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Question

What are the elements of the carrying cost of inventory and their relationship with inventory levels and capital investment? How does ABC inventory stratification impact the carrying cost equation?

Answer

1. The elements of the carrying cost of inventory include capital cost, inventory service cost, inventory risk cost, and storage space cost. 2. The Economic Order Quantity (EOQ) Model shows that there is an increase in the carrying cost of inventory when the inventory order exceeds the EOQ level, which results in an increased capital investment for the inventory that is kept in stock for a long period. Therefore, there is a linear relationship between the carrying cost of inventory and inventory levels and capital investment. When one element increases, the other two elements will also increase. 3. ABC Inventory stratification aids in reducing the carrying cost equation by dividing inventory into different classifications based on their annual demand, ensuring that inventory levels match. Inventory is defined as the unsold stock held by a company at the end of a trading period, and it is one of the current assets used in determining the current ratio.

The carrying cost of inventory includes capital cost, inventory service cost, inventory risk cost, and storage space cost. The EOQ Model explains that there is a linear relationship between the carrying cost of inventory and inventory levels and capital investment. The carrying cost of inventory increases when inventory orders exceed the EOQ level, resulting in an increase in capital investment for the inventory held for an extended period. ABC Inventory stratification classifies inventory items according to their annual demand, reducing the carrying cost equation. Inventory is the unsold stock held by a company at the end of a trading period, and it is one of the current assets used to calculate the current ratio.