Question by Cindy B: What are three types of inventory costs, and why is it important for a company to reduce its inventory-hold?
I need this for a business class
Thank You for any and all help
Best answer:
Answer by Big Time C-Hawk Fan
Inventory types; Raw materials, Goods in process (stuff being built), and finished goods (inventory-hold). Raw materials and goods in process should eventually end up being finished goods so they are ok. However, it is important to reduce inventory-hold because products not sold that are stocked in the shelves or warehouses are costing money. Goods unsold equal capital that is just lying around.
Give your answer to this question below!
Cost of funds (interest if borrowed funds) to buy the inventory. Cost to store the inventory (if any). Cost to manage the inventory (if any) in terms of people/payroll needed to manage it, money needed to get the inventory from supplier to holder, etc. Cost of the inventory itself.
Without doing any research, I would say:
1. Cost of the inventory itself to include shipping.
2. Warehousing costs – the cost of the warehouse building
3. Theft and damage and lost of value
From another site:
1. Start up costs
2. Cost of materials and the warehouse equipment
3. Cost of lost production if inventory runs out
Warehousing does not generate income, it is an expense.
If a company can drop ship a product, they wouldn’t have to warehouse the product before sale. Auto manufacturers use a “just-in-time’ ordering system where the parts and assemblies that are needed are received at the time they are needed in the assembly process.