What are 'Carrying Costs'

Carrying costs are the costs of holding inventory and include maintenance, specifically in regard to perishable items, and storage costs; insurance and less tangible expenses such as opportunity costs; and losses resulting from theft. The advantage of cyber stores, over brick-and-mortar stores, is the overriding lack of carrying costs. Most online stores stock inventory as it is needed or simply have it shipped from one centralized location instead of keeping inventory in multiple physical locations.

BREAKING DOWN 'Carrying Costs'

Carrying costs are also sometimes referred to as carrying cost of inventory or as inventory cost. It is the cost accrued, over a period of time, by holding and storing inventory. This figure is used by businesses to evaluate the level of profit that can reasonably be expected on their current inventory. It is also useful in determining whether goods should be produced less or more so the business can stay on top of expenses and continue to generate a steady income stream.

Percentage of Inventory Value

Carrying costs are regularly referred to as a percentage of the business’ inventory value. The percentage indicated may include a number of different costs, such as employee costs, taxes, insurance, depreciation, opportunity costs, the cost of replacing items and even the cost of capital that helps to generate income for the business.

Holding Costs

The term "carrying costs" can also be referred to as holding costs. Holding costs are calculated by multiplying the per-unit annual holding cost by the average level of inventory. The average inventory level is equal to the quantity of ordered items, divided by two. As previously indicated, holding, or carrying, costs include any number of expenses related to the holding and warehousing of inventory.

Decreasing Carrying Costs

There are a number of options for business owners to decrease the amount spent on carrying costs. The volume of inventory being stored can be limited and the amount of time the inventory spends in storage can also be limited. For businesses that utilize refrigerated warehouse space, this tactic is of specific importance. Improvement of warehouse or storage space may also be an option when trying to lower carrying costs; having an efficient and cost-effective warehouse design and utilizing correct storage techniques likely keeps carrying costs down.

Tracking inventory is also an option to help businesses cut down on carrying costs. In most cases, computerized inventory management systems are employed to keep track of inventory levels, as well as the business’ supplies and materials, and are designed to alert owners or management when more or less inventory is needed.

RELATED TERMS
  1. Carrying Cost Of Inventory

    This is the cost a business incurs over a certain period of time, ...
  2. Perpetual Inventory

    A method of accounting for inventory that records the sale or ...
  3. Average Age Of Inventory

    The average number of days it takes for a firm to sell to consumers ...
  4. Holding Costs

    The associated price of storing inventory or assets that remain ...
  5. Inventory Reserve

    An inventory reserve is a contra asset account on a company's ...
  6. Periodic Inventory

    The periodic inventory system is a method of inventory valuation ...
Related Articles
  1. Investing

    Understanding Periodic vs. Perpetual Inventory

    An overview of the two primary inventory accounting systems.
  2. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  3. Investing

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  4. Investing

    Is Sales Growth Weaker Than Inventory Growth?

    Find out why Goldman Sachs Equity Research is concerned about inventory growth, which appears to be outpacing sales growth for many U.S. sectors.
  5. Investing

    US EIA Oil Inventory Preview

    U.S. Department of Energy crude oil inventory data released later today should provide an indication of what is next for oil prices.
  6. Investing

    Key Financial Ratios for Restaurant Companies

    These 7 financial ratios provide insight into the profitability of a restaurant, prospective longevity of the business and quality of decisions being made.
  7. Personal Finance

    The Future of Retail Is Not Big Box Stores

    The future of shopping involves a lot more Internet and a lot less window shopping at the mall.
  8. Personal Finance

    Top Tips For Year-End Car Buying

    'Tis the season to purchase new wheels, and these tips will help you drive away with the best price.
RELATED FAQS
  1. How can a company control its holding costs?

    Learn about the specific costs that go into a company's overall inventory holding costs, and understand how a company can ... Read Answer >>
  2. How is the economic order quantity model used in inventory management?

    Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
  3. How do you analyze inventory on the balance sheet?

    Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
  4. How Do I Calculate The Inventory Turnover Ratio?

    The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>
  5. What is the formula for calculating inventory turnover?

    Learn about the inventory turnover ratio, how it is calculated and what this efficiency metric tells businesses about their ... Read Answer >>
  6. Does working capital include inventory?

    Learn about inventory that is part of current assets and working capital, which is the difference between current assets ... Read Answer >>
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center