What Is Inventory Carrying Cost?

Inventory carrying or 澳洲幸运5官方开奖结果体彩网:holding cost is an accounting term that idꦏenti𒁏fies all expenses for holding and storing unsold goods.

Total costs include the applicable warehousing, employee salaries, transportation, handling, taxes, and insurance. Expenses also include 澳洲幸运5官方开奖结果体彩网:depreciation, 澳洲幸运5官方开奖结果体彩网:shrinkage, and 澳洲幸运5官方开奖结果体彩网:opportunity costs. Total carrying costs are oft🅘en shown as a percentage of a company's inventory.

Tangible and Intangible Costs

Inventory and associated costs can represent a substantial percentage of 澳洲幸运5官方开奖结果体彩网:current assets on the balance sheet. Inventory f🙈lows can greatly influence the costs of carrying that inventory. Carrying costs can directly impact the cost of capital and future cash flows.

The tangible costs include storage, handling, a🏅nd insuring goods. Intangible costs include the opportunity cost of the money used to purchase the inventory and the cost of deterioration and obsole🏅scence of goods sitting in storage.

Opportunity cost is generally defined as the price of forgoing other, possibly more advantageous uses for money tied up in the stored goods. Businesses consider opportunity costs when analyzing their inventory car♉rying costs, just as they do with other potential investments.

Calculating Holding Costs

A company's inventory carrying cost can be expressed as a percentage. It is calculated by totaling carrying costs and dividing that figure by the total value of the inventory, then multiplying by 100. 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% and 30% of the total inventory, although that varies depending on the industry and the business size. Suppose ABC Compan🍸y has an annu✤al inventory value of $1 million. Its carrying cost is 20% of its inventory or $200,000. Like ABC Company, XYZ Company has an inventory value of $1 million, but its carrying cost is 25%. The annual inventory carrying cost for XYZ is $250,000.

If ABC and XYZ are in the same industry, an analyst might conclude that ABC is more efficient with its use of inventory, given that its carrying costs are lower.

The Bottom Line

Inventory carrying cost is a metric companies can use to determine how efficiently they are making use of their inventory. It includes both tangible and intangible costs, such as opportunity costs. It can also help a business determine if it needs to ramp up or ratchet down production to maintain a favorable income stream. Analysts can compare inventory carrying costs as one measure of the re♊lative efficiency of different companies in the same ind𝐆ustry.