, vermin damage and others

(B) COSTS OF OBTAINING STOCK:

Also known as Ordering costs which includes

· Clerical and administrative costs associated with the purchasing, accounting and goods received departments;

· Where goods are manufactured internally, the set up and tooling costs associated with each production run.

© STOCK OUT COSTS:

Stock out costs are associated with running out of stock. As a result if insufficient/stock out situation, the company will lose a lot of opportunity costs which includes the following:

· Lost of future sales as unhappy customers will go away;

· Loss of customer goodwill;

· Cost of production stoppages caused by stockouts of raw materials and or work-in-products;

· Lost contribution through lost sales;

· Extra costs associated with urgent, often small quantity, replenishment purchases which includes freight and or courier charges instead of the normal cheaper shipping and normal transportation costs;

· Production workers will be frustrated if their wages are based on pieces or overtime rate.