The cost of holding inventory in storage, including rent, insurance, and other expenses.
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Carrying cost, also known as holding cost, is a cost associated with holding inventory over a period of time. It includes expenses such as storage, insurance, taxes, depreciation, obsolescence, and financing costs.
The calculation of carrying cost varies depending on the specific costs involved and the method of calculation. However, a common formula for calculating carrying cost is as follows:
Carrying cost = (Average inventory level x Carrying cost per unit) / 2
The average inventory level is the average value of inventory held during a specific period, such as a month or a year.
Carrying cost per unit is the cost of holding one unit of inventory for a specific period.
For example, if a company holds an average inventory of $10,000 over a month and the carrying cost per unit is $2, the carrying cost for the month would be:
Carrying cost = ($10,000 x $2) / 2
Carrying cost = $10,000
This means that the company incurs a carrying cost of $10,000 for holding inventory over the month, which includes expenses such as storage, insurance, taxes, depreciation, obsolescence, and financing costs.
It is important for companies to manage their carrying costs effectively to optimize their inventory levels and reduce the overall cost of holding inventory. This can be achieved through techniques such as just-in-time (JIT) inventory management, economic order quantity (EOQ) analysis, and inventory turnover optimization.
Related Glossary terms
→ Actual Landed Cost
→ Average Cost
→ Cost of Goods Sold (COGS)
→ Inventory Management
→ Just-in-Time (JIT) Inventory
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