How do you calculate the cost of

carrying inventory?
The cost of carrying or holding inventory is the sum of the following costs:

1. Money tied up in inventory, such as the cost of capital or the opportunity cost
of the money.
2. Physical space occupied by the inventory including rent, depreciation, utility
costs, insurance, taxes, etc.
3. Cost of handling the items.

4. Cost of deterioration and obsolescence.

Often the costs are computed for a year and then expressed as a percentage of the cost
of the inventory items. For example, a company might express the holding costs as
20%. If the company has $300,000 of inventory cost, its cost of carrying or holding
the inventory is estimated to be $60,000 per year.

The cost of carrying inventory will vary from company to company. For instance, if a
company has a large cash balance with no attractive investment options, has excess
space for storage, and its products have a low probability for deterioration or
obsolescence, the company's holding or carrying costs are very low. A company with
enormous debt, little space, and products subject to deterioration will have very high
holding costs.

For decision making, such as determining the economic order or production quantity,

it is important to determine the incremental holding costs for a year. In other
words, what will be the additional holding costs expressed as an annual cost for the
items being purchased or produced.
Related Questions
 What is EOQ?
 How do you calculate ending inventory?
 How do I calculate the cost of goods sold for a manufacturing
company?
 What is scrap value?
 How do you calculate the cost of goods sold for a retailer?
 How do I record money received for an insurance claim on
inventory loss?
To learn more, see the Related Topics listed below: