Question

Question 1 - Carrying materials in inventory is expensive. Previous studies have found that the typical firm's annual inventory carrying cost is between 25 35% of the value of the inventory. Elaborate any Five (5) major elements the makes up these costs. [50 marks]

Answer 1

Answer:-

Inventory can be defined as acceptable or materials that have been held in stock by an organization in request to meet the necessities of its clients. The sole purpose behind holding inventory is the smooth functioning of the business.

Carrying materials in inventory involves enormous costs and costs however on the off chance that an organization doesn't have appropriate inventory levels they may need to endure on their business volume and business can be interrupted, hence it is imperative to have right parity of inventory in an association.

Inventory carrying costs can be characterized into following major elements:

1) Interest charged:

Numerous businesses nowadays are sponsored up by funding from banks or investors and they charge strong interests on the funding raised. The enormous piece of that funding is then changed over into inventory by the organizations to satisfy the client's needs. Accordingly, that interest being charged is one of the elements of these costs on the grounds that after all that funding was changed over into inventory.

2)Storage costs:

When the inventory is bought by the organization that inventory should be appropriately obtained, oversaw and put away and for that organizations either purchase or lease distribution centers and other storage spaces. The combination of stockroom lease, contract, lighting costs, cooling and so forth shapes another component of carrying inventory costs. A portion of the costs are fixed in nature like lease of distribution center and some of them are variable like handling costs.

3) Taxes paid and insurance covering inventory:

Another component of carrying inventory costs includes charges paid to the neighborhood government or nearby body and insurance paid to insure the inventory from fire, robbery or harm. As the degree of inventory is high it turns out to be critical to have insurance, otherwise firms may need to incur extreme misfortunes because of absence of insurance spread. The premium of the insurance changes according to the level and sort of inventory; higher the degree of inventory, higher is the measure of insurance premium.

4) Personnel and machinery cost:

For carrying materials in inventory organizations need different kinds of machinery and individuals to deal with that inventory. Machinery can shift from loading vehicles to mini trucks which again involve cost to run and deal with the machines. Correspondingly different kinds of faculty like Computer administrators, information section administrators, mechanics and engineers are required to work those machines and handle the inventory. Accordingly these work force and machinery cost frames another component of inventory carrying costs.

5) Inventory risk costs:

Carrying or storing materials in inventory accompanies a certain measure of risk. Insurance can give spread to burglary or fire or water harm yet at the same time there are risks which can't be insured.

At the point when an organization stocks a certain sort of merchandise there is consistently a dread or risk that thing may fall in genuine incentive during the period it is in the distribution center.

New form or new items can smother the items put away in stockrooms which are later sold on too low costs which is a misfortune for the organization. If there should arise an occurrence of certain things like medicines or perishable products which accompany an expiry date, such risk increases and if the things lapse than they are generally rejected. Subsequently these of costs is an another component which makes up inventory carrying costs.

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