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What does net cost mean?

Net cost is also called holding cost.

1. Refers to the difference between the income obtained from holding spot financial instruments and the financing costs paid for purchasing financial instruments.

2. This difference may be positive or negative.

The holding cost is the difference between the interest cost that financiers need to pay to purchase the underlying object (i.e. financial bond) in the futures market and the income that can be obtained during the period of owning the financial futures contract. That is the net cost that investors need to pay during this period.

For financial futures, holding costs mainly include: risk cost, interest (the cost of holding funds due to purchasing financial futures contracts), insurance premiums and interest rates. Among them, changes in interest rates have the greatest impact on holding costs.

Holding costs include storage, handling, damage, depreciation, insurance and other costs.

Holding costs refer to the costs incurred in handling and storing inventory, generally between 15% and 40% of the total inventory cost, which also include storage and material handling costs, financing costs, holding inventory opportunity costs, insurance, taxes and obsolescence costs.

How to calculate holding costs?

To calculate the holding cost, it is mainly the holding cost of inventory. Inventory holding cost, also known as the book cost of inventory, refers to the processing and storage of inventory by the enterprise during the accounting period (month, quarter, year). The cost of unsold inventory is calculated as the sum of storage costs, financial costs, insurance premiums and scrap costs.

1. Storage cost

Storage cost is easy to understand. We usually don’t miss it. It is also the one we can express simply and clearly. This cost couldn’t be more familiar.

It includes: warehouse rent, warehouse labor costs, warehouse maintenance costs, material costs, water and electricity, etc.

2. Financial costs

Financial costs include opportunity costs and financing costs.

Financing costs, if the warehouse is built with financing, the corresponding interest, etc. also need to be calculated.

Opportunity cost, the cash tied up in unsold inventory that, if used for inventory, could generate a return at a rate to the company's cost of capital. This implied loss is an opportunity cost to the business and therefore increases the entity's carrying costs.

3. Insurance premium

Almost every company will insure its own inventory products, or clearly stipulate the amount of insurance in the outsourcing contract, which is usually a relatively fixed value.

4. Scrap costs

With inventory, we cannot avoid losses and scrapping. Usually once a year, we will clean up old inventory that is damaged or can no longer be sold. .

In addition, due to technological advancement, some products may depreciate, and we have to reduce the price, scrap, etc. of these products.