Storage costs of inventory – 5 factors and a clear example
What do you think storage costs are? And why are they crucial in running a profitable business venture? This article delves deeper into the common concepts of Storage costs and constructs a clear idea of the term while discussing how to calculate storage costs.
What are the storage costs?
Storage cost is the amount spent over the storage or holding of inventory, in simple terms.
Storage cost is a subset of inventory carrying costs, including the cost of warehouse utilities, material handling personnel, equipment maintenance, building maintenance, and security personnel.
Only companies with tightly linked components that do not generate any type of irregularities within the production do not need to maintain any kind of storage, hence no inventory cost analysis.
A company needs to store several materials, starting from raw materials, to finished products, to machine parts, and so on. It also needs to spend on the safekeeping of these items, security personnel, and rent for owning storage space, and so on.
The storage costs of inventory are usually deductible in nature. While most companies do not add their storage and transportation costs onto the price of the finished product, some products with very high storage costs do have hidden or indirect storage costs added to their price.
Example of storage cost
First, we need to measure the storehouse by square feet and calculate the total cost of renting it, along with charges like electricity, water supply.
Next, the finished items to be stored like maybe a piece of furniture is considered as inventory. Raw materials like wood, nuts, bolts, metal plates can be a part of the inventory.
Machines parts like the ones used for cutting wood pieces, gallium used as an adhesive, or even wood fillings or sawdust required during the process might need to be stored in the inventory.
If later you want to put security to guard your furniture all this incur a cost, known as storage costs.
What is an Inventory and how it incur storage cost?
An inventory is a stock or store of goods maintained by the firm. It might be at a location near the retail store or the production site. The number of finished products in the storage at any given moment is known as the on-hand inventory.
There are various other types of inventories that are not related directly to the independent demand of the finished product, but consist of goods involved in maintaining the production line.
Inventories of raw materials, machine parts involved in the production, assemblies, and sub-assemblies processed or waiting to be processed in the next step are known as work-in-progress inventory. These are known as dependent demand and do not have any direct connection to the market demand of the finished item.
The cost of keeping inventory increases due to a lot of issues and need to be dealt with smartly to cut out unnecessary expenses.
How is the cost of storage distributed?
Storage costs can vary on a lot of issues. Starting from the location of the facility, the total area in terms of square feet, the total time of renting, quality, and climate control to the security needed to be provided.
A high-end storage facility increases the cost of inventory on-hand.
Customizing a self-storage area based on the requirements is a better option.
But it is only for established companies with considerable amounts of inventory at every level. A conveniently placed facility is generally the smarter choice.
The climatically controlled storage units cost about 15% more than the non-climatically controlled units. These are absolutely essential in areas with high humidity or heat, to make sure that the stored goods are properly cared for.
Security is another essential part of the contract. Without the proper level of security, the stored goods aren’t safe, and if they are not safe then what’s the point!
Although it might sound like a lot of effort to develop the perfect storage facility and manage the costs, once done it will safeguard your firm against unprecedented losses and probable raw material crises.