CIPS Level 4 Whole Life Asset Management L4M7 · Free Practice Question Medium
Question 16
What is true about the costs of holding inventory?
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A
They are based on the opportunity cost of the money invested in inventory and the average value of the inventory held
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B
They decline as the cost of the inventory item rises
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C
They always exceed total ordering costs
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D
They are independent of the average stock level
Reveal correct answer
Correct answer: A
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
Discussion
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