What Is Inventory Carrying Cost?
Any company holding inventory has to bear inventory carrying costs. They represent a large chunk of a company’s total logistics systems costs. Inventory carrying costs are expressed as a percentage of the average dollar value of inventory over a fixed period – usually a year. As a rule of thumb, inventory carrying cost is 25% of a company’s average inventory investment, but when you tally up all the relevant carrying costs, it can run as high as 40% or more. Capital vs. Non-Capital Carrying Costs A company carrying an inventory has both capital and non-capital costs. The actual investment in your inventory itself is regarded as a capital cost, but there’s also the non-capital cost of carrying the inventory. Determining your capital costs is as straightforward as checking your financial reports. Estimating your non-capital costs takes more work. They’re not readily apparent from your accounting records, as most bookkeeping systems don’t capture all the information you need to calculate
