Loading the player...

What is 'Carrying Cost Of Inventory'

Carrying cost of inventory, or carry cost, is often described as a percentage of the inventory value. This percentage could include taxes, employee costs, depreciation, insurance, cost to keep items in storage, opportunity cost, cost of insuring and replacing items and the overall cost of capital for the company as a whole.

BREAKING DOWN 'Carrying Cost Of Inventory'

Also referred to as carry cost of inventory, the carrying cost of inventory is the cost a business incurs over a certain period of time to hold and store its inventory. Businesses use this figure to determine how much profit can be made on current inventory. It also 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.

Total Cost of Ownership

The way in which a company manages assets can tell a great deal about its future performance as well as management's efficiency. This is why analysts look at ratios such as return on assets (ROA) and inventory turnover. Inventory generally represents the largest portion of current assets. As such, the management of inventory flows can greatly influence the cost of carrying that inventory. Additionally, the cost of inventory can have a direct impact on the cost of capital and future cash flows.

The cost of inventory includes all costs associated with holding or storing inventory for sale. These costs include the opportunity cost of the money used to purchase the inventory, the space in which the inventory is stored, the cost of transportation or handling, and the cost of deterioration and obsolescence.

The opportunity cost of the money used depends on the source of funds used. The cost of funds obtained via internally generated activates is going to be lower than the cost of obtaining funds by issuing equity. The space used to store inventory includes expenses such as rent, depreciation, insurance and other charges associated with maintenance and operational controls such as security, workplace accidents and permits. The cost of obsolescence can be seen in the average amount of write-offs a company has. Perishable or trendy inventory may have a higher cost of obsolescence than non-perishable or staple items.

Inventory Carrying Cost Example

Inventory carrying cost is the cost of owning inventory and is generally expressed in percentage terms. For example, if a company has an inventory carrying cost of 10% and the average annual value of inventory is $1 million, the annual cost of inventory is $100,000. Inventory cost is generally between 20% and 30% of the cost to purchase inventory, but the average rate varies based on the industry and size of business. As such, analysts like to compare the rate against other companies in the same peer group and market capitalization.

RELATED TERMS
  1. Carrying Costs

    The price of holding, or "carrying," inventory. Carrying costs ...
  2. Average Inventory

    A calculation comparing the value or number of a particular good ...
  3. Perpetual Inventory

    A method of accounting for inventory that records the sale or ...
  4. Holding Costs

    The associated price of storing inventory or assets that remain ...
  5. Inventory Write-Off

    An inventory write-off is an accounting term for the formal recognition ...
  6. Obsolete Inventory

    Obsolete inventory is a term that refers to inventory that is ...
Related Articles
  1. 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.
  2. Investing

    Understanding Periodic vs. Perpetual Inventory

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

    Why It Is Important to Follow Crude Oil Inventories

    Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market.
  4. 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 ...
  5. Investing

    Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.
  6. 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.
  7. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  8. Investing

    EIA vs. API: Comparing Crude Inventories Announcements

    Between the two major oil inventory reports: the API and the U.S. EIA, which is more highly regarded and why?
  9. 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 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 >>
  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 Calculate Inventory Turnover?

    Inventory turnoverĀ measures how many times inventory hasĀ sold during a period and provides insight into a company's inventory ... Read Answer >>
  4. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Answer >>
  5. What does a high inventory turnover tell investors about a company?

    Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Read Answer >>
  6. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Understand the principles behind just-in-time inventory management and customer-managed inventory. Learn the difference between ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center