Cost of holding inventories, Financial Management

Q. Cost of Holding Inventories?

The holding of inventories engages blocking of a firm's funds. The various risks as well as costs in holding inventories are as below:

(1) Capital Costs: - Maintaining of inventories consequence in blocking of the firm's financial resources. The firm has thus to arrange additional funds to meet the cost of inventories. The funds possibly arranged from own resources or from outsiders. However in both cases the firm acquires a cost. In the previous case there is an opportunity cost of investment while in the later case and the firm has to pay interest to outsiders.

(2) Storage and Handling Costs: - Holding of inventories as well involves costs on storage as well as handling of materials. The storage costs include:

(i) Rent of the Godown

(ii) Insurance charges and so on.

(3) Risk of Price Decline: - There is forever a risk of reduction in the prices of inventories by the suppliers on holding inventories. This may be because of increased market supplies and competition or general depression in the market.

(4) Risk of Obsolescence: - The inventories may become obsolete due to change in requirements, improved technology, change in customer's tastes etc.

(5) Risk Deterioration in Quality: - The quality of the materials may as well deteriorate while the inventories are kept in stores.

Posted Date: 8/6/2013 2:52:01 AM | Location : United States







Related Discussions:- Cost of holding inventories, Assignment Help, Ask Question on Cost of holding inventories, Get Answer, Expert's Help, Cost of holding inventories Discussions

Write discussion on Cost of holding inventories
Your posts are moderated
Related Questions
Value of a Warrant: The market price of a warrant fluctuates between minimum and maximum limits. When the current market price of the stock Ps is greater than the exercise pri

how is financial management relevant to profit and loss?

DIVIDEND POLICY Dividends provide the portion of a firm's net earnings which are paid out to the shareholders. the objective of financial management of maximizing the share

Have mergers affected competition? A: Federal Reserve data depict that measured on the local level, where competition occurs; markets have in fact experienced more banking comp

The Total Investable Capital Market Portfolio According to a report prepared by McKinsey in January 2007, World financial assets including bonds, stocks, corporate debt securit

Trade credit is free credit.  Do you agree or disagree with this statement?  Explain. Trade credit isn't free.  It has a value.  Who bears that cost depends on the conditions o

Q. Show the Costs of Investment in Receivables? Costs of Investment in Receivables: - When a firm sells goods or else services on credit it has to bear numerous types of costs.

What is the meaning of Breakeven point?

International mortgage-backed securities are the mortgage-backed securities that are issued in a country by a non-domestic entity. With limited size of the Indian

1.   Discuss the various techniques of inventory management for efficient working capital management. 2.   Discuss the importance of dividend decisions. What is MM theory of div