Estimate annual inventory holding cost from average inventory value and carrying rate, or from units on hand and cost per unit per year, month, or quarter.
Annual Holding Cost Formula
The following formula is used to calculate the Annual Holding Cost.
- Where AHC is the Annual Holding Cost ($)
- AIL is the average inventory level (# of units)
- HCU is the holding cost per unit per year ($/unit/year)
To calculate annual holding costs from per-unit holding cost, multiply average inventory units by the annual holding cost per unit. For monthly or quarterly costs, first multiply by 12 or 4. Alternatively, multiply average inventory value by the annual carrying rate divided by 100; inventory value may be entered directly or calculated from average units times purchase value per unit. Add only additional costs not already included in the rate or per-unit estimate.
How to Calculate Annual Holding Cost?
The following example problems outline how to calculate Annual Holding Cost.
Example Problem #1:
- First, determine the average inventory level (# of units). The average inventory level (# of units) is given as 500.
- Next, determine the holding cost per unit per year ($/unit/year). The holding cost per unit per year ($/unit/year) is provided as 25.
- Finally, calculate the Annual Holding Cost using the equation above:
AHC = AIL * HCU
The values given above are inserted into the equation below:
AHC = 500 * 25 = 12500 ($)
Example Problem #2:
The variables needed for this problem are provided below:
average inventory level (# of units) = 300
holding cost per unit per year ($/unit/year) = 30
Entering these values and solving gives:
AHC = AIL * HCU = 9000 ($)
