Stockholding costs represent the sum of all costs incurred in the course of holding goods in stock. Major components of these costs are interest on committed capital, wear and tear, loss and breakage, transportation and handling, storage and depreciation, warehouse management and insurance costs.
Knowledge of stockholding costs is important for determining the current costs of inventory as well as for determining economic lot sizes. Stockholding costs are usually expressed as a percentage of the inventory value.
The stockholding costs are therefore imputed costs. It is hardly possible to calculate them for each individual material. At best, certain cost shares can be determined for different warehouses or different goods or product groups in order to arrive at warehouse-, or product group-specific stockholding cost rates. Furthermore, not all components of stockholding costs grow proportionally with inventory, such as capital commitment costs. Many cost components represent fixed costs that change by leaps and bounds as inventory increases or decreases, such as inventory management costs or depreciation costs.
Assuming that changes in stock levels or economic lot sizes are intended to have lasting effects and not just temporary ones, it is generally sufficient for calculating the current stockholding costs and for calculating economic lot sizes to assume that the stockholding costs are proportional to the stock level, i.e. to work with a stockholding cost rate that does not change over the stock level.