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Holding Cost Determination - an Activity Based Cost Approach

Berling, Peter LU (2008) In International Journal of Production Economics 112. p.829-840
Abstract
We consider the problem of choosing the holding cost in inventory models. Traditionally, the cost of holding inventory is assumed to increase linearly with a rate that is equal to a percentage of the product value. This since the capital cost is believed to make up the main part of the cost. However, recent research indicates that this is not necessarily the case. In the present work, we present a more general model of the cost of holding inventory based on a microeconomic framework. A method for determining a suitable holding cost per unit and time unit, h, which can be used in existing heuristics/formulas is derived. The method is based on the ideas behind activity-based costing (ABC). The suggested method works well in the considered... (More)
We consider the problem of choosing the holding cost in inventory models. Traditionally, the cost of holding inventory is assumed to increase linearly with a rate that is equal to a percentage of the product value. This since the capital cost is believed to make up the main part of the cost. However, recent research indicates that this is not necessarily the case. In the present work, we present a more general model of the cost of holding inventory based on a microeconomic framework. A method for determining a suitable holding cost per unit and time unit, h, which can be used in existing heuristics/formulas is derived. The method is based on the ideas behind activity-based costing (ABC). The suggested method works well in the considered numerical examples (maximum and average cost increase is 1.78% resp. 0.08%). There exist situations where the traditional approach, i.e., setting h as a percentage of the product value, gives rise to a significant cost increase (> 15%). (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
activity-based cost, holding cost, inventory control
in
International Journal of Production Economics
volume
112
pages
829 - 840
publisher
Elsevier
external identifiers
  • wos:000254982500025
  • scopus:39649089556
ISSN
0925-5273
DOI
10.1016/j.ijpe.2005.10.010
language
English
LU publication?
yes
id
78683b7c-e66c-4707-abe1-27afa121d7a5 (old id 1039080)
date added to LUP
2008-02-27 08:40:37
date last changed
2017-08-27 04:53:54
@article{78683b7c-e66c-4707-abe1-27afa121d7a5,
  abstract     = {We consider the problem of choosing the holding cost in inventory models. Traditionally, the cost of holding inventory is assumed to increase linearly with a rate that is equal to a percentage of the product value. This since the capital cost is believed to make up the main part of the cost. However, recent research indicates that this is not necessarily the case. In the present work, we present a more general model of the cost of holding inventory based on a microeconomic framework. A method for determining a suitable holding cost per unit and time unit, h, which can be used in existing heuristics/formulas is derived. The method is based on the ideas behind activity-based costing (ABC). The suggested method works well in the considered numerical examples (maximum and average cost increase is 1.78% resp. 0.08%). There exist situations where the traditional approach, i.e., setting h as a percentage of the product value, gives rise to a significant cost increase (> 15%).},
  author       = {Berling, Peter},
  issn         = {0925-5273},
  keyword      = {activity-based cost,holding cost,inventory control},
  language     = {eng},
  pages        = {829--840},
  publisher    = {Elsevier},
  series       = {International Journal of Production Economics},
  title        = {Holding Cost Determination - an Activity Based Cost Approach},
  url          = {http://dx.doi.org/10.1016/j.ijpe.2005.10.010},
  volume       = {112},
  year         = {2008},
}