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Inventory Carrying Cost
Inventory Carrying Cost
Inventory carrying cost, or holding costs, is an accounting term that identifies all business
expenses related to holding and storing unsold goods. The total carrying costs include
the related costs of warehousing, salaries, transportation and handling, taxes, and
insurance as well as depreciation, shrinkage, and opportunity costs.1
KEY TAKEAWAYS
• Inventory carrying cost is the total of all expenses related to storing unsold goods.
• The total includes intangibles like depreciation and lost opportunity cost as well as
warehousing costs.
• A business' inventory carrying costs will generally total about 20% to 30% of its
total inventory value.
Total carrying costs are often shown as a percentage of a business' total inventory in a
particular time period. The figure is used by businesses to determine how much income
can be earned based on current inventory levels. It also helps a business determine if
The resulting figure can be used to determine if inventory carrying costs are optimum or
whether they can be reduced. Carrying costs generally run between 20 percent and 30
percent of the total cost of inventory, although it varies depending on the industry and the
business size.21
For retailers in particular, inventory and its associated costs represent a substantial
percentage of current assets on the balance sheet. As such, the management of
inventory flows can greatly influence the costs of carrying that inventory. Carrying costs
also can have a direct impact on the cost of capital and future cash flows generated by
the company.
When the company is public, analysts monitor its inventory carrying costs over time for
big changes and also compare its inventory carrying costs against those of others in its
peer group.
The Intangibles
The tangible costs of storing inventory such as storage, handling, and insuring goods are
obvious. Less obvious are the intangibles such as the opportunity cost of the money that
was used to purchase the inventory, and the cost of deterioration and obsolescence of
goods in storage.
Opportunity cost is generally defined as the price of foregoing other, possibly more
advantageous uses for money that is being tied up in the stored goods. Opportunity costs
should be considered when analyzing your business's inventory carrying costs.
Like ABC Company, XYZ Company has an annual inventory value of $1 million. But its
carrying cost is 25% of its annual inventory. The annual inventory carrying cost for XYZ
would, therefore, be $250,000, or 25% of $1 million.
Assuming ABC and XYZ are in the same industry, and they have the same annual
inventory value, ABC's carrying costs are lower. An analyst may conclude that ABC is
more efficient with their use of inventory.
Total Carrying Costs / Total Inventory Value * 100 = Inventory Carrying Cost %
Promotions or bundles can help to move stale inventory off your shelves. To increase
your inventory turnover, use the analysis from your forecasts above to stock your shelves
with inventory that has a high turnover rate.
Improving the layout of your physical warehouse location can also have an impact on
your carrying costs. Redesigning your warehouse may allow you to see inventory that
has gone unnoticed. An optimized layout could also improve the manual processing time
and labor costs associated with stored inventory items.