The cost of carrying inventory is another name for the carrying cost of inventory, the total cost a business bears for holding goods in stock rather than selling or using them straight away. The same idea is also called holding costs.
What the cost includes
Carrying cost has both cash and non-cash elements. The cash costs include warehouse rent or depreciation, utilities, insurance on the goods, property taxes in some states, and the labor used to move and count stock. Other costs arise from the goods themselves: shrinkage from theft or damage, and losses from items going out of date or out of fashion. The largest element is often the cost of money tied up in inventory. Cash spent on stock could instead repay a loan or earn a return, so that forgone return is an opportunity cost.
Businesses usually express carrying cost as a yearly percentage of average inventory value. A firm with average inventory of $400,000 and an estimated carrying rate of 20 percent spends about $80,000 a year to hold it. Most of these costs never appear as a single line in the accounts; they are spread across rent, insurance, interest and inventory write-downs.
The figure is a key input to the economic order quantity (EOQ) model, which balances carrying cost against ordering cost to find the most economical order size.