One element of holding costs is risk. Risk costs are the risk that is assumed when inventory is acquired. In addition to this risk costs refer to loss of inventory value. This is often referred to as the shrinkage that occurs within inventory.
What is Inventory Shrinkage?
Inventory shrinkage occurs when actual inventory levels are less than what is recorded. In general, this means something has gone wrong. Formally defined, inventory shrinkage is the depletion of the actual quantities of inventory that is on hand, in process or in transit. This may be caused by regular reductions, scrap, deterioration or even theft.
How is Inventory Shrinkage Calculated?
Other Risk Costs
In addition to shrinkage, risk costs of inventory also include any costs that a company incurs to manage the risks of inventory. Expenses like warehouse security, insurance and bars on windows or locks are some examples of inventory risk costs. You now know what Risk Costs are with relation to inventory.
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