1. Warehousing is used of storage of inventories during all phases of logistics process why is it necessary for firm to store any kind, since inventory carrying costs can be very high?


Proper Inventory management can be very profitable in a bussiness, it can lower the cost of goods sold, and or increase sales. Inventory resulution invovle a complex balance bwteen three differnt cost; carrying cost, ordering cost, and shortage cost. Holding up inventory can help deminish or reduce this cost, moreso, most busineses hold inventory for many justifications:

Meeting unexpected demand: most bussinesses work on forecasting, meaning they do not know when the storm comes striking and consumeers will come for the goods, so, they usually stock up their invontory to meet these unexpected demand. This will account for a reduction in shortage cost.

Smoothing season demand: most bussineses have peak seasons, with the coming of these events, bussiness need to stock up inventory to meet these demand. For example; chrismass toys.

Taking advantage of price discount: most purchases reveived discount on high quantiy, taking advantage of this price is helpfull at times, but also keeping in mind the your demand rate.

Hedging againts price increase: Businesses usually hold inventory to avoid from the ever fluctuating market price of inventories. Thus, by having efficient and good inventory system, businesses can control their inventory cost.

Shortage: Disrupted production when raw materials are unavailable, which will result to idle work, high cost of machine setups, etc.


Sources: Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.407

http://hyperserver.engrg.uwo.ca/es492b/Lectures/Lect12/tsld005.htm. Accessed. 08-02-14

  1. Explain what the differences between different costing methods of warehousing are.


Four categories of warehouse costing are analyst below:


All cost associated with moving product in and out of the warehoouse. Which encompases the labour- receiving,put-away,order selection,and loading.-, rewarehouse. It also include all cost associated with the equipment uesed. Other handling cost may include, detention of trucks or rail cars, trash disposal, etc. Conseqently, it iclude all cost of goods in motion.

Storage These are cost associated with goods at rest. These cost will remain the same, whether or not these goods are moved, becuase it is associated with the cost of occupying a facility, and are paid per year or month.

Example of storage cost include; Forgone interest on working capital tied up in inventory, Deterioration, theft, spoilage, or obsolescence.

Operational adminstation

Cost incured to suport the operation of the distributin centre, shutting down the warehouse will eliminate these costs. It include; cost of information technoloy, supplies, insurance, taxes, etc.

General admistration Indirect expenxes incured, such as; general office expenses, general management, none-operating staff.

Sources: Hilton, Ronald W., Managerial Accounting. McGraw-Hill,Inc (1994). p.407


http://www.warehousingforum.com/news/KB_v24n07_June2009.pdf (accessed: 08-02-14)

  1. Total inventory cost can be described for example following way: = Capital cost + Inventory carrying cost + Storage space cost + Inventory risk cost. Find real life examples of products where capital cost or inventory risk cost plays significant role


Capital cost are fixed, one-time expense on the purchase of land, building, constrcution, plant and equipment use in the production of goods or services. These cost do not change with regards to output, but may diminish as the output increases. An example of a product where capital cost play an example is, metal-based components. On a vissit to Ruukki company in ylivieska, a manufacturer and supplies of metal-based components and systems to the construction and engineering industries, i gatheered a clue the companys structure. , Varity fo metal materials exist with varried weights, leng, thickness, and hights. Finished products need to be stored, lifted, moved, drilled, cuts,and weld. The capital cost that was invested here are the cost of the buildings, plants, equitments, rails, and tools. If this company do not produce or the level of sales reduces, these cost are still going to be encured.

Inventory risk cost is the possibility that something such as a price change will cause the value of an inventory (the materials and goods in factories and shops) to decrease. An example of such a product is wheat related products like bread. In cases where the price of wheat may fall – duel to efficient use of fertilizer-, companies woud find the cost of current raw material more expensive than the current supply, consequently leading to the drop of bread cost, keeping companies who had lower inventory to benefit from this price, and thus, hold the lead on compitition.

Sources:   http://lexicon.ft.com/Term?term=inventory-risk (accessed 09-02-2014)

http://www.fao.org/docrep/003/v8490e/v8490e05.htm#3.2%20Fixed%20Investment (accessed 09-02-2014)