What is Carrying cost of inventory?

Business & Management
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#1

Carrying cost of inventory often refers to a certain percentage of the inventory value, which represents the cost a business incurs over a certain period of time to hold and store its inventory.This percentage could include taxes, employee costs,insurance, costs to keep items in storage.It helps businesses find out if there is a need to produce more or less to keep up with expenses or maintain the same income stream.

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#2

Well the main cost of course is storage. When you carry inventory you have to put it somewhere, and unless you have some kind of magical black hole in your house you have to pay for that space in which you store it. Other than that the only other costs are what you take on to protect it.

For example, if a fire happens where you store the inventory you are going to want to have insurance. If the inventory can perish you can lose money if you don’t sell it in time and have to throw it out. When it comes to carrying inventory it’s all about trying to think of the little costs that can add up but are quite important.

#3

Can someone help explain… Inventory Carrying Cost supposedly helps you identify when you have too much inventory / holding it too long. However, the figure drops as you increase the inventory you have on hand. How is this helpful? Is it intended to work in tandem with turnover rate?

Example

Holding sum / inventory value = holding cost

Scenario A
$10,000 / $20,000 = 50% (bad)

Scenario B (more stagnant inventory)
$10,000 / $40,000 = 25% (good)

What gives?

#4

Thanks!