Question

In: Accounting

Identify the advantages, disadvantages, and cost of holding inventory

Identify the advantages, disadvantages, and cost of holding inventory

Solutions

Expert Solution

Advantages of holding inventory:

If the inventory is readily available, it enables the company to serves its customers at a much lower time there by increasing the satisfaction of the customers & developing brand value. Also, it helps the company to better meet the unexpected higher demand periods thereby generating higher revenues.

Disadvantages of holding inventory:

Holding inventory leads to higher costs being incurred by the company for managing & storing the same. Also there are higher risks in case of damage to the inventory from natural or man maade disasters. One of the other disadvantages of holding inventory is that it can lead to huge losses in cash of sudden fall in the prices.

Cost of holding inventory:

Interest cost - Unsold inventory is locked working capital for the company on which it incurs interest costs on the borrowed money.

Rent - Space is also required in form of godowns to store the inventory which leads to rental expenses

Other costs- There are other costs also associated with holdin inventory like labor, insurance , taxes, etc.


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