What is carrying cost?
Carrying cost is how much it costs a company to hold their inventory. This includes expenses such as how much it costs to rent and run the warehouse where stock is stored, salaries of employees at the warehouse, shrinkage (loss of inventory due to theft or damage) and insurance costs.
Carrying costs are usually between 20% and 30% of a company's inventory value.
Where have you heard about carrying cost?
If your company owns stock then you’ll be familiar with inventory management, of which the carrying cost is a significant part.
What you need to know about carrying cost...
Carrying cost tells a company how long they can hold their inventory before they start losing money and how much they need to buy or sell to maintain inventory levels.
The sum of the following calculates the carrying cost for a year:
- Physical storage costs
- Employee salaries
- Costs tied up in inventory value
- Depreciation costs
This total carrying cost is then calculated as a percentage of the inventory’s value. For example, if the carrying cost is £12,000 per year and the inventory value is £40,000, the carrying cost percentage is 30%.