Taxes, Insurance, and Shrinkage Mor

Taxes, Insurance, and Shrinkage More taxes are paid if end-of-year inventories are high, and the cost of insuring the inventories increases, too. Shrinkage takes three forms. The first, pilferage, or theft of inventory by customers or employees, is a significant percentage of sales for some businesses. The second form of shrinkage, called obsolescence, occurs when inventory cannot be used or sold at full value, owing to model changes, engineering modifications, or unexpectedly low demand. Obsolescence is a big expense in the retail clothing industry. Drastic discounts on seasonal clothing frequently must be offered on many of these products at the end of a season. Finally, deterioration through physical spoilage or damage due to rough or excessive material handling results in lost value. Food and beverages, for example, lose value and might even have to be discarded when their shelf life is reached. When the rate of deterioration is high, building large inventories may be unwise.