Which of the following statements holds true about inventory holding costs?

Which of the following statements holds true about inventory holding costs?
A . They decline as the cost of the inventory item rises
B . They always exceed total ordering costs
C . They depend upon the opportunity cost of tying up funds and the average value of the stock holding
D . They are independent of the average stock level

View Answer

Answer: C

Explanation:

Holding costs (carrying costs) are the costs associated with the storage and handling of physical stock.

There are two different types of holding costs:

– Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied up in inventory, which may be the bank borrowing rate or the company’s target for return on capital); cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of inventory; losses due to theft, accidental damage etc.

– Costs related to the physical characteristics of the inventory include the following: storage space; power, heat and lighting of the store; movement equipment; labour costs; administration costs.

Reference: CIPS study guide page 100-101

LO 2, AC 2.2