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.

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