Safety stock is an additional quantity of an item held in inventory in order to reduce the risk that the item will be out of stock. Safety stock acts as a buffer in case the sales of an item are greater than planned and/or the supplier is unable to deliver additional units at the expected time.

There are additional holding costs associated with safety stock. However, the holding costs could be less than the cost of losing a customer if the customer's order cannot be filled.

Learn Accounting: Gain unlimited access to our seminar videos, flashcards, visual tutorials, exams, business forms, and more when you upgrade to PRO.