Enter the inventory service cost, inventory risk cost, capital cost, storage cost, and inventory value into the calculator to determine the carrying cost.
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Carrying Cost Formula
The following formula is used to calculate the carrying cost of an inventory:
CC = IHS / TVI * 100
- Where CC(%) is the carrying cost percentage of the inventory
- IHS is the inventory holding sum ($)
- TVI is the total value of inventory ($)
Further, the inventory holding sum can be calculated using the following formula:
IHS = Inventory service cost + inventory risk cost+ capital cost+ storage cost.
Carrying Cost Definition
A carrying cost is defined as the monetary cost it takes for a business to hold inventory over a given period of time. This value is often expressed as a percentage of the total value of the inventory.
In general, a business will want to keep its carrying cost to the lowest possible percentage.
Example Problem
How to calculate a carrying cost?
The first step in determining a carrying cost percentage is to calculate the total value of the inventory the business is holding. In this example, we are analyzing a warehouse that has $40,000 in inventory value.
Next, determine the inventory service cost. This cost includes IT, insurance, tax, and other applications. For this problem, the inventory service cost is calculated to be $4,000.
Next, determine the inventory risk cost. Inventory risk cost is any cost associated with losing product that sits in inventory too long due to degradation, clerical errors, or theft. In this case, the inventory risk cost is small at $500.00.
Next, determine the capital cost. This is the cost of the inventory itself investment required to purchase the inventory. For this problem, the capital investment was $5,000.
Next, determine the storage cost. The cost to store the inventory including the rent for the warehouse was $5,000.00.
Finally, calculate the carrying cost. Using the formula above, the carrying cost is calculated as:
CC (%) = IHS / TVI * 100
= ( 4,000 + 500 + 5,000 + 5,000 )/ 40,000 * 100
= 36.25%.
