holding cost

(noun)

In business management, holding cost is money spent to keep and maintain a stock of goods in storage.

Related Terms

Examples of holding cost in the following topics:

  • Economic Order Quantity Technique

    • Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs: ${ Q }^{ * }=\left( \frac { 2DS }{ H } \right) ^{ \frac { 1 }{ 2 } }$.
    • Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs.
    • This is not the cost of goods), H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc., usually not related to the unit cost).
    • Total Cost = purchase cost + ordering cost + holding cost
    • Holding cost: the average quantity in stock (between fully replenished and empty) is Q/2, so this cost is H × Q/2.

  • Benefits of Inventory Management

    • Improved inventory management can lead to increased revenue, lower handling and holding costs, and improved cash flows.
    • The intent of inventory management is to continuously hold optimal inventory levels.
    • Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs.
    • All of these practices leads to optimal product storage, helping minimize holding and handling costs.
    • This also saves handling and holding costs.

  • Dangers Involved in Inventory Management

    • The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns, and defective goods and demand forecasting.
    • In addition, excessive inventory incurs extra handling costs and holding costs.
    • Inventory control - inventory cost elements (holding cost, order cost, total)Parameters: Order-cost (C) 10, demand (D) 1000, holding cost (i) 20% (of price), price (p) 10 => EOQ = 100

  • Understanding the Cost of Money

    • The cost of money is the opportunity cost of holding money instead of investing it, depending on the rate of interest.
    • The cost of any decision includes the cost of the most forgone alternative.
    • The cost of money is the opportunity cost of holding money in hands instead of investing it.
    • The trade-off between money now (holding money) and money later (investing) depends on, among other things, the rate of interest that can be earned by investing.
    • The cost of money is the opportunity cost of holding money in hands instead of investing it.

  • Accounting Methodologies: Amortized Cost, Fair Value, and Equity

    • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
    • If a business holds debt securities to maturity with the intent to sell are classified as held-to-maturity securities.
    • Held to maturity securities are reported at amortized cost less impairment.
    • subjective factors such as risk characteristics, cost of and return on capital and individually perceived utility.
    • Explain the difference between amortized cost, fair value and the equity method for reporting debt securities

  • Assessing Fair Value

    • A company initially records the "available for sale securities" at cost.
    • Transaction costs, such as brokerage fees, included in acquisition cost and capitalized, or immediately expensed.
    • The original investment is recorded at its investment cost.
    • Transaction costs, such as brokerage fees, may be included in acquisition cost and capitalized, or immediately expensed.
    • A company initially records the "available for sale securities" at cost.

  • Inventory Costs

    • Inventory costs depends on methods used, which include Specific Identification, Weighted Average Cost, Moving-Average Cost, FIFO, and LIFO.
    • Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs.
    • Weighted Average Cost is a method of calculating Ending Inventory cost.
    • Moving-Average (Unit) Cost is a method of calculating Ending Inventory cost.
    • Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory.

  • The Law of Diminishing Returns

    • The law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower per-unit returns .
    • If the law of diminishing returns holds, however, the marginal cost curve will eventually slope upward and continue to rise, representing the higher and higher marginal costs associated with additional output.
    • Average total cost is interpreted as the the cost of a typical unit of production.
    • As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing.
    • Average cost begins to increase where it intersects the marginal cost curve.

  • The Costs of Inflation

    • The costs of inflation include menu costs, shoe leather costs, loss of purchasing power, and the redistribution of wealth.
    • In economics, a menu cost is the cost to a firm resulting from changing its prices.
    • Shoeleather cost refers to the cost of time and effort that people spend trying to counteract the effects of inflation, such as holding less cash, investing in different currencies with lower levels of inflation, and having to make additional trips to the bank.
    • A significant cost of reducing money holdings is the additional time and convenience that must be sacrificed to keep less money on hand than would be required if there were less or no inflation.
    • Other costs of high and/or unexpected inflation include the economic costs of hoarding and social unrest.

  • Amortized Cost Method

    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • The definition of a debt is held-to-maturity is a debt which the company has both the ability and intent to hold until maturity.
    • Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.
    • Z Company has both the ability and intent to hold the securities until the maturity date.
    • Explain how a company would apply the amortized cost method to a debt held to maturity