Some inventory items may never be used or will be damaged while in storage, and so must be disposed of at a reduced price, or at no price at all. If a company has no debt, this cost represents the foregone interest income associated with the allocated funds. There is always an interest cost associated with the funds used to pay for inventory. There may also be fire suppression systems and burglar alarms, as well as their servicing costs. Perhaps the largest inventory cost is related to the facility within which it is housed, which includes warehouse depreciation, insurance, utilities, maintenance, warehouse staff, storage racks, and materials handling equipment. More specifically, holding costs include the items noted below. Most of these costs are also included in an overhead cost pool and allocated to the number of units produced in each period. These costs are related to the space required to hold inventory, the cost of the money needed to acquire inventory, and the risk of loss through inventory obsolescence.
These costs are typically included in an overhead cost pool and allocated to the number of units produced in each period. These costs include the wages of the procurement department and related payroll taxes and benefits, and possibly similar labor costs by the industrial engineering staff, in case they must pre-qualify new suppliers to deliver parts to the company. Inventory costs can be classified as follows. This can result in changes in the order fulfillment rate for customers, as well as variations in the production process flow. This cost is examined by management as part of its evaluation of how much inventory to keep on hand. Inventory cost includes the costs to order and hold inventory, as well as to administer the related paperwork.
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