- Holding cost
In business management, holding cost is money spent to keep and maintain a stock of goods in storage.
The most obvious holding costs include rent for the required space; equipment, materials, and labor to operate the space; insurance; security; interest on money invested in the inventory and space, and other direct expenses. Some stored goods become obsolete before they are sold, reducing their contribution to revenue while having no effect on their holding cost. Some goods are damaged by handling, weather, or other mechanisms. Some goods are lost through mishandling, poor record keeping, or theft, a category euphemistically called "shrinkage".
Holding cost also includes the
opportunity costof reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes.
While it is possible to measure the components of holding cost, it is common to estimate them as at least one-third the value of the stored goods per year. If opportunity cost is included, it is reasonable to use one-half the value of stored goods as their holding cost.
The effect of reducing the value of inventory by $1,000,000 reveals the effect holding cost has on its owner. If holding cost is set at one-third of the inventory's value, $333,333 becomes available for other purposes. At the higher rate, $500,000 becomes available. Whether that money is added to
net incomeand profitability or used for other purposes, it is a noticeable amount.
Theory of Constraints
Wikimedia Foundation. 2010.
Look at other dictionaries:
holding cost — ➔ cost1 * * * holding cost UK US noun [C] ► ACCOUNTING the cost of storing goods or owning assets: »The most obvious holding costs include rent … Financial and business terms
holding cost — The *cost of storing items of inventory Holding costs typically include (i) *warehouse expenses, (ii) insurance costs, (iii) *shrinkage, and (iv) obsolescence … Auditor's dictionary
cost — The opposite of revenue. An expense that reflects the price of purchasing goods, services and financial instruments. A cash cost means that cash is given up today to the purchase. Also, the purchase price of an investment, which is compared to… … Financial and business terms
Holding gains — ( losses ) are generally defined as increases ( decreases ) in the replacement costs of the assets held during a given period. Fact|date=February 2007 Holding gains and losses accrue to the owners of assets and liabilities purely as a result of… … Wikipedia
Cost price — In retail systems, the cost price represents the specific value that represents unit price purchased. This value is used as a key factor in determining profitability and in some stock market theories it is used in establishing the value of stock… … Wikipedia
Cost of carry — This article is about the financial term. For the marketing term, see Carrying cost. The cost of carry is the cost of carrying or holding a position. If long, the cost of carry is the cost of interest paid on a margin account. Conversely, if… … Wikipedia
cost of carry — (or carry) For physical commodities such as grains and metals, the cost of storage space, insurance, and finance charges incurred by holding a physical commodity. In interest rate futures markets, it refers to the differential between the yield… … Financial and business terms
Cost curve — In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production (minimising cost), and… … Wikipedia
Holding Costs — The associated price of storing inventory or assets that remain unsold. Holding costs are a major component of supply chain management, since businesses must determine how much of a product to keep in stock. This represents an opportunity cost,… … Investment dictionary
holding gain — A gain that results from the length of time an asset has been held rather than its use in the operations of a business. A holding gain is realized when the asset is sold but remains unrealized when the asset is still held. See also: current cost… … Accounting dictionary