What is Carrying Cost? - Inventory - Zoho

Carrying costs are usually 15% to 30% of the value of a company's inventory. This is a significant figure as it tells the company how long they can keep their ... Inventory LearnMore Home / InventoryManagement WhatisCarryingCost? Guides| 3minread |3comments ReadingTime:3minutesCarryingcostistheamount thatabusiness spendsonholdinginventoryovera periodoftime.Itisthecostofowning,storing,andkeepingthe itemsinstock. Significanceofcarryingcost Carryingcost includesthecostofrentingthewarehousewherethestockiskept, operatingthewarehouse,payingthe salariesoftheemployeesworkingatthewarehouse, any lossofinventoryduetotheftanddamage,and insuringtheinventory.Carryingcosts are usually 15%to30% ofthe valueofacompany’sinventory. Thisisasignificantfigureasit tellsthecompany howlongtheycankeeptheirinventorybeforetheystartlosingmoneyoverunsalableitems.Additionally,itshowshowmuchtheyneedtosellandbuyinordertomaintainappropriateinventorylevels. Calculatingcarryingcostandknowinghowtominimizeitcanhelpacompanyreclaimmoneytiedupininventoryandincreaseitsprofits. Componentsofcarryingcost Thefourmaincomponentsofcarryingcost are: 1. Capitalcost 2. Inventoryservicecost 3. Inventoryriskcost 4. Storagespacecost  Capitalcost Capitalcostisthelargestcomponentofcarryingcostincurredby businesses. Itincludestheinterestsaddedandthecostofmoneyinvestedintheinventory. Capitalcostisalwaysexpressedasapercentageofthetotalvalueoftheinventorybeingheld.Forexample,ifacompany reportsthat itscapitalcostis30%ofitstotalinventorycosts,andthetotalinventoryisworth$8,000,thenthe company’s capitalcostis$2,400. Inventoryservicecost Inventoryservicecostincludes IThardware,applications,tax,andinsurance.The company’s insurance costsaredependentonthetype ofgoodsininventoryandthelevelofinventory. Thelevelofinventoryistheamountofinventory thecompanykeepsonhandto fulfill itsorders—ahighlevelofinventorymakesiteasier tomeetthecustomerdemand. Highlevelsofinventoryattracthigherinsurancepremiumsandtaxes,raisingthetotalinventoryservicecost.  Inventoryriskcost Carryinginventorycomeswithrisk.Inventoryriskcostsincludetheshrinkageofinventory(which referstothelossofproductsbecauseoffactorsotherthansale),theft,andadministrativeerrors(suchas misplacedgoods,errorsinshipping, or latesystemupdates). Anotherriskfactorisproductvaluedepletion:if itemsarestoredfortoolongintheinventory,their value candroptoafractionofwhat theywereoriginallyworth. Storagespacecost Storagespacecost includestherentpaidtowarehouseyourproducts,airconditioning andheating,lighting,transportation,andother costsassociatedwiththe physical warehouse.Thiscosthasafixed component andavariablecomponent. Therentisafixedcost,whereasthecostsofhandlingthematerialswill varyconstantlybasedondemandandthenumberofproductsstocked. Howtocalculatecarryingcost Calculatingyourcarryingcostpercentageisimportantforcalculatingtheprofityou’remakingonyourinventory.Carryingcostsarealwaysexpressed asapercentageofthetotalvalueofinventory. Carryingcostsarealwaysexpressedasapercentageofthetotalvalueofinventory.They’reequaltotheinventoryholdingsumdividedbythetotalvalueofinventory,thenmultipliedby100. Carryingcost (%) =Inventoryholdingsum / Totalvalueofinventoryx 100 Theinventoryholdingsumissimplythetotalofallfourcomponentsofcarryingcost. Inventoryholdingsum= Inventoryservicecost+ Inventoryriskcost+ Capitalcost+ Storagecost Tocalculateyourcarryingcost: 1. Calculatethevalueof eachof yourinventorycostcomponents(inventoryservicecost,inventoryriskcost,capitalcost,andstoragecost). 2. Addtheinventorycostcomponents togettheinventoryholdingsum. 3. Determinethetotalvalueofyourinventory. 4. Dividetheinventoryholdingsum bythetotalvalueofinventoryandmultiplyby100. Forexample, let’slookatthecarryingcostfora Motorcycleretailerwhocarriesinventoryforall hisbikemodels.Thetotalvalueofhisinventoryis$50,000. Hisinventory holdingsumis$10,000(whichincludestheinventoryservicecost,riskcost,capitalcostandstoragecost).Hisinventorycarryingcost,expressedasapercentage,is: Carryingcost (%) =Inventoryholdingsum /Totalvalueofinventoryx100                 =10,000/50,000x100                  =0.2x100                  =20% Thecarryingcostincurredbythemotorcycleretaileris20%ofhistotalinventoryvalue. Therefore,carryingcostsenablesyoutofindoutyourprofitagainstincurredagainsttheinventoryyouareholding.Thiscostensuresthatyoudonotrunintogravelossesbyholdinginventoryoveralongperiodoftime.Alwaysthecarryingcostshouldonlybeinlimitsof20%–30%ofyourtotalinventoryvalue. RelatedPostsWhatisInventory?WhatisJust-in-Time(JIT)?|Just-in-TimeInventorymanagementWhatisManufacturingOverheadCost? «PreviousChapterWhatisJust-in-Time(JIT)?|Just-in-TimeInventorymanagement NextChapter»WhatIs the RevisedPaymentServiceDirective(PSD2)? SmuruthiKesavanContentMarketer Cancelreply ThissiteusesAkismettoreducespam.Learnhowyourcommentdataisprocessed. Reply CalculatecostcarryingA/Rifallcostomerdon’ttakethediscount Reply HiAgeze, Thankyouforreachingouttous!We’regoingtoneedsomemoreinformationtohelpyoubetter.Pleasecontactusatsupport@zoho-inventory.com,andwe’llbehappytoansweryourqueries. Reply Informative Youmightalsolike InventoryFulfillordersmoreefficiently.TryZohoInventoryToday!GETSTARTEDNOW