Obsolescence and deterioration
In most inventory operations, a certain percentage of the stock spoils, is damaged, is pilfered, or eventually becomes obsolete. A certain number always takes place even if they are handled with utmost care.
Generally speaking, this group of carrying costs rises and falls nearly proportionately to the rise and fall of the inventory level.
Moreover, the inventory level is directly proportional to the quantity in which the ordered material is delivered. Hence costs of carrying inventory vary nearly directly with the size of the delivery quantity. This relationship is illustrated as follows:
(Carrying Cost per year) = (Average inventory value) x (Inventory carrying cost as a % of inventory value)
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