The inventory cost stands for the cost you need when you keep the goods in stock. People often express it as a percentage of the value of inventory (Also see Financial Reporting Standards 2 Inventories). The management can calculate this cost to identify how much inventory they should keep with them. It comprises of the ordering costs (the related expenses when you order the goods), holding costs (the associated costs when you store the products), administrative costs, cost of money, costs of space, as well as the cost of obsolescence.
Ordering Costs
Another name for ordering cost is the setup cost. These costs comprise of the salaries and incomes of the procurement personnel, overtime (if any), related benefit, taxes, as well as other expenditures. If a company needs to pre-qualify a new vendor before he can supply products to the company, the expenses may include the cost of labour of the engineering personnel of that industry who is in charge of completing the tasks. Typically, companies would often include the ordering costs in the overhead costs. They should allocate the ordering costs based on the number of units they handle in every period.
Holding Costs
Holding costs are the cost you need to acquire, store, as well as dispose of inventory. They consist of the cost of space you need to keep the stock, cost you need to obtain the stock, as well as the cost of obsolescence, which is the cost to dispose of the spoilt or remaining products. Holding prices contributes the most to the inventory costs (Also see How Can Bookkeeping Services Indicate Business Health?).
Administrative Costs
The salaries and wages of the cost accountant, as well as the non-operating workers, contribute to the administrative costs. Cost accountants are people who play a role in compiling the costs of items sold and the costs of inventory, replying to demands for analysis of other inventory, as well as guarding their position to auditors. You will have to include related general workplace costs in the administrative costs too.
Cost of Capital
Cost of capital is the interest that you have to pay to your creditors on the funds you use to purchase the inventory. A lot of firms would use some loans to obtain stock. If a firm has not taken any loan, the cost of money stands for the interest income related to the funds they have allocated to acquire the inventory.
Costs of Space
Costs of space are the expenses associated with the storehouse. It includes the costs of utilities, storage racks, maintenance, inventory managing devices, insurance, storehouse workers, as well as depreciation. All buildings will depreciate eventually, and this is where the depreciation comes from. Insurance plays a vital role in securing the inventory from theft, as well as loss as a result of humanmade and natural disasters. Costs of space may consist of the expenses on safety devices, for example, fire suppression systems and alarm system.
Cost of Obsolescence
The risk of having some inventory damaged while holding them in storage or keeping them unused is always present. It is a must to dispose of these items, typically at a decreased cost or even at no charge. We will call these as obsolescence costs. If there are perishable items among the inventory you purchase, your obsolescence costs could be rather high.
The inventory cost can be significant to your business, as you may have seen in the explanation above. Hence, it is crucial to hire the best accounting services Singapore to keep track of the cost of your business with due diligence. If you fail to do so, you may suffer from losses as the expenses can cause severe loss in profits as well as cash reserves. If you are facing any difficulties in dealing with your inventory cost, do not hesitate to seek help from an expert accounting firm to keep a tight grip of your finances.