Inventory has value at least theoretically equal to the price paid for its purchase. Inventory is far less liquid than cash and therefore the firm incurs a cost of holding the asset. The financial aspect of holding cost consists of the marginal cost of capital, which is equal to what the firm foregoes in the form of income that could have been generated using the money tied up in inventory. Holding cost also reflects the cost of storing inventory (such as warehousing expense, and possibly costs of refrigeration, and other expenses), and losses due to pilferage or obsolescence. Holding cost rate is expressed in terms of the cost to hold one unit for one year. Holding costs increase with the size of inventory on hand.
See Inventory flow analysis; Simulation of production problems using spreadsheet programs.
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(2000). HOLDING COST RATE . In: Swamidass, P.M. (eds) Encyclopedia of Production and Manufacturing Management. Springer, Boston, MA . https://doi.org/10.1007/1-4020-0612-8_408
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-7923-8630-8
Online ISBN: 978-1-4020-0612-8
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