Frequently asked questions
What is carrying cost?
Carrying cost, also called holding cost, is the total cost of keeping inventory for a period.
What is the carrying cost formula?
Carrying cost = average inventory value × carrying cost rate. With 50,000 of inventory and a 22% rate, the yearly cost is 11,000.
What is included in the carrying cost rate?
The cost of money tied up in stock, storage space, insurance, taxes, handling, shrinkage, damage and obsolescence.
What is a typical carrying cost rate?
Many businesses estimate roughly 20% to 30% of inventory value a year, but yours depends on your storage, products and cost of capital, so calculate your own.
How do I work out my own rate?
Add all yearly costs of holding stock, divide by your average inventory value and multiply by 100.
Which inventory value should I use?
Use average inventory at cost, not at selling price.
How is carrying cost different from ordering cost?
Carrying cost is the cost of keeping stock. Ordering cost is the cost of placing and receiving orders. EOQ balances the two.
Why does carrying cost matter?
It is a hidden cost that reduces profit, and large stock levels also tie up cash you could use elsewhere.
How can I reduce carrying costs?
Improve turnover, order smaller quantities, forecast better, clear dead stock, negotiate storage costs and consider just-in-time or drop shipping for slow items.
Does carrying cost include the cost of money?
Yes. Cash tied up in stock could earn interest or reduce loans, so include your loan rate or the return you could earn instead.
Should I use a monthly or yearly rate?
Rates are usually annual. For one month, divide the yearly rate by 12 and use the matching inventory value.
How do I find carrying cost per unit?
Multiply the unit cost by the carrying rate, or divide the total carrying cost by the units on hand.
How does obsolete stock affect the cost?
Write-offs and markdowns on obsolete stock add to the cost. Fashion, electronics and perishable goods often have higher rates.
Should carrying cost affect my pricing?
It can. Products that sit in stock for long cost more to hold, so slow items should carry more of this cost in their pricing decisions.
How often should I review the rate?
Review it yearly and whenever rent, interest rates or insurance costs change.